Reading 73: Alternative Investments - LOSj~Q1-4 advantages, management, investing, benefits, expected

yanghon

 

LOS j: Explain the benefits and drawbacks to fund of funds investing.

 

Q1. One of the main advantages to investing in a fund of funds (FOF) is that FOF provide:

A)   higher expected returns.

B)   lower management fees.

C)   improved diversification of assets.

 

Q2. Samantha Gold is a young investor. She has many affluent friends who have made a lot of money by investing in hedge funds. Drawn by the significant potential returns, Gold has also decided to invest in hedge funds. A friend has suggested investing in a fund of funds, but Gold is concerned with the risks associated with such investing. Also, she is a relatively small investor compared to what she calls “the big hedge fund players.” Which of the following two statements, in combination, about fund of funds investing, when compared to investing in individual hedge funds is most accurate?

Benefit of Fund of Funds                                                  Drawback of Fund of Funds

A)      Provide returns that, on a risk-adjusted basis,

 are superior to investing in individual funds.        Only open to investors with significant capital.

B)Enable investors with limited capital to invest

 in a portfolio of hedge funds.                                      On a risk-adjusted basis, net-of-fees performance may

     be lower than that of individual funds.

B)      May grant investors access to highly

sought-after closed funds.                                    Returns are most likely going to be spent on additional management fees.

 

Q3. Which of the following statements best describes the fund-of-funds (FOF) class of hedge funds? A fund of funds:

A)   allows smaller investors to access the hedge funds market.

B)   is an open-end mutual fund that primarily invests in other open-end funds.

C)   is open to institutional investors for the purpose of seeking arbitrage situations in hedge fund pricing.

 

Q4. Which of the following statements regarding fund of funds (FOF) is FALSE?

A)   The higher diversification of a FOF can lead to lower expected returns.

B)   FOF have consistently delivered high returns to investors.

C)   FOF may be able to offer access to hedge funds that are closed to new, individual investors.

 

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