Alternative Investments Flashcards
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Read the first 6 Alternative Investments flashcards as text
Which of the following is considered an alternative investment?
Answer: Hedge funds
Hedge funds are classified as alternative investments because they use strategies like short selling and leverage not typically available in traditional funds.
A hedge fund that uses a 'long/short equity' strategy will:
Answer: Buy securities expected to rise and short-sell securities expected to fall
Long/short equity managers take long positions in stocks they expect to outperform while shorting stocks they expect to underperform, aiming for market-neutral or directional returns.
Private equity investments are typically characterized by:
Answer: Illiquidity and long investment horizons of 5–10 years
Private equity involves investing in non-publicly traded companies and typically requires capital to be locked up for 5–10 years until the fund exits its positions.
What is a 'fund of hedge funds'?
Answer: A fund that allocates capital across multiple underlying hedge funds
A fund of hedge funds pools investor capital and diversifies it across several hedge funds, providing diversification but adding an extra layer of fees.
The '2 and 20' fee structure commonly used by hedge funds refers to:
Answer: 2% management fee and 20% performance fee on profits
The '2 and 20' structure charges a 2% annual management fee on assets under management and a 20% performance fee on profits above a hurdle rate.
Which term describes the minimum return a hedge fund must achieve before collecting its performance fee?
Answer: Hurdle rate
A hurdle rate is a minimum threshold return (often equal to a benchmark rate like T-bills) that must be exceeded before the performance fee is earned.