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Questions and Answers
Which of the following is a characteristic of alternative investments?
Which of the following is a characteristic of alternative investments?
What type of return do traditional investments typically provide?
What type of return do traditional investments typically provide?
Which of the following groups is considered an alternative investor?
Which of the following groups is considered an alternative investor?
What does market segmentation refer to in alternative investments?
What does market segmentation refer to in alternative investments?
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What is a common feature of alternative investments concerning returns?
What is a common feature of alternative investments concerning returns?
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Which of the following best describes hedge funds?
Which of the following best describes hedge funds?
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Which return factor is not generally associated with alternative investments?
Which return factor is not generally associated with alternative investments?
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What is a key distinguishing feature of modern alternative investments compared to traditional investments?
What is a key distinguishing feature of modern alternative investments compared to traditional investments?
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What is one characteristic of investment managers in relation to their funds?
What is one characteristic of investment managers in relation to their funds?
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Who are considered as target investors for hedge funds?
Who are considered as target investors for hedge funds?
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What change occurred in the interest of institutions investing in hedge funds?
What change occurred in the interest of institutions investing in hedge funds?
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What is a key trait of High Net Worth Individuals (HNWI) as investors?
What is a key trait of High Net Worth Individuals (HNWI) as investors?
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Why is it challenging to find information about hedge funds?
Why is it challenging to find information about hedge funds?
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What motivates institutions to invest in hedge funds?
What motivates institutions to invest in hedge funds?
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What type of investments do HNWIs typically pursue?
What type of investments do HNWIs typically pursue?
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What is one consequence of institutions investing in hedge funds?
What is one consequence of institutions investing in hedge funds?
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What does maximum drawdown measure in investments?
What does maximum drawdown measure in investments?
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Which of the following is NOT a source of return in long/short equity strategies?
Which of the following is NOT a source of return in long/short equity strategies?
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What is a disadvantage of long/short equity strategies?
What is a disadvantage of long/short equity strategies?
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What is meant by 'beta neutral' in equity market neutral strategies?
What is meant by 'beta neutral' in equity market neutral strategies?
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Which approach focuses on sectors that are undervalued or overvalued?
Which approach focuses on sectors that are undervalued or overvalued?
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What does 'dollar neutral' refer to in market-neutral equity strategies?
What does 'dollar neutral' refer to in market-neutral equity strategies?
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Which characteristic is typical for long/short equity strategies in a bull market?
Which characteristic is typical for long/short equity strategies in a bull market?
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What type of approach ranks positions based solely on numerical data?
What type of approach ranks positions based solely on numerical data?
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What is a characteristic of hedge funds that differentiates them from traditional funds?
What is a characteristic of hedge funds that differentiates them from traditional funds?
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What type of fee is unique to hedge funds that is contingent upon the fund's performance?
What type of fee is unique to hedge funds that is contingent upon the fund's performance?
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What does the 'high water mark' in hedge funds imply?
What does the 'high water mark' in hedge funds imply?
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How do hedge funds generally differ from traditional funds in terms of legal structure?
How do hedge funds generally differ from traditional funds in terms of legal structure?
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Why might investors face limitations when withdrawing funds from a hedge fund?
Why might investors face limitations when withdrawing funds from a hedge fund?
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What is often the reason hedge funds have higher fees compared to traditional funds?
What is often the reason hedge funds have higher fees compared to traditional funds?
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What feature of hedge funds contributes to their limited transparency?
What feature of hedge funds contributes to their limited transparency?
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Which statement reflects the nature of liquidity in traditional funds?
Which statement reflects the nature of liquidity in traditional funds?
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What does the term 'gate for redemption' refer to in hedge funds?
What does the term 'gate for redemption' refer to in hedge funds?
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Which of the following fees is typically not associated with traditional funds?
Which of the following fees is typically not associated with traditional funds?
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What strategy involves buying one share while selling short another within the same or different sectors?
What strategy involves buying one share while selling short another within the same or different sectors?
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Which trading strategy focuses primarily on numerical analysis and market data rather than on the fundamental approach?
Which trading strategy focuses primarily on numerical analysis and market data rather than on the fundamental approach?
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Which trading strategy is known for having a high frequency of transactions and aims for short-term gains?
Which trading strategy is known for having a high frequency of transactions and aims for short-term gains?
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What is the potential maximum drawdown percentage for high-frequency trading strategies?
What is the potential maximum drawdown percentage for high-frequency trading strategies?
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What is the rate of positive months typically associated with high-frequency trading strategies?
What is the rate of positive months typically associated with high-frequency trading strategies?
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Distressed securities are primarily characterized by their:
Distressed securities are primarily characterized by their:
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What can cause a significant drop in stock prices due to excess selling pressure?
What can cause a significant drop in stock prices due to excess selling pressure?
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Which of the following is true regarding distressed equities?
Which of the following is true regarding distressed equities?
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What is the primary advantage of engaging in a restructuring process for investors?
What is the primary advantage of engaging in a restructuring process for investors?
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Which of the following best describes a passive investment strategy?
Which of the following best describes a passive investment strategy?
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What is a significant risk associated with the restructuring process?
What is a significant risk associated with the restructuring process?
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How can the insider trading law impact an active investment strategy?
How can the insider trading law impact an active investment strategy?
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What defines the global macro strategies in hedge fund investments?
What defines the global macro strategies in hedge fund investments?
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What characteristic of ETFs makes them less risky compared to derivatives?
What characteristic of ETFs makes them less risky compared to derivatives?
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What is a common outcome of utilizing restructuring strategies in investments?
What is a common outcome of utilizing restructuring strategies in investments?
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What role does the judge play in the context of investments in the US, UK, and Australia?
What role does the judge play in the context of investments in the US, UK, and Australia?
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Study Notes
Traditional vs Alternative Investments
- Traditional investments include stocks, bonds, and cash.
- Common alternative investments include private equity, commodities, real estate, hedge funds, managed futures, art, and crypto.
- Commodities, like gold and silver, can have quick price increases followed by systematic decreases.
- Hedge funds employ specific investment strategies.
- Managed futures can be categorized as a type of hedge fund.
- Alternative investments (like hedge funds) can be less liquid than traditional investments.
- Characteristics common to alternative investments include risk/return characteristics, diversification, illiquidity, and due diligence processes.
- Common investors in alternative investments include high net worth individuals, pension funds, and other institutional investors (e.g., insurers, foundations).
- Alternative investments allow investors to gain exposure to various risk factors and specialized investment strategies.
Alpha Drivers
- Absolute return strategies deliver consistent returns regardless of market conditions.
- Market segmentation involves targeting specific sub-market subgroups.
- Concentrated portfolios focus on a smaller number of assets to potentially outperform benchmarks like the S&P 500.
- Non-linear return distributions are often linked to derivatives (especially options).
Certain Points to Consider
- Diversifying investments across asset classes.
- Investing in assets where one has an informational edge.
- Long-term perspectives are crucial in evaluating alternative investment returns; short-term outperformance is not the primary objective.
Core - Satellite Portfolio
- Beta investments form the core, while alternatives serve as satellites.
- Structured products—like Credit Default Swaps (CDS)—are complex financial instruments whose performance is linked to specific events.
- The swap agreement involves two parties, with one providing credit protection to the other if a certain event occurs.
Collateralized Debt Obligations (CDOs)
- CDOs are complex financial products created using various types of debt obligations.
- Different tranches with varying degrees of risk are formed.
- Senior bonds are typically considered the least risky, while subordinated tranches are viewed as more risky.
- Risks associated with CDOs stem from defaults in underlying debt instruments.
Hedge Funds - History
- Hedge funds experienced setbacks during significant market crises, like the 1997 Asian crisis and the 2008 Lehman crisis.
- Traditional funds generally maintain an index as a benchmark; hedge funds can deviate from typical market returns (absolute returns versus beta return).
- Hedge fund managers may employ various strategies and target specific rates of return or market conditions.
Hedge Funds vs. Traditional Funds
- Hedge funds aim for absolute returns, while traditional funds often seek to match or beat market benchmarks.
- Hedge funds can involve alternative strategies, often with more flexibility.
- Traditional funds often utilize index-based or passively managed strategies.
- Hedge funds may involve illiquidity, with unique terms for subscriptions and redemption.
- Hedge funds frequently employ fees that are tied to the fund's performance.
High Water Mark
- Hedge funds typically have different legal structures and lower levels of transparency compared to traditional funds.
- Individuals may find it challenging to discern or evaluate hedge funds.
HF Strategies - Long/Short Equity
- Hedge funds that utilize long/short equity strategies aim for returns regardless of the overall market trend.
- The objective is to achieve market neutrality in terms of overall returns irrespective of the market direction.
- Investment strategies in this arena can include sector-neutral or factor-neutral approaches.
HF Strategies - Emerging Markets
- Emerging markets can exhibit significant volatility and liquidity challenges.
- Growth potential in emerging markets can be substantial, but so can the risks.
- The potential for higher returns is balanced by increased volatility and illiquidity.
HF Strategies - Fixed Income Arbitrage
- Fixed income arbitrage involves strategies within the fixed-income markets.
- This can include relative value, market neutrality, and directional styles.
HF Strategies - Convertible Arbitrage
- Convertible arbitrage involves taking advantage of mispricing in convertible bonds.
- Identifying mispricing opportunities where convertible bonds trade at a discount to their fair value.
- Strategies aim to capitalize on the arbitrage associated with the bond's value as a straight bond or equity option.
- Potential risks in this arena include interest rate fluctuations, creditworthiness issues, and timeliness of transactions.
HF Selection & Due Diligence
- Key to the success of any hedge fund strategy is the proper selection of investments and due diligence.
- The strategy must be well-defined, as well as the investor objectives and constraints.
- There should be clear standards to assess the viability of a strategy and its viability and risks.
- The due diligence of a hedge fund approach should investigate the management team, infrastructure, and investment process.
HF Case Study - LTCM
- The Long-Term Capital Management (LTCM) case highlights the perils of excessive leverage and underestimating the risks associated with market liquidity.
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Description
This quiz explores the characteristics and features of alternative investments versus traditional investments. It covers key concepts such as hedge funds, market segmentation, and the roles of various types of investors. Test your knowledge on what sets alternative investments apart in today's financial landscape.
