Alternative Investment

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential)

 Question 1

▪ An investor wishes to invest in Becker fund Ltd and the details are given as below:
▪ Land: 2,000,000
• Investments: 75,000,000
• Liabilities: 17,000,000
• Accrued Expenses: 500,000
• Front end load: 2%
• Outstanding units: 1,000,000 Calculate NAV
A. 59.5
B. 60
C. 58.31

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 2

 Solution 1

▪ A.
The formula for calculating NAV is (Assets-Liabilities-Accrued expenses)/Outstanding units
= (2m+75m-17m-0.5m)/1m
= 59.5 Hence A is correct.

The information on front end load is not required to calculate NAV.ℳ

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 3

 Question 2

A UK Global macro fund manager wants to invest his funds. Which of the following scenarios are least
likely suitable for him for investing purposes?
A. Steep fall in the US dollar.
B. An acquisition of a distressed firm by another foreign company on expectations of synergy benefits.
C. Low volatility in the Japanese stock markets.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 4

 Solution 2

▪ B.
An event driven fund manager would be looking for investment in the distressed firm's acquisition.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 5

 Question 3

What is the most likely motive of creating a collateralized commodities futures position?
A. To earn a return equal to gain on futures position plus the interest on treasury securities like T bills.
B. To buy more T bills, when the futures contract prices fall.
C. To sell more T bills, when the futures contract prices fall.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 6

 Solution 3

▪ C.
A collateralized commodities futures position is created by going long on commodities futures and buying
treasury securities worth the contract value of the futures contract. If futures fall, it results in margin calls
as long on futures loses, which can be honored by selling T bills, hence C is correct. B is incorrect as T
bills are bought when futures prices increase as investor is long.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 7

 Question 4

Which of the following conclusions regarding hedge funds is least likely to be correct?
A. Hedge funds have higher risk profile than equity investments measured by standard deviation
B. Sharpe ratio for hedge funds has been consistently higher than most equity investments
C. There is low correlation between hedge fund performance and conventional asset class

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 8

 Solution 4

▪ A.
The correct answer is Hedge funds have higher risk profile than equity investments measured by
standard deviation

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 9

 Question 5

Which of these are not the risks involved in ETFs?

A. High liquidity may lead to larger bid ask spreads in ETF prices.
B. Some ETFs resort to taking positions in options and forward markets for hedging purposes, leading
to credit risks.
C. An investor is exposed to country and currency risks for investing in international ETFs.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 10

 Solution 5

▪ A.
Low liquidity may lead to larger bid ask spreads in ETF prices. OTC derivatives like forwards and options
involve counterparty/credit risks.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 11

 Question 6

The limitation in which the disclosure of past performance of all the funds managed vests with the fund
manager is termed as:
A. Back-filling bias
B. Survivorship bias
C. Self-selection Bias

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 12

 Solution 6

▪ C.
When the index only includes surviving funds and not the discontinued ones, its called survivorship bias.
Hence B is incorrect. Hedge fund index includes mostly those managers who have strong track record is
called back-filled bias. Hence A is incorrect. However the funds to be disclosed voluntarily at the
discretion of the fund manager leads to Self-selection bias, hence C is correct.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 13

 Question 7

▪ An investor is considering the purchase of a commercial real estate and provided following
information:
• Gross potential rental income 175,000
• Vacancy & collection loss rate 8%
• Insurance 15,000
• Taxes 12,000
• Utilities and maintenance 25,000

▪ Calculate the appraisal value of the property if market cap rate is 10%?
A. 1,210,000
B. 1,090,000
C. 1,230,000

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 14

 Solution 7

▪ B.
The correct answer is 1,090,000

NOI= 175000*(1-8%)- 25000 – 15000- 12000= 109,000

Appraisal value= 109,000/10%= 1,090,000

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 15

 Question 8

▪ In which of the following types of hedge funds, fund invests in a distressed company or in a potential
merger & acquisition situation?
A. Long / short funds
B. Event driven funds
C. Market neutral funds

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 16

 Solution 8

▪ B.
The correct answer is Event driven funds

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 17

 Question 9

If the NAV of an asset declines during a year

A. No fee is paid to the fund manager
B. Fund manager gets a minimum fee which is called the incentive fee
C. None of the above

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 18

 Solution 9

▪ C.
The fund manager gets a minimum fee which is called the management fee and not the incentive fee

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 19

 Question 10

Which of the following is true

A. Hedge funds are more liquid than mutual funds
B. Hedge fund investment is open only to a limited number of investors
C. Hedge fund can invest in less number of securities than mutual funds

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 20

 Solution 10

▪ B.
Hedge fund investment is open to a limited number of people. In US, people with more than $ 1 million in
net worth.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 21

 Question 11

▪ A hedge fund with 10 million of initial investment. They charge “1” and “10” percent management fee
on fund at year end and incentive fee respectively. The capital has 30 percent return. Find the
effective investor gain if the incentive fee is calculated based on return net of the management fee
A. 2.57 million
B. 2.583 million
C. 3 million

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 22

 Solution 11

▪ B.
Management fee = 1% of 13 million = .13 million
Incentive fee = 10% of (13-10 -.13) = .287 million
Investor gain = 3 milllion - .13 milllion - .287 million = 2.583 million

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 23

 Question 12

An LBO occurs when

A. The acquirer has high leverage
B. The cash flows of the target company are good and target company is depressed
C. Both a and b

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 24

 Solution 12

▪ B.
An LBO occurs only when the acquirer is less levered and The cash flows of the target company are
good and target company is depressed

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 25

 Question 13

A drawdown occurs in a hedge fund then

A. NAV of the fund increases
B. NAV of the fund decreases and may lead to redemption
C. None of the above

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 26

 Solution 13

▪ B.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 27

 Question 14

Which of the following is a event driven strategy

A. Fundamental growth
B. Multi strategy
C. Activist strategy

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 28

 Solution 14

▪ C.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 29

 Question 15

Which of the following is true

A. REIT are less liquid than private equity funds
B. Commodity futures generally have a lock-up period
C. An investor requires more liquidity premium in private equity funds than REITs

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 30

 Solution 15

▪ C.
Private equity funds generally have a locking period. Hence investors demand more liquidity premium.
REITs and commodity futures are generally traded and hence are more liquid.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 31

 Question 16

The profit earned on holding an underlying asset rather than entering a contract is
A. Roll yield
B. Collateral yield
C. Current yield

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 32

 Solution 16

▪ B.
Collateral yield is the profit on holding a commodity rather than entering a contract. Examples you buy oil.
Price of oil rises after six months and you gain more than owning the contract.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 33

 Question 17

Introducing the previous performance data for firms recently added to a fund adds
A. Survivorship bias
B. Back-fill bias
C. None of these

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 34

 Solution 17

▪ B.
Back-fill bias occurs when funds include the previous performance of the firms recently added to a
benchmark index

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 35

 Question 18

Which of the following is true about ETF

A. They do not trade on exchange
B. They are linked to a commodity, stock etc
C. Their NAV is calculated on a daily basis like mutual fund

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 36

 Solution 18

▪ B.
ETF are traded on an exchange and the NAV value is therefore not calculated daily

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 37

 Question 19

Standard deviation is not applicable to measure the risk of

A. Hedge funds
B. Listed stocks
C. REITs

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 38

 Solution 19

▪ A.
Hedge funds use models and estimated values and as such the standard deviation may be understated.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 39

 Question 20

Which of the following is true

A. Future prices are calculated using risk free rate, cost of carry and spot prices
B. If future prices are higher than spot price it is contango
C. Both a and b

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 40

 Solution 20

▪ C.
Both the statements are correct. Reverse of contango is called backwardation

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 41

 Question 21

The types of exit for a venture capitalist are

A. Trade sae and secondary sale
B. Recapitalization and IPO
C. All of the above

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 42

 Solution 21

▪ C.
All of the above method are used for exiting by the venture capitalist

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 43

 Question 22

A better measure of the risk of alternative investments are

A. Sharpe ratio
B. Sortino ratio
C. Both a and b

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 44

 Solution 22

▪ B.
Some alternative investments use models that smooth the return and understate the standard deviations
In that case the sharpe ratio fails and sortino ratio is used

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 45

 Question 23

In venture capital funding angel funding is the first stage and is used for marketing and production
A. True
B. False
C. Sometimes true

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 46

 Solution 23

▪ B.
The first stage is angel investing but it is used for concept development.

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 47

 Question 24

A hedge fund with 10 million of initial investment. They charge “1” and “10” percent management fee on
fund at year end and incentive fee respectively. The capital has 30 percent return in year 1. Find the
effective investor gain if the fund value decreases to 12 million in year 2. The incentive fee is calculated
based on excess over net return excluding the management fee
A. .69 million
B. .12 million
C. -.69 million

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 48

 Solution 24

▪ C.
When The incentive fee is calculated based on excess over net return excluding the management fee
fund at end of year 1 is calculated as
▪ Management fee= 1%of 13 million=.13 million
▪ Incentive fee= 10% of (13-10)=.3 million
▪ Investor return = 3 milllion-.13 milllion-.3 million=2.57 million
▪ Capital at end of year 1 = 10 + 2.57=12.57 million
▪ At end of year 2
▪ Management fee= 1%of 12 million=.12 million
▪ Incentive fee= 0 since fund value has declined
▪ Capital at end of year 1 = 10 + 2-.12 =11.88 million
▪ Investor gain = 11.88-12.57=.69 million

© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential) 49

 Thank You!

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© EduPristine For [CFA-I – Alternative Investment-MM] (Confidential)