06.09.
2024, 12:42 Kaplanlearn - Quiz
Question #1 of 18 Question ID: 1646008
Alternative investments most likely have which of the following characteristics compared to
traditional investments?
A) Lower leverage and higher liquidity.
B) Unique legal structures and tax treatments.
C) Higher levels of regulation and transparency.
Explanation
Compared to traditional investments, alternative investments have unique legal issues and
tax treatments that are related to their legal structure and registrations. They often have
lower levels of regulation and are less transparent than traditional asset classes.
Alternative investments often employ high levels of leverage in illiquid markets.
(Module 76.1, LOS 76.a)
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Question #2 of 18 Question ID: 1646022
An alternative investment fund generated an 18% return during 20X2. The manager has a
20% performance fee, subject to an 8% soft hurdle rate and a catch-up clause. What
performance fee did the manager earn for 20X2?
A) 2.0%.
B) 3.2%.
C) 3.6%.
Explanation
The investor would receive the first 8%. The catch-up would allow the manager to receive
the next 2%, so it catches up on earning 20% of the first 10% of gains. The manager will
also receive another 20% of the 8% remaining after the catch-up, which is 1.6%. Thus, the
manager would earn 2% + 1.6% = 3.6%.
(Module 76.1, LOS 76.c)
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06.09.2024, 12:42 Kaplanlearn - Quiz
Question #3 of 18 Question ID: 1646019
An alternative investment fund's term sheet describes its:
A) fee structure and investor requirements.
B) fee structure and management biographies.
C) management biographies and investor requirements.
Explanation
A term sheet describes a fund's investment policy, fee structure, and investor
requirements. The fund manager may provide other information such as management
biographies through investor presentations and other legal documents and agreements.
(Module 76.1, LOS 76.b)
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Question #4 of 18 Question ID: 1646016
Which of the following is a challenge that alternative investments have?
A) Little availability of performance information.
B) Same information between managers and investors.
C) High correlation with traditional investments.
Explanation
It is difficult to assess performance for alternative investments because historical return
and volatility data is less available compared to traditional investments. Alternative
investments typically have low correlation with traditional investments and managers have
different information than investors.
(Module 76.1, LOS 76.a)
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Question #5 of 18 Question ID: 1646006
Compared to a traditional mutual fund, a hedge fund is more likely to feature:
A) higher fees.
B) higher liquidity.
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C) lower leverage.
Explanation
A hedge fund typically is more likely to use leverage, is less liquid, and charges higher fees
than a traditional mutual fund.
(Module 76.1, LOS 76.a)
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Question #6 of 18 Question ID: 1646018
Compared to fund investing, direct investing most likely has:
A) more diversification.
B) lower fees.
C) lower investment amounts.
Explanation
Direct investing avoids outside manager fees, while fund managers charge fees.
Disadvantages of direct investing include lack of diversification, higher required
investment amounts, and specialized knowledge needed to evaluate deals. Fund investing
provides access to a more diversified pool of assets, and the investment amount is
typically lower because the cost is shared with other investors.
(Module 76.1, LOS 76.b)
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Question #7 of 18 Question ID: 1646015
The most likely perceived benefit of alternative investments is:
A) accessibility.
B) diversification.
C) liquidity.
Explanation
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Perceived benefits of alternative investments include (1) risk reduction from diversification
since alternative investments tend to have low correlations with traditional investments,
and (2) possible higher returns from holding illiquid securities. Alternative investments are
generally more difficult to access because of higher minimum investments and specialized
knowledge.
(Module 76.1, LOS 76.a)
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Question #8 of 18 Question ID: 1646020
In the context of alternative investments, an investor has the most control over an asset
through:
A) co-investing.
B) direct investing.
C) fund investing.
Explanation
An investor has control over the investment through direct investing. The fund manager
has control over the investments through fund investing, and the fund manager may share
control with the investor through co-investing.
(Module 76.1, LOS 76.b)
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Question #9 of 18 Question ID: 1646011
Victrix is a hedge fund that has a 3-and-15 fee structure. Compared to hedge funds with 2-
and-20 fee structures, Victrix charges higher:
A) redemption fees.
B) incentive fees.
C) management fees.
Explanation
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Hedge fund fee structures indicate management fees as a percentage of assets under
management and incentive fees as a percentage of gains in value. A 3-and-15 fee structure
means a fund charges a 3% management fee and a 15% incentive fee.
(Module 76.1, LOS 76.c)
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Question #10 of 18 Question ID: 1646007
Compared to traditional investments, alternative investments are most likely to be more:
A) liquid.
B) leveraged.
C) transparent.
Explanation
Alternative investments tend to use more leverage and are typically less liquid and less
transparent than traditional investments.
(Module 76.1, LOS 76.a)
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Question #11 of 18 Question ID: 1646010
In a 2-and-20 hedge fund fee structure, the "2" refers to a hedge fund's:
A) incentive fee.
B) hurdle rate.
C) management fee.
Explanation
"2-and-20" denotes a 2% management fee and a 20% incentive fee.
(Module 76.1, LOS 76.c)
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Question #12 of 18 Question ID: 1646013
Which private capital fund waterfall structure involves distributing profits as each investment
is sold and subsequently shared according to the partnership agreement?
A) European waterfall.
B) Whole-of-fund waterfall.
C) Deal-by-deal waterfall.
Explanation
With a deal-by-deal waterfall, profits are distributed as each fund investment is sold and
subsequently shared according to the partnership agreement. With a whole-of-fund
waterfall (or European waterfall), the limited partners receive all distributions until they
have received 100% of their initial investment plus the hurdle rate.
(Module 76.1, LOS 76.c)
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Question #13 of 18 Question ID: 1646017
Robert Aaron would like to start investing a relatively small amount of capital into
commercial real estate, and diversification among these investments is important to him.
Which investment method is Aaron most likely to use?
A) Co-investing.
B) Direct investing.
C) Fund investing.
Explanation
Fund investing gives an investor access to a diversified pool of assets. Co-investing
typically requires a larger investment amount. Direct investing provides the least
diversification and requires the largest capital investment.
(Module 76.1, LOS 76.b)
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Question #14 of 18 Question ID: 1646021
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06.09.2024, 12:42 Kaplanlearn - Quiz
What is another name for a performance fee paid by investors in alternative investment
funds?
A) Carried interest.
B) Preferred return.
C) Management fee.
Explanation
The performance fee may also be called an incentive fee or carried interest. This fee is
designed to incentivize management based on performance, and typically the fund must
exceed a hurdle rate or preferred return before that performance fee is earned. Fund
managers earn the management fee regardless of performance.
(Module 76.1, LOS 76.c)
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Question #15 of 18 Question ID: 1646023
Which alternative investment incentive fee feature is most likely to benefit the manager?
A) Clawback provision.
B) High-water mark.
C) Catch-up clause.
Explanation
A catch-up clause allows the manager to catch up on its performance fee after the hurdle
rate is reached. A high-water mark disallows performance fees on gains that only offset
prior losses. A clawback provision returns prior performance fees to investors if gains are
reversed when deals are exited.
(Module 76.1, LOS 76.c)
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Question #16 of 18 Question ID: 1646014
A private equity provision that requires managers to return any periodic incentive fees
resulting in investors receiving less than 80% of profits is a:
A) high water mark.
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B) drawdown.
C) clawback.
Explanation
A clawback provision requires the manager to return any periodic incentive fees to
investors that would result in investors receiving less than 80% of the profits generated by
portfolio investments as a whole.
(Module 76.1, LOS 76.c)
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Question #17 of 18 Question ID: 1646009
When compared to traditional investments, alternative investments are characterized by:
A) less liquidity of assets held.
B) more regulation and transparency.
C) less concentrated portfolios.
Explanation
Alternative investments typically exhibit several characteristics including less liquidity of
assets held, relatively more concentrated portfolios, and less regulation and transparency.
(Module 76.1, LOS 76.a)
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Question #18 of 18 Question ID: 1646012
Hedge fund management fees are most commonly structured as a percentage of:
A) invested capital.
B) committed capital.
C) assets under management.
Explanation
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For hedge funds, management fees are calculated as a percentage of assets under
management— typically, the net asset value of the fund. For private capital funds, the
management fee is calculated as a percentage of committed capital.
(Module 76.1, LOS 76.c)
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