Hedge Funds — MCQs

Sterling Multi-Asset Fund is reviewing three alternative strategies to improve diversification relative to its long-only public equity and bond holdings. The investment committee requires the analyst to identify each strategy by its economic return source rather than by the manager's stated product category. The committee is also assessing operational risks because several proposed investments use derivatives, short sales, or direct ownership of digital assets. Alpha Convertibles purchases convertible bonds that the manager considers undervalued and shorts shares of the same issuers. The short equity positions are sized to reduce sensitivity to small changes in the underlying share prices. The manager seeks to earn returns from differences between the market pricing of the convertibles and the value implied by their bond and embedded-option components. The strategy does not focus on announced mergers, bankruptcies, or corporate restructurings. TrendPath Futures uses liquid exchange-traded futures and a systematic trend-following model. It may hold long positions in markets with positive trends and short positions in markets with negative trends. The mandate spans equity indexes, government bond futures, currencies, and commodities. Sterling's chief investment officer expects some markets to experience prolonged directional trends during periods in which traditional stock–bond diversification may weaken. The committee therefore wants to identify which proposal is most directly designed to exploit such trends. The fund is separately rolling a long natural gas futures position. The expiring contract is sold and the next-delivery contract is purchased at the prices shown in Exhibit 2. For purposes of calculating the expected roll return, the analyst assumes that the new contract will later be sold at USD 3.00 per MMBtu and ignores collateral income, transaction costs, changes in spot prices, and leverage. Digital Reserve would hold cryptoassets directly rather than through securities issued by an operating company. The proposal currently permits employees to retain private keys on internet-connected devices. Sterling's operational-risk policy instead favors segregated assets, offline key storage, multi-person authorization, documented recovery procedures, and independent reconciliation. The committee is particularly concerned that loss or theft of private keys could make assets permanently inaccessible even if blockchain records remain intact.

Northbridge Pension Plan is evaluating commitments to several private equity funds. The investment committee understands that reported internal rates of return can be affected by the timing of capital calls and distributions, whereas investment multiples generally do not incorporate the time value of money. The committee therefore asks its analyst, Elena Park, to assess both dimensions of performance rather than rank funds using IRR alone. Park first reviews Fund Alpha and Fund Beta using the information in Exhibit 1. All NAV amounts are the general partners' most recent fair value estimates, and all distributions are cash amounts already received by limited partners. Neither fund has used recallable distributions. Park notes that Fund Alpha is younger and has a greater proportion of its value remaining in unrealized investments. Fund Beta has completed several exits, although it continues to hold portfolio companies with material residual value. The committee also considers a commitment to Fund Gamma, which is preparing a distribution under the terms summarized in Exhibit 2. The fund uses a European-style waterfall, so the general partner does not receive carried interest on an individual successful transaction before the limited partners recover aggregate contributed capital and the stated preferred return. The committee asks Park to calculate the carried interest strictly under the specified simplified terms; taxes and transaction expenses are ignored. Finally, Park reviews Fund Delta. Its general partner uses a subscription credit facility to finance investments temporarily before issuing capital calls to limited partners. Assume the facility merely delays the limited partners' contributions, the underlying investments and exit proceeds are unchanged, and any interest expense is immaterial. Park tells the committee that the facility can make the reported since-inception IRR appear stronger even when it does not improve the underlying portfolio companies' economics. Park also examines Fund Alpha's performance against a public market benchmark using a public market equivalent (PME) analysis, matching the fund's contribution and distribution cash flows to the same dates in a reference index, as summarized in Exhibit 3. Separately, the committee is comparing a direct commitment to the underlying fund against investing through a fund-of-funds vehicle that would add an extra layer of management fees and carried interest, as summarized in Exhibit 4. Park also explains the typical J-curve pattern. Early in a private equity fund's life, management fees, organizational expenses, and initial investment costs may contribute to negative or weak returns. Reported performance may improve as portfolio companies mature, valuations rise, and successful exits generate distributions. The committee intends to evaluate the funds using TVPI, DPI, residual value, cash-flow timing, PME benchmarking, fee layering, and the reliability of unrealized valuations.

The Alder University Endowment is reviewing several alternative strategies to improve diversification during periods of equity and bond market stress. The committee requires the investment staff to identify each strategy's underlying economic return driver rather than relying on a manager's marketing classification. Exhibit 1 summarizes three proposals. Strategy Alpha invests only after a public acquisition announcement. Its manager analyzes financing conditions, shareholder approvals, regulatory reviews, and the probability that each transaction will close. The manager generally buys the target below the announced consideration and may short the acquirer's shares when the consideration includes acquirer stock. The strategy loses money if a transaction fails and the target's price falls toward its unaffected level. Strategy Beta trades liquid futures on equity indexes, government bonds, currencies, and commodities. Its systematic model establishes long positions after persistent price increases and short positions after persistent declines. Position sizes are volatility adjusted. The manager expects the strategy to perform best when market movements are sustained, but recognizes that rapid reversals can cause repeated losses as signals change direction. Strategy Gamma maintains fully collateralized long commodity futures positions. The investment staff decomposes return into changes in the relevant spot price, collateral income, and roll return. For the markets currently targeted by Gamma, futures prices are below the spot prices expected to prevail at contract expiration and increase toward spot as expiration approaches. The endowment assumes the convergence described in Exhibit 1 occurs and evaluates the roll component separately from spot and collateral returns. The committee is also considering a direct allocation to digital assets. As described in Exhibit 2, ownership and transfer depend on cryptographic keys rather than a conventional securities registrar. The proposed custodian would use offline storage, authorization controls, and backup procedures, but these controls cannot eliminate the possibility that inaccessible or compromised keys could prevent the endowment from controlling its holdings. Separately, the endowment already owns timberland. Staff notes that biological growth contributes to timber volume and that harvest timing can sometimes be deferred when prices are unfavorable. The committee nevertheless recognizes that timberland remains exposed to fire, disease, weather, operating costs, illiquidity, and uncertain sale prices. Each proposed strategy is therefore assessed on its specific return source and structure-specific risks.

Meridian Real Assets advises an institutional investor seeking income, inflation sensitivity, and diversification from conventional equities and bonds. The investor can tolerate moderate illiquidity but wants the valuation and risk analysis to reflect the economics of each real asset rather than relying on a single framework for all holdings. Meridian first evaluates Riverside Plaza, an unlevered office property. Current annual rental revenue is USD 4.2 million. Property operating expenses, including property taxes, insurance, maintenance, and management costs, are USD 1.5 million. After the replacement of a departing tenant, the analyst forecasts stabilized annual net operating income of USD 3.0 million. Comparable stabilized properties trade at a 5.4% capitalization rate. The valuation is to be performed using direct capitalization, and financing costs are excluded from NOI. The investor also owns shares in a publicly traded equity REIT. For the most recent year, the REIT reported funds from operations of USD 3.40 per share. Recurring capital expenditures required to maintain the quality and occupancy of existing properties were USD 0.25 per share. The REIT reported no unusual leasing commissions, straight-line rent adjustments, or other adjustments beyond those stated. An analyst proposes using adjusted funds from operations to assess the cash flow potentially available for distribution after maintaining the property portfolio. Meridian then compares three infrastructure assets. The first is an operating toll road that has five years of traffic data but requires rehabilitation. The second is a proposed greenfield port facility that is awaiting permits, construction, and customer commitments. Its forecast usage depends on regional trade growth. The third is an operating regulated electric utility with established demand and a permitted return on invested capital. All three investments would be acquired at independently appraised fair values. Finally, Meridian reviews a timberland holding containing mature and semi-mature trees. Lumber prices have declined temporarily, but the forest is healthy, carrying costs are manageable, and the investor has no near-term liquidity requirement. The manager proposes reducing current harvesting and allowing selected trees to continue growing. The investment committee notes that timberland returns may arise from changes in land value, changes in timber prices, and biological growth. It asks whether the manager's harvest proposal is economically consistent with timberland's distinctive characteristics.

A private loan pays three-month SOFR plus 600 basis points, subject to a 4.0% SOFR floor. If SOFR is 3.0%, the annualised coupon rate is closest to:

An institution commits capital to a closed-end buyout fund that draws funds as investments arise. The fund's liquidity pattern is best described by:

A one-year private loan is issued at USD 98. It pays USD 2 cash interest and USD 8 payment-in-kind interest, increasing the USD 100 principal repaid at maturity to USD 108. The lender's holding-period return is closest to:

A corporate treasurer seeks a blockchain-based asset designed to track USD for programmable payments with limited price volatility. The asset is most likely a: