karoliukas

In distressed securities investing, a private equity fund that seeks to partner with the company in which the fund invests would most likely be called:

A) a vulture fund.

B) a high yield fund.

C) an orphan equity fund.

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A “vulture fund” is a private equity fund that uses an “active” approach where the fund or investor acquires positions in the company, and the investment gives some measure of control. The investor can then influence and assist the company and then acquire more ownership in the process of any reorganization. By providing services and obtaining a strategic position, the investors create their own opportunity.

karoliukas

In distressed securities investing, the strategy that focuses on trying to find opportunities where the prospects will improve is called:

A) a momentum strategy. The goal is to find a firm that has “improvement momentum.”

B) long-only value investing. Its returns depend on the fact that not all investors can invest in distressed securities.

C) long-only value investing. Its returns depend on the fact that the market for distressed securities is efficient.

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This is the basic principal of long-only value investing in distressed securities.

karoliukas

In alternative investments, distressed debt arbitrage seeks to earn a return from:

A) an improvement in the prospects of the firm only.

B) either the decline of the stock to zero or an improvement in the prospects of the firm.

C) the decline of the stock to zero only.

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Distressed debt arbitrage is the purchasing of a company’s distressed debt while selling the equities short. The investment can earn a return in two ways: 1) if the equity declines or goes to zero the investor gains from the short position but may continue to gain from the long bond position, 2) if the company’s prospects improve, because of the seniority of bond claims, the returns to bond holders should be greater than that of equity holders. The possibility of returns from two events provides a good market opportunity.

karoliukas

In distressed securities investing, event risk is:

A) a source of diversification only.

B) a source of return only.

C) a source of both return and diversification.

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Event risk refers to the fact that the return on a particular investment within this class typically depends on a particular event for a company, and that can provide good diversification.

karoliukas

In distressed securities investing, the fact that there can be cyclical supply and demand for these investments is associated with:

A) arbitrage risk.

B) J-factor risk.

C) market liquidity risk.

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Market liquidity risk refers to the low liquidity and the fact that there can be cyclical supply and demand for these investments.

karoliukas

In distressed securities investing, the type of risk that is from the human element associated with decisions determined in a court of law is called:

A) event risk.

B) decision risk.

C) J-factor risk.

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In J-factor risk, the “J factor” refers to the role that courts and judges can play in the return, and this involves an unpredictable human element.

karoliukas

Which of the following statements regarding the performance of managed futures is most accurate?

A) Publicly traded managed futures have performed well on both a stand-alone and portfolio basis.

B) Privately managed futures have not performed as well as publicly traded funds.

C) Managed futures have exhibited a positive correlation to equities and bonds during up markets and a negative correlation during falling markets.

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The primary benefit to managed futures is the significant diversification potential (i.e., improved Sharpe ratios). For example, some research has even shown that managed futures have exhibited positive correlation to equities and bonds during up markets and negative correlations during falling markets, although the performance seems to be related to specific strategies and time periods. In particular, private funds seem to add value whereas publicly traded funds have performed poorly both stand-alone and in portfolios.

karoliukas

Which of the following statements regarding how managed futures are typically structured is least accurate?

A) Commodity pool operators can act as commodity trading advisors who actively manage a pool of futures contracts.

B) Commodity trading advisors are responsible for actively buying and selling futures contracts.

C) Commodity trading advisors hire commodity pool operators to manage the pool of futures contracts.

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Managed futures programs are typically run by Commodity Pool Operators (CPOs). CPOs can themselves be commodity trading advisors (CTAs) or will hire CTAs to actually manage all or part of the pool. In the United States, both must be registered with the U.S. Commodity Futures Trading Commission and the National Futures Association. Some CTAs may choose to work independently outside of a public or private CPO structure.

karoliukas

A commodity pool operator (CPO) is deciding whether or not to hire a particular commodity trading advisor (CTA). The CTA has a good track record of performance and often exhibits negative correlation with equities thus enhancing overall performance in down markets. Which of the following statements regarding whether or not the CPO should hire the CTA is most accurate? The CPO should:

A) not hire the CTA if their beta relative to other CTAs managing the pool of futures contracts is too low, as this indicates that the CTA’s past returns are low relative to the pool of operators.

B) hire the CTA only if its beta and correlation have been considered in determining its risk relative to the pool of operators.

C) not hire the CTA if their past performance is highly correlated with the pool of operators, as this indicates their volatility relative to the pool is high.

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In selecting a CTA to include in the portfolio, the manager should consider risk. For example, even though CTAs often exhibit negative correlations with equities, correlations among CTAs themselves can range anywhere from significantly positive (i.e., close to 1.0) to only modestly positive. In addition, the beta that relates the performance of an individual CTA to a fund of CTAs can be a good indicator of future risk-adjusted performance. Just as equity beta relates the volatility (risk) of an individual equity security or portfolio to the overall equity market, the CTA beta measures the risk of the individual CTA relative to a fund of CTAs.

karoliukas

Which of the following statements regarding what a managed futures trading strategy is called and how it is described is least accurate?

A) Unsystematic – the commodity trading advisor tracks specific commodity futures contracts and uses trading rules to signal when to buy and sell the contract.

B) Systematic – the commodity trading advisor trades according to market trends and may even use a contrarian strategy which trades against the market trend.

C) Discretionary – the commodity trading advisor uses their own discretion to buy futures contracts they feel are over or undervalued.

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Commodity trading advisor (CTA) strategies can be described as systematic or discretionary (not unsystematic). CTAs that specialize in systematic trading strategies typically apply sets of rules to trade according to short, intermediate, and/or long-term trends. They may also trade counter to trends in a contrarian (against the trend) strategy.
A discretionary trading strategy is based on the discretion of the CTA, in the same way that any active manager seeks value.
Managed futures can also be classified according to the markets in which they trade. They apply systematic or discretionary trading strategies in financial markets, currency markets, or diversified markets. In financial markets, they trade in financial (i.e., interest rate) and currency futures, options, and forward contracts. Those that specialize in currency markets trade exclusively in currency derivatives. A fund that trades in diversified markets trades in all the financial derivatives markets described as well as commodity derivatives.