CFA Level 3 Exam

359 Questions

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Question No. 1

Bartholomew Hope, CFA, is the chief investment officer of Children's Trust Foundation (CTF), a foundation that supports a wide variety of child-related causes. CTFs total assets total $2.3 billion. The foundation's current asset mix is 55% stocks, 35% bonds, and 10% cash (T-bills earn 3.5%). The foundation provides $126.5 million annually for a variety of programs for children, which is forecasted to remain more or less constant in real terms. Hope does not envision any major capital expenditures for the foreseeable future.

CTF's investment portfolio has underperformed its benchmark over the past three years. Hope believes corrective action is needed to address the issue of poor performance. Hope wants to evaluate the possibility the portfolio's risk to reward profile. Hope's staff generates Exhibit 1, which reviews the relevant necessary metrics to make the asset mix decision. The overall cost of investing the assets is 75 basis points.
Exhibit 1: Expected Returns, Risk, and Correlations for Asset under Consideration
Exhibit 1: Expected Returns, Risk, and Correlations for Asset under Consideration
One of the members of Hope's staff, Rene Meyer, includes a report on the key attributes of investing in venture capital funds. The report includes the following sections:
Structure: "Indirect venture capital investments are achieved by pooling the funds of multiple investors into a limited partnership (LP). The investors are limited partners who allow a general partner to control the investments for a period of 7 to 10 years. The general partner also invests capital, earning a management fee of 1.5% to 2.5% of invested capital and a carried interest fee, which is generally 20% of the fund profits, after the fund's hurdle rate has been met."
Strategy: "Because initial public offerings are a primary exit strategy of venture capital investing, the correlation between public equity markets and returns on venture capital investments are positive. Therefore, the primary focus of any venture capital investment undertaken by Glendale should be long-term return enhancement rather than significant diversification. In addition, Glendale must make sure that all of the committed capital is available for the required up front cash distribution to the general partner at the beginning of the investment period."
Hope recognizes there are several unique strategies within the hedge fund group that have very different risk to reward trade-offs. Hope identifies three hedge funds as potential investment opportunities for the CTF. Exhibit 2 lists the funds under consideration and their most recent securities transactions.
Exhibit 2: Hedge Fund Transactions
Exhibit 2: Hedge Fund Transactions
While Clark presents the hedge funds, Hope comments that he is concerned with the potential difficulties in measuring hedge fund manager performance. Glendale's charter has strict requirements regarding the performance assessment of investment managers who control the assets of the foundation. Hope believes the performance of alternative investments presented may be difficult to evaluate against a benchmark index as required by Glendale's charter.
State which of the following hedge funds identified by Hope and listed in Exhibit 2 most likely follows an equity market neutral strategy.
Choose the correct option from the given list.
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