CIMA Alternative Investments 1 — Questions and Answers
Question 1: Which characteristic most distinguishes alternative investments from traditional asset classes?
- Low correlation with public equities and bonds (Correct answer)
- Guaranteed principal protection
- Daily liquidity and mark-to-market pricing
- Full SEC registration requirements
Correct answer: Low correlation with public equities and bonds
Alternative investments typically exhibit low correlation with traditional assets, providing diversification benefits.
Question 2: A CIMA professional is evaluating a hedge fund with a 2-and-20 fee structure. What does '2-and-20' refer to?
- 2% management fee and 20% performance fee (Correct answer)
- 2% performance fee and 20% management fee
- 2% front-end load and 20% redemption fee
- 2-year lock-up and 20-day notice period
Correct answer: 2% management fee and 20% performance fee
The 2-and-20 structure charges 2% annually on AUM as a management fee and 20% of profits as a performance (incentive) fee.
Question 3: Which type of private equity strategy involves purchasing an entire company, often using significant debt financing?
- Leveraged buyout (LBO) (Correct answer)
- Venture capital
- Growth equity
- Mezzanine financing
Correct answer: Leveraged buyout (LBO)
A leveraged buyout uses borrowed funds to acquire a controlling interest in a mature company, with the target's assets often serving as collateral.
Question 4: In the context of hedge fund strategies, a long/short equity fund primarily seeks to profit by:
- Buying undervalued stocks and shorting overvalued stocks (Correct answer)
- Holding only long positions in equity indices
- Investing exclusively in convertible arbitrage
- Using derivatives to replicate fixed income returns
Correct answer: Buying undervalued stocks and shorting overvalued stocks
Long/short equity funds take long positions in stocks expected to rise and short positions in stocks expected to fall, seeking alpha on both sides.
Question 5: A limited partnership structure in private equity limits the liability of limited partners to:
- Their invested capital only (Correct answer)
- The total fund NAV
- All partnership debts and obligations
- Three times their capital commitment
Correct answer: Their invested capital only
Limited partners in a private equity fund can lose no more than the amount they invested, which is the defining protection of their 'limited' status.
Question 6: Which of the following is a key characteristic of real assets as an alternative investment?
- They often provide a hedge against inflation (Correct answer)
- They have the highest liquidity among alternatives
- They are primarily financial instruments with no physical form
- They are exempt from all capital gains taxes in the US
Correct answer: They often provide a hedge against inflation
Real assets such as commodities, real estate, and infrastructure tend to increase in value with inflation, providing a natural inflation hedge.
CIMA Alternative Investments 1
Which characteristic most distinguishes alternative investments from traditional asset classes?