CAIA Alternative Investment Vehicles Flashcards

In a master-feeder fund structure, where does the actual trading of securities occur?

Answer: In the master fund

All trading occurs at the master fund level, while feeder funds (onshore and offshore) pool investor capital and pass it to the master for investment.

Which of the following is a key disadvantage of investing in a fund-of-hedge-funds?

Answer: Double layer of fees reducing net returns

Fund-of-funds investors pay both the FoF management fee and the underlying hedge fund fees (typically 2 and 20), significantly eroding net returns.

A separately managed account (SMA) in alternatives differs from a commingled fund primarily because:

Answer: SMAs give the investor direct ownership of the underlying assets

In an SMA, the investor owns the underlying securities directly rather than holding fund units, providing greater transparency and customization.

Which type of alternative investment vehicle is most suitable for an endowment seeking illiquidity premium with a 20-year investment horizon?

Answer: Long-dated unlisted infrastructure or private equity fund

Endowments with long horizons can harvest illiquidity premiums through long-dated unlisted funds where capital is locked up in exchange for higher expected returns.

Under SEC Regulation D, what exemption do most US private funds rely on to avoid registering their securities offerings?

Answer: Rule 506(b) or 506(c) of Regulation D

Most US private funds rely on Reg D Rule 506(b) (no general solicitation, up to 35 non-accredited investors) or 506(c) (general solicitation allowed, accredited only) to exempt their offerings from SEC registration.

A SPAC (Special Purpose Acquisition Company) generates returns for investors primarily through:

Answer: Capital appreciation following a successful merger with a target company

SPAC investors earn returns when the blank-check company identifies and merges with an attractive private target, bringing it public and (ideally) generating price appreciation.