Alternative Managed Products Flashcards

When conducting due diligence on a hedge fund, which operational risk factor is considered a critical 'red flag' according to industry best practices?

Answer: Fund administrator and investment manager are the same entity (self-administration)

Self-administration — where the manager also controls the calculation and custody of assets — removes a key independent check and significantly increases the risk of fraud or error.

A high-net-worth client asks about investing in an exempt market hedge fund via an offering memorandum. Which suitability factor is MOST critical to assess before recommending it?

Answer: The client's liquidity needs given the fund's lock-up and redemption restrictions

Liquidity suitability is paramount because many exempt-market hedge funds impose lock-up periods, gates, or quarterly redemption windows that can trap capital when clients need it.

In the context of alternative managed products, 'gates' refer to:

Answer: Provisions allowing the fund manager to limit or suspend redemptions during stressed market conditions

Gates are provisions that allow a fund manager to restrict or delay investor redemptions when redemption requests exceed a specified threshold, protecting remaining investors from forced asset sales.

Which of the following alternative strategies is MOST appropriate for an investor whose primary goal is to profit from pricing inefficiencies between a company's convertible bonds and its common equity?

Answer: Convertible arbitrage strategy

Convertible arbitrage exploits mispricing between a company's convertible bonds and underlying equity by simultaneously taking offsetting positions in both securities.

A global macro hedge fund manager believes interest rates in Canada will rise sharply. Which position best reflects this directional view?

Answer: Short Canadian government bond futures

Rising interest rates cause bond prices to fall, so a manager expecting higher rates would short bond futures to profit from the anticipated price decline.

Which regulatory document must a prospective investor in an exempt-market alternative fund receive and acknowledge before investing?

Answer: Offering memorandum (OM) and risk acknowledgement form

Exempt-market products sold via the offering memorandum exemption require investors to receive the OM and sign a risk acknowledgement confirming they understand the speculative nature of the investment.

Which of the following best illustrates the concept of 'absolute return' as it applies to alternative managed products?

Answer: A fund that aims to generate positive returns regardless of whether equity markets rise or fall

Absolute return strategies target positive performance in all market conditions rather than beating a benchmark, using tools like short selling and derivatives to reduce directional market exposure.