CSC Alternative Investments 1 — Questions and Answers
Question 1: Which of the following is considered an alternative investment?
- Government of Canada bonds
- TSX-listed common shares
- Hedge funds (Correct answer)
- GICs from a chartered bank
Correct answer: Hedge funds
Hedge funds are classified as alternative investments because they use strategies like short selling and leverage not typically available in traditional funds.
Question 2: A hedge fund that uses a 'long/short equity' strategy will:
- Only purchase undervalued stocks and hold them indefinitely
- Buy securities expected to rise and short-sell securities expected to fall (Correct answer)
- Invest exclusively in fixed-income instruments with leverage
- Replicate a benchmark index using futures
Correct answer: Buy securities expected to rise and short-sell securities expected to fall
Long/short equity managers take long positions in stocks they expect to outperform while shorting stocks they expect to underperform, aiming for market-neutral or directional returns.
Question 3: Private equity investments are typically characterized by:
- Daily liquidity and exchange-listed trading
- Investment in publicly traded companies only
- Illiquidity and long investment horizons of 5–10 years (Correct answer)
- Regulatory limits of $5,000 minimum investment
Correct answer: Illiquidity and long investment horizons of 5–10 years
Private equity involves investing in non-publicly traded companies and typically requires capital to be locked up for 5–10 years until the fund exits its positions.
Question 4: What is a 'fund of hedge funds'?
- A hedge fund that invests in government bonds using leverage
- A fund that allocates capital across multiple underlying hedge funds (Correct answer)
- A mutual fund that replicates hedge fund strategies without restrictions
- A closed-end fund traded on a stock exchange
Correct answer: A fund that allocates capital across multiple underlying hedge funds
A fund of hedge funds pools investor capital and diversifies it across several hedge funds, providing diversification but adding an extra layer of fees.
Question 5: The '2 and 20' fee structure commonly used by hedge funds refers to:
- 2% sales charge and 20% redemption fee
- 2% management fee and 20% performance fee on profits (Correct answer)
- 20% management fee and 2% expense ratio
- 2% minimum return guarantee and 20% fund size limit
Correct answer: 2% management fee and 20% performance fee on profits
The '2 and 20' structure charges a 2% annual management fee on assets under management and a 20% performance fee on profits above a hurdle rate.
Question 6: Which term describes the minimum return a hedge fund must achieve before collecting its performance fee?
- High-water mark
- Hurdle rate (Correct answer)
- Sharpe ratio
- Alpha
Correct answer: Hurdle rate
A hurdle rate is a minimum threshold return (often equal to a benchmark rate like T-bills) that must be exceeded before the performance fee is earned.
CSC Alternative Investments 1
Which of the following is considered an alternative investment?