Alternative Investment

Which of the following is least likely to be considered an alternative investment?

• Real Estate

• Commodities

• Long-only equity funds

Relative to traditional investments, alternative investments are least likely to be characterized by

• high levels of transparency.

• limited historical return data

• significant restrictions on redemptions

An analyst wanting to assess the downside risk of an alternative investment is least likely to use the investment’s:

• Sortino ratio.

• value at risk (VaR).

• standard deviation of returns.

Answer explanation

Downside risk measures focus on the left side of the return distribution curve where losses occur. The standard deviation of returns assumes that

returns are normally distributed. Both the

Sortino ratio and the value-at-risk measure are both measures of downside risk.

Risks in infrastructure investing are most likely greatest when the project involves:

• construction of infrastructure assets.

• investment in existing infrastructure assets

• investing in assets that will be leased back to a government.

A hedge fund has the following fee structure: (see attachment)

The fund has a value of $583.1 million at the beginning of the year. After one year, it has a value of $642 million before fees. The net return to an investor for this year is closest to:

• 6.72%.

• 6.80%

• 7.64%.

Answer explanation

An investor chooses to invest in a brownfield rather than a greenfield infrastructure project. The investor is most likely motivated by:

• growth opportunities

• predictable cash flows.

• higher expected returns.

Answer explanation

A brownfield investment is an investment in an existing infrastructure asset, which is more likely to have a history of steady cash flows compared with that of a greenfield investment.

Growth opportunities and returns are expected to be lower for brownfield investments, which are less risky than greenfield investments.

As the loan-to-value ratio increases for a real estate investment, risk most likely increases for:

• debt investors only.

• equity investors only.

• both debt and equity investors.

An equity hedge fund following a fundamental growth strategy uses fundamental analysis to identify companies that are most likely to:

• be undervalued.

• be either undervalued or overvalued.

• experience high growth and capital appreciation.

Answer explanation

Fundamental growth strategies take long positions in companies

identified, using fundamental analysis, to have high growth and capital appreciation.

Fundamental value strategies use fundamental analysis to identify under-

valued companies. Market-neutral strategies use quantitative and/or fundamental analysis to identify under- and overvalued companies.

The first stage of financing at which a venture capital fund most likely invests is the:

• seed stage.

• mezzanine stage

• angel investing stage.

Answer explanation

The seed stage supports market research and product development

and is generally the first stage at which venture capital funds invest. The seed

stage follows the angel investing stage.

An effective risk management process used by alternative investment funds most likely includes:

• in-house valuations

• internal custody of assets

• segregation of risk and investment process duties

Answer explanation

Investment risk should be monitored by a chief risk officer who is separated from the investment process.

Risk factors monitored include leverage, sector, and individual position limits as well as counterparty risks.

Independent (as opposed to in-house) valuation of underlying positions should be performed and reviewed on a regular basis. Third-party custody of assets can help reduce the chance of fraud.