Investment Jobs Alternative Investments Test 1 — Questions and Answers
Question 1: Which type of alternative investment involves buying controlling interests in private companies with the intent to improve and sell them?
- Hedge funds
- Private equity (buyout funds) (Correct answer)
- Venture capital
- Real estate investment trusts
Correct answer: Private equity (buyout funds)
Private equity buyout funds acquire controlling stakes in established companies, typically using leverage, improve operations, and exit via sale or IPO.
Question 2: What is the standard fee structure for most hedge funds (the '2 and 20' model)?
- 2% sales load and 20% expense ratio
- 2% management fee and 20% performance fee on profits (Correct answer)
- 2% front-end load and 20% back-end redemption fee
- 2% annual return floor and 20% leverage cap
Correct answer: 2% management fee and 20% performance fee on profits
The '2 and 20' fee structure means hedge funds charge a 2% annual management fee on assets under management plus a 20% performance fee on any profits generated.
Question 3: What is a Real Estate Investment Trust (REIT) and what tax advantage does it offer?
- A private real estate partnership; no special tax treatment
- A publicly traded company that owns income-producing real estate; must distribute 90% of taxable income to avoid corporate tax (Correct answer)
- A real estate mutual fund; gains are tax-deferred
- A government bond backed by real estate; tax-exempt interest
Correct answer: A publicly traded company that owns income-producing real estate; must distribute 90% of taxable income to avoid corporate tax
A REIT is a company that owns income-producing real estate and must distribute at least 90% of its taxable income as dividends to qualify for pass-through tax treatment, avoiding corporate-level tax.
Question 4: In venture capital, what does 'Series A' funding typically represent?
- The initial seed investment from founders
- The first significant round of institutional financing after early-stage proof of concept (Correct answer)
- The pre-IPO round of financing
- Government grants for startups
Correct answer: The first significant round of institutional financing after early-stage proof of concept
Series A is typically the first significant round of venture capital financing, coming after seed funding, and is used by startups that have demonstrated early traction to scale operations.
Question 5: What is 'carried interest' in private equity and hedge funds?
- Interest earned on uninvested capital held in escrow
- The fund manager's share of profits above a specified return threshold (Correct answer)
- Interest costs on leverage used in buyouts
- The annual management fee expressed as an interest rate
Correct answer: The fund manager's share of profits above a specified return threshold
Carried interest (or 'carry') is the share of investment profits, typically 20%, that fund managers receive as performance compensation once returns exceed the hurdle rate.
Question 6: Which type of hedge fund strategy aims to profit regardless of market direction by being simultaneously long and short?
- Global macro strategy
- Long/short equity strategy (Correct answer)
- Event-driven strategy
- Fixed income arbitrage
Correct answer: Long/short equity strategy
Long/short equity strategies hold long positions in stocks expected to appreciate and short positions in stocks expected to decline, aiming to generate returns uncorrelated with market direction.
Investment Jobs Alternative Investments Test 1
Which type of alternative investment involves buying controlling interests in private companies with the intent to improve and sell them?