Reading 34: Alternative Investm....olio Management－LOS ol major, within, groups, including, investment

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CFA Institute Area 8-11, 13: Asset Valuation
Session 11: Alternative Investments for Portfolio Management
Reading 34: Alternative Investments Portfolio Management
LOS old f: Review the investment characteristics of the major types of investment within alternative investment groups, including risks and liquidity.

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Ben Leesom, CFA, thinks distressed securities are appropriate for one of his clients. If liquidity is important for the client, then Leesom should recommend:

A) an investment with a hedge fund structure over a private equity structure.

B) investments with either a hedge fund structure or a private equity structure.

C) an investment with a private equity structure over a hedge fund structure.

D) neither an investment with a hedge fund structure nor a private equity structure.

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Answer and Explanation

Distressed securities can be divided by the two indicated structures. Hedge fund structured investments are usually more liquid than investments in distressed equity using the private equity structure.

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Compared to indirect investments in real estate, direct investments in real estate are least likely to have which of the following properties?

A) Lower liquidity.

B) Higher transactions costs.

C) Higher transparency.

D) Lower mobility.

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Answer and Explanation

Direct investments in real estate generally have low liquidity, large lot sizes, high transactions costs, low mobility, and asymmetric information in transactions (low transparency).

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With respect to adding managed futures investing to a stock and bond portfolio:

A) a trend-following strategy will offer lower diversification than a contrarian strategy.

B) a trend-following strategy will offer more diversification than a contrarian strategy.

C) a trend-following strategy will offer diversification equal to that of a contrarian strategy.

D) neither trend-following strategies nor contrarian strategies offer any diversification.

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Answer and Explanation

For managed futures funds, a trend-following strategy will offer lower diversification than a contrarian strategy. This should be obvious since the trends would be those of the cash markets for which the investor is trying to obtain diversification. The market for the underlying securities will also play a role.