CIMA Alternative Investments 2 — Questions and Answers
Question 1: What is the J-curve effect commonly observed in private equity fund performance?
- Early negative returns followed by positive returns as investments mature (Correct answer)
- Steady linear growth over the fund's life
- Immediate positive returns that taper off over time
- Volatile returns that mirror public market fluctuations
Correct answer: Early negative returns followed by positive returns as investments mature
Private equity funds typically show negative early returns due to fees and unrealized losses, then generate positive returns as portfolio companies mature and are exited.
Question 2: A commodity pool operator (CPO) manages a fund that trades futures contracts on agricultural commodities. Under US regulations, the CPO must register with:
- The Commodity Futures Trading Commission (CFTC) and NFA (Correct answer)
- The Securities and Exchange Commission (SEC) only
- FINRA as a broker-dealer
- The Federal Reserve Board
Correct answer: The Commodity Futures Trading Commission (CFTC) and NFA
Commodity pool operators must register with the CFTC and become members of the National Futures Association (NFA) under the Commodity Exchange Act.
Question 3: Which hedge fund strategy attempts to profit from pricing discrepancies between convertible bonds and the underlying equity?
- Convertible arbitrage (Correct answer)
- Global macro
- Event-driven
- Managed futures
Correct answer: Convertible arbitrage
Convertible arbitrage involves buying convertible bonds and shorting the underlying stock to exploit mispricing between the two related securities.
Question 4: In private real estate investing, the term 'cap rate' refers to:
- Net operating income divided by property value (Correct answer)
- Total debt divided by property equity
- Annual appreciation divided by purchase price
- Gross rental income divided by total expenses
Correct answer: Net operating income divided by property value
The capitalization rate (cap rate) equals net operating income divided by the current market value, serving as a key real estate valuation metric.
Question 5: Which of the following best describes a fund of funds in the context of alternative investments?
- A fund that invests in a portfolio of other hedge funds or private equity funds (Correct answer)
- A mutual fund that holds only large-cap equities
- A fund restricted to government securities and agency bonds
- A single-strategy hedge fund with multiple sub-accounts
Correct answer: A fund that invests in a portfolio of other hedge funds or private equity funds
A fund of funds aggregates capital to invest across multiple underlying alternative funds, providing diversification and manager access at the cost of an additional fee layer.
Question 6: From a CIMA perspective, what is the primary due diligence concern when recommending a hedge fund with a high-water mark provision?
- The manager only earns incentive fees when returns exceed the previous peak NAV (Correct answer)
- The fund automatically redeems if NAV falls below the high-water mark
- High-water marks eliminate all management fees during drawdowns
- Investors can exit penalty-free once the high-water mark is reached
Correct answer: The manager only earns incentive fees when returns exceed the previous peak NAV
A high-water mark ensures the manager only receives performance fees when the fund's NAV surpasses its prior highest value, aligning manager and investor interests.
CIMA Alternative Investments 2
What is the J-curve effect commonly observed in private equity fund performance?