CAIA PROFESSIONAL ALTERNATIVE
INVESTMENTS PREP QUESTIONS AND
ACCURATE ANSWERS GRADED A+
●● A distressed securities strategy is most likely to earn returns from
liquidity risk.
Answer: Global macro and equity long/short are most likely to earn
returns from directional market risks.
●● Investor protection clauses are clauses within limited partnership
agreement and include
Answer: investment strategy, the investment committee, the LP advisory
committee, key-person terms, exclusivity, conflicts of interest, and
termination
●● Issues facing negatively skewed assets can be addressed by
Answer: (1) changing the optimization process to account for skewness
and kurtosis; (2) adding constraints for skewness and kurtosis; and (3)
limiting the portfolio weights applicable to assets with higher moments
●● The AMC requires that managers should provide at least quarterly
performance reporting to clients—and within.
Answer: 30 days of the end of the period, if possible. This should be
done even for funds with lockup periods
,●● AIFs are suitable for larger investors with significant funds to invest.
AIFs have few restrictions and can invest in a range of securities,
including less liquid alternative investments such as hedge funds, private
equity, and real estate. SIFs are specialized funds specifically aimed at
qualified investors in Luxembourg.
Answer: UCITS funds are suitable for smaller investors and typically
invest in more liquid and safer investments that are publicly traded. CISs
encompass both UCITS funds and AIFs
●● Negative (or exclusionary) screening is an investment approach that
avoids including
Answer: in investment portfolios the equity or bond securities issued by
entities with low environmental, social, and governance (ESG) scores or
weak ESG performance
●● Natural resource investments should adopt techniques to reduce the
negative impact on biodiversity. That would include achieving sufficient
diversity of flora and fauna.
Answer: Together with farming and timbering, mining can cause
significant disruption and degradation of soil conditions. ESG issues are
quite similar between indirect and direct investments in natural
resources. Studies on protecting endangered species should be taken
before the development process to minimize any negative environmental
impacts
,●● From 2016 to 2018, ESG assets under management in alternative
investments increased nearly
Answer: threefold from $206 billion to $588 billion
●● Buildings to be significantly refurbished essentially face the same
issues as buildings that are being newly developed (e.g., quality of
planning, design, and construction).
Answer: Preparing demolition materials should ideally be done on site.
Materials that are safe to use may release toxic gases, so they are not
always safely placed in landfills. A predemolition audit is primarily
designed to minimize the amount of landfill waste and to promote safe
handling of dangerous materials
●● Key drivers behind the movement of hedge funds toward ESG
include:
Answer: regulation, risk management, client demand, and the search for
new alpha sources
●● Investments in PRIs qualify for tax advantages in the U.S., and
nonprofit or charitable entities can make tax-free distributions from
PRIs. PRIs offer ESG impact but provide below-average or no risk-
adjusted returns.
Answer: On the other hand, MRIs offer both competitive risk-adjusted
returns and an ESG impact
, ●● There are 10 ESG metrics commonly requested by private equity
investors:
Answer: 1) existence of an ESG policy, 2) person/group tasked with
implementing ESG policy, 3) existence of a corporate code of ethics, 4)
existence of any litigation, 5) people diversity, 6) employee composition,
7) environmental policy, 8) CO2 footprint, 9) data and cybersecurity
incidents, and 10) health and safety incidents
●● The competitive advantage enjoyed by firms with an ESG strategy
include higher-risk-adjusted returns and reduced reputation risk.
Answer: About 65% of institutional investors report that most of their
investment managers do not consider ESG when making investment
decisions. Currently, there is an insufficient amount of guidance
available regarding the determination, and implementation of ESG
strategies lacks clarity. Very few alternative asset managers have the
skills and knowledge to determine their sources of ESG data and how to
collect and assess that data.
●● Polluted water cannot be reused without being properly treated first.
Answer: Remediation involves restoration of water by reversing or
stopping any environmental damage (e.g., pollution).
●● Common issues with risk parity are that historic returns may not
provide reasonable basis for future performance of low-volatility
strategies;
INVESTMENTS PREP QUESTIONS AND
ACCURATE ANSWERS GRADED A+
●● A distressed securities strategy is most likely to earn returns from
liquidity risk.
Answer: Global macro and equity long/short are most likely to earn
returns from directional market risks.
●● Investor protection clauses are clauses within limited partnership
agreement and include
Answer: investment strategy, the investment committee, the LP advisory
committee, key-person terms, exclusivity, conflicts of interest, and
termination
●● Issues facing negatively skewed assets can be addressed by
Answer: (1) changing the optimization process to account for skewness
and kurtosis; (2) adding constraints for skewness and kurtosis; and (3)
limiting the portfolio weights applicable to assets with higher moments
●● The AMC requires that managers should provide at least quarterly
performance reporting to clients—and within.
Answer: 30 days of the end of the period, if possible. This should be
done even for funds with lockup periods
,●● AIFs are suitable for larger investors with significant funds to invest.
AIFs have few restrictions and can invest in a range of securities,
including less liquid alternative investments such as hedge funds, private
equity, and real estate. SIFs are specialized funds specifically aimed at
qualified investors in Luxembourg.
Answer: UCITS funds are suitable for smaller investors and typically
invest in more liquid and safer investments that are publicly traded. CISs
encompass both UCITS funds and AIFs
●● Negative (or exclusionary) screening is an investment approach that
avoids including
Answer: in investment portfolios the equity or bond securities issued by
entities with low environmental, social, and governance (ESG) scores or
weak ESG performance
●● Natural resource investments should adopt techniques to reduce the
negative impact on biodiversity. That would include achieving sufficient
diversity of flora and fauna.
Answer: Together with farming and timbering, mining can cause
significant disruption and degradation of soil conditions. ESG issues are
quite similar between indirect and direct investments in natural
resources. Studies on protecting endangered species should be taken
before the development process to minimize any negative environmental
impacts
,●● From 2016 to 2018, ESG assets under management in alternative
investments increased nearly
Answer: threefold from $206 billion to $588 billion
●● Buildings to be significantly refurbished essentially face the same
issues as buildings that are being newly developed (e.g., quality of
planning, design, and construction).
Answer: Preparing demolition materials should ideally be done on site.
Materials that are safe to use may release toxic gases, so they are not
always safely placed in landfills. A predemolition audit is primarily
designed to minimize the amount of landfill waste and to promote safe
handling of dangerous materials
●● Key drivers behind the movement of hedge funds toward ESG
include:
Answer: regulation, risk management, client demand, and the search for
new alpha sources
●● Investments in PRIs qualify for tax advantages in the U.S., and
nonprofit or charitable entities can make tax-free distributions from
PRIs. PRIs offer ESG impact but provide below-average or no risk-
adjusted returns.
Answer: On the other hand, MRIs offer both competitive risk-adjusted
returns and an ESG impact
, ●● There are 10 ESG metrics commonly requested by private equity
investors:
Answer: 1) existence of an ESG policy, 2) person/group tasked with
implementing ESG policy, 3) existence of a corporate code of ethics, 4)
existence of any litigation, 5) people diversity, 6) employee composition,
7) environmental policy, 8) CO2 footprint, 9) data and cybersecurity
incidents, and 10) health and safety incidents
●● The competitive advantage enjoyed by firms with an ESG strategy
include higher-risk-adjusted returns and reduced reputation risk.
Answer: About 65% of institutional investors report that most of their
investment managers do not consider ESG when making investment
decisions. Currently, there is an insufficient amount of guidance
available regarding the determination, and implementation of ESG
strategies lacks clarity. Very few alternative asset managers have the
skills and knowledge to determine their sources of ESG data and how to
collect and assess that data.
●● Polluted water cannot be reused without being properly treated first.
Answer: Remediation involves restoration of water by reversing or
stopping any environmental damage (e.g., pollution).
●● Common issues with risk parity are that historic returns may not
provide reasonable basis for future performance of low-volatility
strategies;
