Deck 21: Alternative Investments: Private Equity and Hedge Funds

Question 1

Market neutral funds are:

A)neither long nor short in their strategy.
B)only long in their strategy.
C)only short in their strategy.
D)follow a 45° Market Line.

Answer 1

A
Explanation: Hedge funds that are neither long nor short in their strategy are either market neutral funds or no-bias funds.

Question 2

All equity investments in nonpublic companies is referred to as:

A)core-satellite strategy.
B)a hedge fund.
C)private equity.
D)None of the above

Answer 2

C
Explanation: The term private equity refers to all equity investments in nonpublic companies.

Question 3

A strategy that buys a convertible security for the income and then sells the common stock short is called:

A)convertible arbitrage.
B)no-bias arbitrage.
C)long/short bias.
D)merger arbitrage.

Answer 3

A
Explanation: Convertible arbitrage is centered on convertible preferred stock and convertible bonds. The strategy can be U.S.-oriented or globally focused. The common strategy is to buy the convertible security for the income and sell the common stock short.

Question 4

Hedge fund managers today construct a portfolio with a beta that:

A)is lower in rising markets and a higher in falling markets.
B)is higher in rising markets and lower in falling markets.
C)is market neutral.
D)is not relevant.

Question 5

The No-Bias hedge fund strategy is to:

A)use multiple stocks to sell short or long.
B)pair two stocks in the same industry, sell one short and keep one long.
C)use no stocks, only CDs.
D)None of the above

Question 6

The most common categories of private equity are:

A)collectibles.
B)venture capital, leveraged buyouts, and mezzanine debt.
C)money markets.
D)None of the above

Question 7

Hedge funds:

A)are open about their trading strategies.
B)are secretive about their strategies.
C)trade using only one brokerage.
D)None of the above

Question 8

Hedge funds are:

A)regulated by the SEC.
B)private limited partnerships.
C)unregulated by the SEC.
D)Both B and C

Question 9

Why do alternative investments make sense for institutional investors?

A)They reduce the rate of return and increase the standard deviation of the portfolio
B)They increase the rate of return and reduce the standard deviation of the portfolio
C)They reduce the rate of return and reduce the standard deviation of the portfolio
D)They increase the rate of return and increase the standard deviation of the portfolio

Question 10

Merger arbitrage funds:

A)make their money investing in only foreign funds.
B)make their money betting on the long position of utility stocks.
C)make no money, only hold long portfolios.
D)make their money betting on the completion or failure of the merger.

Question 11

Other types of hedge funds deal in areas like:

A)collectible football cards.
B)artwork masterpieces.
C)currencies and commodities.
D)collectible muscle cars.

Question 12

One method professional managers use to manage pension funds, endowment funds, foundations, and other large portfolios that have a long-term focus with required payout is the:

A)Markowitz method.
B)core-satellite portfolio approach.
C)market line method.
D)capital market line methoD.

Question 13

Relative to other asset classes, hedge funds are:

A)not highly correlated.
B)negatively correlated.
C)not correlated at all.
D)related only to the currencies.

Question 14

Alfred Jones' original strategy was to:

A)identify strong and weak stocks, buy strong ones, short the weak ones, and use leverage to enhance the returns.
B)buy only weak stocks and hold them long.
C)buy only strong stocks and hold them long.
D)identify strong and weak stocks, buy weak ones, short the strong ones, and avoid leverage.

Question 15

A fund that always has a negative bias and can be 100% short or a blend of short and long is:

A)a no-bias fund.
B)an event-driven fund.
C)a short-bias fund.
D)a long-bias funD.

Question 16

The risk/return trade-off with hedge funds over time has been:

A)negative.
B)positive.
C)neutral.
D)undetermineD.

Question 17

The first hedge fund was created in 1949 by:

A)Dow Jones.
B)William P. Standard.
C)Alfred Jones.
D)Michael Milken.

Question 18

Any change in the value of a company due to an event can create an opportunity to profit. What fund takes advantage of this fact?

A)Event-driven fund
B)No-bias fund
C)Long/short equity fund
D)Distressed fund

Question 19

The first hedge fund used a strategy to:

A)hedge against a rising market.
B)hedge against a falling market.
C)speculate on a rising market.
D)speculate on a falling market.

Question 20

A fund which invests in companies that are in or close to bankruptcy is called:

A)a short/long bias fund.
B)a market neutral fund.
C)a distressed fund.
D)a sloan funD.

Question 21

What is a major reason that entities invest in private equity funds?

A)Higher returns than can be earned from the stock market
B)The joy of seeing new companies start up
C)The safety of the investment
D)None of the above

Question 22

The hurdle rate is:

A)the rate of money expenditure in a new venture.
B)the rate charged to the most credit-worthy investors.
C)the rate paid to the investors before the general partners' cut.
D)the rate of interest charged on the borrowing firm by the venture capitalists.

Question 23

What are buy-out funds?

A)A hedge fund that buys out overstocked inventory
B)A fund that purchases existing public companies or a division of a public company that needs to be restructured
C)A fund which holds only money market securities
D)None of the above

Question 24

Seed capital is usually supplied by investors called:

A)hard-core investors.
B)angel investors.
C)hedge fund investors.
D)None of the above

Question 25

A corporate venture capital fund is:

A)a fund operated by private investors.
B)a fund operated by a corporation.
C)a fund operated for a non-profit.
D)None of the above

Question 26

What is characteristic of late-stage companies?

A)They are near bankruptcy
B)They are late to bring products to the market
C)They are producing and shipping goods and are often two or three years away from an initial public offering
D)They are highly risky, and the failure rate for venture capital investors is quite high

Question 27

Limited partners in venture capital investment funds typically receive ____ of the profits.

A)20%
B)100%
C)50%
D)80%

Question 28

Kohlberg Kravis and Roberts (KKR) is best known as a:

A)hedge fund.
B)buy-out fund.
C)no-load fund.
D)core-satellite funD.

Question 29

A follow-on fund is:

A)a fund which follows new emerging ventures.
B)an existing fund that is raising another fund.
C)a very risky hedge fund.
D)a special type of CD.

Question 30

One exit strategy for venture capitalists is:

A)to pull their money out when the company first makes a profit.
B)the company goes public.
C)to stop funding the venture.
D)None of the above

Question 31

The venture fund managers are also called:

A)core specialists.
B)general partners.
C)hurdle managers.
D)None of the above