Investment Jobs Alternative Investments Test 2 — Questions and Answers
Question 1: What is a 'fund of funds' in the context of alternative investments?
- A mutual fund that invests only in index funds
- An investment vehicle that allocates capital across multiple underlying hedge funds or PE funds (Correct answer)
- A pension fund that invests across asset classes
- A government fund that supports private equity investment
Correct answer: An investment vehicle that allocates capital across multiple underlying hedge funds or PE funds
A fund of funds invests in a portfolio of other funds (hedge funds, PE funds) rather than directly in securities, offering diversification but adding an additional layer of fees.
Question 2: What is the 'J-curve effect' in private equity investing?
- Returns are highest in the early years of a fund
- Negative returns in early years give way to positive returns as investments mature and are exited (Correct answer)
- Fund performance mirrors the economic cycle
- Leverage amplifies both gains and losses symmetrically
Correct answer: Negative returns in early years give way to positive returns as investments mature and are exited
The J-curve describes the typical pattern of private equity returns: early negative returns due to management fees and unrealized investments, followed by positive returns as portfolio companies grow and are exited.
Question 3: Commodities are included in investment portfolios primarily for which benefit?
- High dividend income
- Inflation hedging and low correlation with stocks and bonds (Correct answer)
- Predictable cash flows
- Tax efficiency
Correct answer: Inflation hedging and low correlation with stocks and bonds
Commodities tend to perform well during inflationary periods and have historically low correlation with traditional asset classes, making them useful for portfolio diversification and inflation protection.
Question 4: What is a 'lock-up period' in the context of hedge fund investing?
- The minimum holding period required by the IRS for capital gains treatment
- A period during which investors cannot redeem their investment from the fund (Correct answer)
- The time needed to complete a leveraged buyout
- A regulatory waiting period before short selling
Correct answer: A period during which investors cannot redeem their investment from the fund
A lock-up period restricts hedge fund investors from withdrawing their capital for a specified time (typically one to two years), giving managers time to execute their strategies.
Question 5: What distinguishes an 'accredited investor' under US securities law?
- Holds a FINRA Series 7 license
- Has annual income exceeding $200K (or $300K joint) or net worth over $1M excluding primary residence (Correct answer)
- Has completed a certified investor education course
- Has a minimum of 10 years investing experience
Correct answer: Has annual income exceeding $200K (or $300K joint) or net worth over $1M excluding primary residence
Under SEC Regulation D, an accredited investor must meet income thresholds ($200K individual or $300K joint for last two years) or have a net worth over $1M excluding their primary residence.
Question 6: What is 'distressed debt investing'?
- Investing in bonds with negative yields
- Purchasing the debt of companies near or in bankruptcy at deep discounts to profit from recovery or restructuring (Correct answer)
- Lending money to distressed homeowners
- Buying high-yield bonds before a credit downgrade
Correct answer: Purchasing the debt of companies near or in bankruptcy at deep discounts to profit from recovery or restructuring
Distressed debt investors buy the bonds or loans of financially troubled companies at significant discounts, profiting if the company successfully restructures or the assets are worth more than the purchase price.
Investment Jobs Alternative Investments Test 2
What is a 'fund of funds' in the context of alternative investments?