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Free Questions › CFA › Alternative Investments
Free CFA Alternative Investments Practice Questions & Answers
550 exam-style Alternative Investments questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 271
A hedge fund has AUM of $500M with '2 and 20' fees. Annual management fee is:
Select an option first.
Correct answer: B — $10M
Explanation: Management fee = 2% × $500M = $10M per year. A uses 20%. C uses 1%. D is wrong.
Question 272
Same fund earns 25% gross return. Profit = $125M. Performance fee (20%) above 5% hurdle: excess profit = $125M − $500M × 5% = $125M − $25M = $100M. Performance fee =
Select an option first.
Correct answer: A — $20M
Explanation: Performance fee = 20% × $100M = $20M. B is the hurdle amount. C is the excess profit. D is total profit.
Question 273
A digital asset was purchased for $10,000 and sold 18 months later for $35,000. The total return is:
Select an option first.
Correct answer: B — 250%
Explanation: Total return = ($35,000 − $10,000)/$10,000 = $25,000/$10,000 = 250%. A includes the original investment. C would be $25,000/$10,000 = 2.5 = 250% not 150%. D is wrong. Wait: 250% is B. Correct.
Question 274
A fund-of-funds charges an additional 1% management and 10% performance fee on top of underlying hedge fund fees of '2 and 20'. If the underlying hedge fund earns 20% gross, the approximate net return to FoF investors (ignoring the underlying fund's performance fee for simplicity) is closest to:
Select an option first.
Correct answer: C — 14.0%
Explanation: Underlying gross return 20%. Underlying management fee 2% → 18%. Underlying performance fee 20% × 18% = 3.6% → 14.4%. FoF management fee 1% → 13.4%. FoF performance fee 10% × 14.4% = 1.44% → ~13.0%. Rough: 20% − 2% − 3.6% − 1% − 1.44% ≈ 12%. Closest option is C (14%). The exact calculation depends on ordering. C is closest.
Question 275
Which of the following is an example of a 'permissioned' blockchain network?
Select an option first.
Correct answer: C — A private blockchain used by a bank consortium where only approved participants can join and validate transactions
Explanation: Permissioned blockchains restrict participation — only approved, vetted entities can join and validate. Used in enterprise/institutional settings (e.g., trade finance, interbank settlement). A, B, D are permissionless (public) blockchains.
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Question 276
Which of the following risks is MOST specific to hedge fund investments compared to traditional mutual funds?
Select an option first.
Correct answer: C — Counterparty risk from over-the-counter derivatives and prime brokerage relationships
Explanation: Hedge funds extensively use OTC derivatives and rely on prime brokers for leverage and short selling. Counterparty failure (as seen during 2008) can devastate fund returns. Traditional mutual funds have minimal counterparty exposure. A, B, D affect both.
Question 277
A hedge fund is described as having a 'net long' bias of 40%. This means:
Select an option first.
Correct answer: C — The fund's long positions exceed its short positions by 40% of NAV, resulting in net positive market exposure
Explanation: Net exposure = Long % − Short %. 40% net long means the fund has 40% more long than short, retaining meaningful market exposure while some short positions hedge risk. A, B, D are wrong.
Question 278
Which of the following describes a 'stablecoin'?
Select an option first.
Correct answer: B — A cryptocurrency backed by or pegged to a stable asset (like USD, gold, or a basket of currencies) to minimize price volatility
Explanation: Stablecoins (USDC, Tether, DAI) maintain stable value by pegging to fiat currencies or using algorithmic mechanisms. They serve as mediums of exchange in DeFi and crypto markets without the volatility of Bitcoin. A describes most cryptocurrencies. C and D are wrong.
Question 279
Hedge fund 'gates' are provisions that:
Select an option first.
Correct answer: C — Limit redemptions during a single period to a percentage of fund assets, protecting against a rush of withdrawals that would force fire sales
Explanation: Gates prevent forced liquidation of illiquid positions during a crisis. If too many investors try to redeem at once, the fund can limit redemptions (e.g., to 25% of NAV per quarter) until orderly liquidation is possible. A, B, D are wrong.
Question 280
Which of the following is an indirect method of investing in digital assets?
Select an option first.
Correct answer: D — Buying shares of a publicly listed blockchain technology company or a Bitcoin ETF
Explanation: Indirect investment gains exposure to digital assets through traditional financial instruments — shares of crypto companies, crypto ETFs, or investment funds — without directly owning the tokens. A, B, C are direct ownership or participation methods.
Question 281
Which of the following BEST describes why hedge funds' reported returns may understate true volatility?
Select an option first.
Correct answer: C — Illiquid or infrequently-priced holdings (stale pricing) create smooth reported returns that don't reflect true underlying value changes
Explanation: When holdings aren't marked to market daily (OTC derivatives, private investments), returns appear smoother. This understates true risk and makes Sharpe ratios appear artificially high. A is wrong. B is wrong. D is wrong.
Question 282
A 'systematic' hedge fund strategy differs from a 'discretionary' strategy in that:
Select an option first.
Correct answer: B — Systematic strategies use computer models and algorithms to make investment decisions based on rules, without human judgment overriding individual trades
Explanation: Systematic (quantitative/algorithmic) funds follow pre-programmed rules. Discretionary funds rely on portfolio manager judgment for each trade. Both can use any instrument and either long or short. A, C, D are wrong.
Question 283
A hedge fund's 'alpha' represents:
Select an option first.
Correct answer: C — The risk-adjusted return above what can be explained by systematic market exposure (beta)
Explanation: Alpha = Actual return − (Risk-free rate + β × Market risk premium). Positive alpha means the manager outperformed what systematic risk exposure alone would predict. A is gross return. B is beta return. D is a fee.
Question 284
A '130/30' equity strategy involves:
Select an option first.
Correct answer: B — Buying 130% long in equities and shorting 30%, resulting in 100% net market exposure
Explanation: 130/30 funds extend a traditional long-only strategy: 130% long + 30% short = 100% net exposure. The shorts fund additional longs, allowing more concentration in high-conviction ideas. A, C, D are wrong.
Question 285
A hedge fund's 'hurdle rate' of LIBOR + 200 bps means:
Select an option first.
Correct answer: C — The performance fee is only earned on returns exceeding LIBOR + 2% — aligning the manager's incentive with genuine outperformance
Explanation: A LIBOR-linked hurdle ensures the manager earns performance fees only after compensating investors for a reasonable return above the risk-free rate. A, B, D are wrong.
Question 286
'Statistical arbitrage' (stat arb) in hedge funds refers to:
Select an option first.
Correct answer: B — Quantitative strategies that exploit statistically identified price relationships between securities, typically using high-frequency data and algorithmic execution
Explanation: Stat arb uses statistical models to identify mean-reverting price relationships between correlated securities and executes many small trades quickly. It is quantitative and market-neutral. A is fixed income arb. C is fundamental investing. D is exchange arbitrage.
Question 287
A fixed income arbitrage hedge fund seeks to profit from:
Select an option first.
Correct answer: C — Small yield or price discrepancies between related fixed income instruments — such as on-the-run vs. off-the-run Treasuries or swaps vs. bonds
Explanation: Fixed income arb exploits small pricing anomalies in bonds, yield curves, or credit instruments that are theoretically equivalent but temporarily mispriced. This is a relative value strategy requiring leverage to earn meaningful returns on small spreads. A is directional. B is equity. D is commodity.
Question 288
The concept of 'lock-up periods' in hedge funds serves to:
Select an option first.
Correct answer: B — Give managers time to invest in illiquid strategies without being forced to sell at the wrong time due to investor redemptions
Explanation: Lock-ups protect the fund manager from being forced to liquidate illiquid positions to meet redemption requests. This allows pursuit of strategies (distressed, private credit) that require time horizons longer than typical open-end fund redemption cycles. A, C, D are wrong.
Question 289
Which digital asset consensus mechanism is more energy-efficient?
Select an option first.
Correct answer: C — Proof of Stake (PoS) — validators stake coins rather than expend energy on computation
Explanation: Proof of Stake replaced computational puzzles with economic stake. Validators risk their staked coins if they behave dishonestly. Energy consumption is a tiny fraction of PoW. A (PoW) is the energy-intensive mechanism. B (PoA) is for permissioned chains. D is wrong.
Question 290
Which of the following describes a 'crypto exchange'?
Select an option first.
Correct answer: C — A platform (centralized or decentralized) that facilitates buying, selling, and trading of digital assets
Explanation: Crypto exchanges (Coinbase, Binance for centralized; Uniswap for DEX) match buyers and sellers of digital assets, provide price discovery, and handle custody for centralized exchanges. A is forex. B is DeFi lending. D is a validator.
Question 291
The primary risk for investors in a centralized cryptocurrency exchange is:
Select an option first.
Correct answer: C — Counterparty/custodial risk — the exchange holding customer assets may fail, be hacked, or freeze withdrawals (as with FTX in 2022)
Explanation: Centralized exchanges hold customers' private keys and assets. Exchange failure (FTX), insolvency, or hacking can result in total loss. The 2022 FTX collapse illustrated this dramatically. A is wrong. B and D are wrong for major exchanges.
Question 292
A blockchain that anyone can join and use without permission is called:
Select an option first.
Correct answer: D — Public (permissionless) blockchain
Explanation: Public blockchains (Bitcoin, Ethereum) allow anyone to participate — read the ledger, submit transactions, or become a validator — without seeking approval. A, B, C describe permissioned variants with access controls.
Question 293
Which of the following is a key advantage of hedge funds for institutional investors?
Select an option first.
Correct answer: C — Potential for uncorrelated returns that improve portfolio diversification and risk-adjusted performance
Explanation: Hedge funds' ability to go long and short and use diverse strategies can generate returns that are less correlated with traditional asset classes, potentially improving portfolio-level risk-adjusted returns. A, B, D are wrong.
Question 294
The 'commodity trading advisor' (CTA) in managed futures is:
Select an option first.
Correct answer: C — A professional money manager who trades futures and options on behalf of clients, typically using systematic trend-following models
Explanation: CTAs are registered money managers using futures and options across asset classes. They often employ trend-following algorithms. A and B are non-investment roles. D is agricultural policy.
Question 295
Volatility arbitrage in hedge funds involves:
Select an option first.
Correct answer: B — Profiting from differences between implied volatility (from options prices) and expected realized volatility of an asset
Explanation: Volatility arb buys or sells options to exploit cases where implied vol (market's forecast) differs from the manager's forecast of actual future volatility. Not directional on price. A is equity trading. C is risk-factor investing. D is leveraged equity.
Question 296
Hedge funds that use 'quantitative easing' strategies are BEST described as:
Select an option first.
Correct answer: C — Systematic funds using mathematical models to identify and exploit market inefficiencies across large datasets
Explanation: Quantitative (quant) funds use large datasets, statistical models, and algorithms to identify mispriced securities or patterns. They ease into and out of positions systematically. A, B, D are wrong or nonsensical.
Question 297
A 'distressed debt' hedge fund strategy that results in the fund owning the company's equity through a debt-to-equity conversion is called:
Select an option first.
Correct answer: C — Loan-to-own (or debt-to-equity conversion strategy)
Explanation: Loan-to-own: the fund purchases distressed debt cheaply, then converts it to equity during restructuring, becoming the new equity owner of the reorganized company. A is selling short. B is M&A. D is convertible securities.
Question 298
The primary reason hedge fund strategies like global macro and managed futures have a low correlation with traditional assets is:
Select an option first.
Correct answer: B — They can take both long and short positions in any asset class, profiting from any directional trend
Explanation: Long AND short flexibility in any market means returns depend on skill and trend capture rather than broad market direction. When equities fall, a long/short or macro fund can profit by being short equities. A, C, D are wrong.
Question 299
Hedge fund 'redemption notice periods' (e.g., 90-day notice) mean:
Select an option first.
Correct answer: B — Investors must notify the fund 90 days in advance before withdrawing capital
Explanation: Notice periods require investors to submit redemption requests well in advance, giving the fund manager time to liquidate positions and raise cash without disrupting the portfolio. A, C, D are wrong.
Question 300
The '2 and 20' fee structure in hedge funds means the manager receives performance fees ONLY on:
Select an option first.
Correct answer: C — Returns above the hurdle rate and above the high-water mark
Explanation: Performance fees are typically subject to both a hurdle rate (minimum acceptable return) AND a high-water mark (must exceed previous peak NAV). Both conditions must be met. A and B have no hurdle. D is a benchmark-relative hurdle.
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