IAR Investment Vehicles 5 — Questions and Answers
Question 1: A hedge fund employing a 'long/short equity' strategy primarily seeks to profit by:
- Buying only undervalued stocks and holding long-term
- Going long stocks expected to rise and shorting stocks expected to fall (Correct answer)
- Arbitraging price differences in the same stock across exchanges
- Investing exclusively in government securities
Correct answer: Going long stocks expected to rise and shorting stocks expected to fall
Long/short equity funds take long positions in stocks believed to be undervalued and short positions in overvalued stocks, seeking market-neutral or directional alpha.
Question 2: Which statement accurately describes the tax treatment of qualified dividends for individual US investors?
- Qualified dividends are taxed as ordinary income at marginal rates
- Qualified dividends are tax-exempt
- Qualified dividends are taxed at preferential long-term capital gains rates (Correct answer)
- Qualified dividends are subject to a flat 28% rate
Correct answer: Qualified dividends are taxed at preferential long-term capital gains rates
Qualified dividends paid by domestic corporations and certain foreign corporations to shareholders meeting holding period requirements are taxed at favorable long-term capital gains rates.
Question 3: A business development company (BDC) primarily invests in:
- Large-cap publicly traded equities
- Small and mid-sized private or thinly traded US companies (Correct answer)
- Foreign government bonds
- Real estate properties
Correct answer: Small and mid-sized private or thinly traded US companies
BDCs are closed-end funds regulated under the '40 Act that provide debt and equity capital to small and mid-sized private US businesses.
Question 4: When interest rates rise, which bond characteristic causes the greatest price decline?
- Short maturity and high coupon
- Long maturity and low coupon (high duration) (Correct answer)
- Short maturity and low coupon
- Long maturity and high coupon
Correct answer: Long maturity and low coupon (high duration)
Bonds with long maturities and low coupons have the highest duration, making them most sensitive to interest rate changes and causing the greatest price decline when rates rise.
Question 5: Which of the following best describes a 'wrap account' offered by an investment adviser?
- An account investing exclusively in wrapped ETFs
- An account bundling management, trading, and custody services for a single all-inclusive fee (Correct answer)
- A tax-deferred account wrapping insurance products
- An account restricted to municipal bonds only
Correct answer: An account bundling management, trading, and custody services for a single all-inclusive fee
A wrap account bundles portfolio management, transaction costs, and custodial services into a single comprehensive fee, typically expressed as a percentage of assets.
Question 6: Which risk applies specifically to limited partnership investments that is generally absent in publicly traded stock investments?
- Market risk
- Inflation risk
- Liquidity risk due to lack of a secondary market (Correct answer)
- Dividend cut risk
Correct answer: Liquidity risk due to lack of a secondary market
Limited partnership interests typically lack a readily available secondary market, making it difficult for investors to exit their positions, creating significant liquidity risk.
Question 7: An interval fund differs from a traditional closed-end fund in that it:
- Trades continuously on a stock exchange throughout the day
- Offers periodic redemptions at NAV during specified repurchase windows (Correct answer)
- Is registered under the Securities Act of 1933 only
- Has no limit on the number of shares it can issue
Correct answer: Offers periodic redemptions at NAV during specified repurchase windows
Interval funds offer periodic (e.g., quarterly) share repurchases at NAV rather than trading on an exchange, providing limited liquidity without daily redemption obligations.
IAR Investment Vehicles 5
A hedge fund employing a 'long/short equity' strategy primarily seeks to profit by: