CFA Level I Alternative Investments

A hedge fund charges 2 and 20. Assets start at $100 million and gross gains are $10 million. If both fees are on gross figures, what are total fees?

2% × 100 = 2, plus 20% × 10 = 2. Charging the incentive net of the management fee would give 3.6.

What does a high-water mark do?

Investors don't pay twice for recovering losses.

What is a hurdle rate in a fund?

A hard hurdle charges incentive fees only on returns above it.

Why do private equity funds often show a J-curve?

Distributions come later in the fund's life.

What is a leveraged buyout?

The target's cash flows service the debt.

Net operating income is $500,000 and the cap rate is 5%. What is the property worth?

Value = NOI / cap rate.

What is a REIT?

REITs give liquid access to real estate.

Commodity futures are in contango when:

Rolling long positions in contango gives a negative roll yield.

What is a brownfield infrastructure investment?

Greenfield means new construction, with more risk.

What is a clawback provision?

It protects limited partners.

What is the main drawback of a fund of hedge funds?

They offer diversification and manager selection in return.

Why can appraisal-based real estate returns look less risky than they are?

Unsmoothing techniques try to correct for this.

What is distressed debt investing?

It is usually an event-driven strategy.

Direct lending by private credit funds means:

It grew as banks pulled back from middle-market lending.

Which describes a blockchain?

Permissionless blockchains let anyone validate; permissioned ones restrict it.

Where do timberland returns come from?

Owners can delay harvesting when prices are low.

Venture capital typically invests in:

Most investments fail, a few return the fund.