CSC CSC - Canadian Securities Course Alternative Investments and Structured Products Questions and Answers 1 — Questions and Answers
Question 1: Which of the following is a key characteristic that distinguishes hedge funds from traditional mutual funds?
- Hedge funds are only available through banks
- Hedge funds can use leverage, short selling, and derivatives to pursue absolute returns (Correct answer)
- Hedge funds are more regulated than mutual funds
- Hedge funds are required to hold at least 50% in government bonds
Correct answer: Hedge funds can use leverage, short selling, and derivatives to pursue absolute returns
Unlike mutual funds, hedge funds can employ strategies such as leverage, short selling, and complex derivatives, aiming for positive absolute returns regardless of market direction.
Question 2: What is a Real Estate Investment Trust (REIT)?
- A government program that subsidizes first-time home buyers
- A company that owns, operates, or finances income-producing real estate and distributes most income to unit holders (Correct answer)
- A type of mortgage insurance product offered by Canadian banks
- A derivative contract based on real estate price indices
Correct answer: A company that owns, operates, or finances income-producing real estate and distributes most income to unit holders
A REIT is a company that owns or finances income-generating real estate and is required to distribute the majority of its taxable income to unitholders, providing investors with real estate exposure without direct property ownership.
Question 3: What does the term 'lock-up period' refer to in the context of alternative investments?
- The period during which a stock is banned from trading due to insider activity
- A minimum holding period during which investors cannot redeem their investment (Correct answer)
- The time required for a securities regulator to approve a new fund
- A period when hedge fund managers are restricted from trading
Correct answer: A minimum holding period during which investors cannot redeem their investment
A lock-up period is a predetermined time during which hedge fund investors are prohibited from withdrawing their capital, allowing the fund manager to execute longer-term strategies without liquidity pressure.
Question 4: Which alternative investment strategy involves simultaneously buying and selling related securities to profit from price discrepancies?
- Long-only equity strategy
- Arbitrage strategy (Correct answer)
- Buy-and-hold strategy
- Market timing strategy
Correct answer: Arbitrage strategy
Arbitrage involves exploiting price differences of equivalent or related securities across markets or instruments, typically by buying the underpriced asset and simultaneously selling the overpriced one.
Question 5: What is the primary investment objective of a market-neutral hedge fund strategy?
- To maximize returns by concentrating in the highest-momentum stocks
- To generate returns that are independent of overall market direction by balancing long and short positions (Correct answer)
- To replicate the performance of a broad market index at low cost
- To invest exclusively in distressed companies undergoing bankruptcy
Correct answer: To generate returns that are independent of overall market direction by balancing long and short positions
A market-neutral strategy aims to produce positive returns regardless of market direction by holding balanced long and short positions, thereby minimizing exposure to broad market movements.
Question 6: In the context of alternative investments, what is 'due diligence'?
- A legal requirement to disclose fund fees to investors
- A comprehensive investigation and analysis of an investment opportunity before committing capital (Correct answer)
- The process of rebalancing a portfolio to maintain target allocations
- A regulatory audit performed by IIROC on hedge fund managers
Correct answer: A comprehensive investigation and analysis of an investment opportunity before committing capital
Due diligence is the thorough investigation of an investment fund's strategy, operations, management team, and risk controls that investors should perform before allocating capital.
CSC CSC - Canadian Securities Course Alternative Investments and Structured Products Questions and Answers 1
Which of the following is a key characteristic that distinguishes hedge funds from traditional mutual funds?