Alternative Investments MCQ - Alternative Investments Section 2

46 The return on commodity index is different from the returns on the underlying commodities. This difference is most likely because:

The commodity index is constructed using commodity futures and not the underlying commodities. Hence, there can be differences between the commodity index returns and the returns on the underlying commodities.

47 Which of the following is most likely a reason for concentrated portfolio strategies to be attractive?

Concentrated portfolio strategies reduces diversification benefit as it involves only a few securities, strategies or manager. But it may enable investors to achieve alpha.

48 Which of the following is most likely a reason for investing in venture capital?

Venture capital investing has higher risk involved than the publicly traded stocks, therefore the returns are also higher

49 Patrick has positions in multiple long-short equity hedge funds and is worried about whether these positions are sufficiently diversified. He will most likely be concerned about the lack of:

Hedge funds generally do not reveal their holdings therefore Patrick will have difficulty in determining if different portfolios are holding diverse or concentrated positions (both within each fund and between funds). Longshort equity hedge funds invest in liquid, publicly traded equity, therefore the underlying positions can be reversed easily and there is no need for independent valuations because current market prices are available.

50 SHM Capital is a hedge fund with $200 million of initial investment capital. They charge a 3 percent management fee based on assets under management at year-end and a 15 percent incentive fee. In its first year, SHM Capital has a 28 percent return. Assume management fees are calculated using end-of-period valuation. In the second year, the fund value declines to $225 million. In the third year, the fund value increases to $250 million. If the incentive fee is calculated based on the return net of the management fee, and also includes the use of a high watermark, the geometric mean annual return over the three-year period is closest to: