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Alternative Investment Features, Methods, and Structures - AI Test

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52 Questions

by tdfedrick

Generated from flash cards on 2026-01-28

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Question 1

Multiple Choice

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In a 2-and-20 fee structure, what does the "20" represent?

They often exhibit low correlation with stocks and bonds because returns are driven by different assets/strategies (real estate, private deals, commodities), which can reduce overall portfolio volatilitythough they bring liquidity and fee trade-offs.

The "20" is the incentive (performance) fee: 20% of the fund's profits. (The "2" is the annual management fee on assets.)

A private equity fund: common model is a management fee calculated on committed capital plus carried interest (performance fee) payable when return thresholds are met. Hedge funds usually charge on AUM; mutual funds charge flat management fees.

More reliant: many alternatives (private equity, hedge funds, real estate) use significant borrowed funds to amplify returns. They also tend to be less liquid and less transparent than public assets.

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Question 2

Multiple Choice

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How does a 2.5-and-10 fee structure differ from a 2-and-20 structure?

More reliant: many alternatives (private equity, hedge funds, real estate) use significant borrowed funds to amplify returns. They also tend to be less liquid and less transparent than public assets.

The whole‑of‑fund (European) waterfall: LPs recover all contributed capital and the preferred return across the entire fund before the GP earns carried interest, reducing the risk that the GP is paid on early winners while the fund overall underperforms.

European requires the whole fund to return all capital (and often a hurdle) before GPs earn carried interest; deal-by-deal can pay GP carry earlier based on individual investment exits, risking earlier GP payouts before all LP capital is returned.

2.5-and-10 charges a higher management fee (2.5% vs 2%) but a lower incentive fee (10% vs 20%). Result: higher fixed cost regardless of performance, lower share of upside to the manager.

Question 3

Multiple Choice

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A 2-and-20 fund grows $1,000,000 to $1,200,000. What is the incentive fee?

Profit = $200,000. Incentive fee = 20% × $200,000 = $40,000. (Management fee is separate and not included here.)

Direct investment → Co-investment → Fund investment. Direct gives maximum control and flexibility if the fund has in-house expertise; co-investments offer partial control and lower fees; fund investments give the least control because external managers make decisions.

Assets under management (AUM): a percentage fee on the current value of assets the manager oversees. (Contrast: private equity often charges on committed capital.)

More reliant: many alternatives (private equity, hedge funds, real estate) use significant borrowed funds to amplify returns. They also tend to be less liquid and less transparent than public assets.

Question 4

Multiple Choice

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What is a primary advantage of direct investing vs investing via a fund?

The right to reclaim previously paid performance fees from the GP if later fund losses reduce overall returns, ensuring GP pay reflects the entire fund performance rather than just early gains.

Illiquidity: alternatives (private equity, real estate, etc.) typically have longer holding periods, lock-ups, infrequent pricing, and limited secondary markets, requiring larger capital commitments and reducing liquidity compared with stocks or bonds.

Profit = $200,000. Incentive fee = 20% × $200,000 = $40,000. (Management fee is separate and not included here.)

Lower overall fees because you avoid external manager management and performance fees. Trade-offs: typically requires more capital, expertise, and offers less diversification.

Question 5

Multiple Choice

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Compared with mutual funds, what are hedge funds typically known for?

Limited liquidity and concentrated holdings — alternatives often consist of illiquid assets (private companies, real estate), are less transparent and more concentrated than broadly diversified public funds.

Hedge funds typically charge higher fees (e.g., 2-and-20), use more leverage, have limited liquidity, and are available mainly to accredited investors.

Clawback provision. It requires the GP to return previously distributed incentive fees when later losses mean the GP was overpaid, ensuring GP compensation reflects net fund performance. This differs from catch-up (accelerates GP share after hurdles) and high-water marks (fees only on gains above prior peaks).

No. Incentive fees are not charged until the fund surpasses the prior peak ($10M). The high water mark prevents paying performance fees on recovery below the previous high.

Question 6

Multiple Choice

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If $5,000,000 is invested in a 2-and-20 fund and value doesn't change, what's the annual management fee?

Managers usually possess more detailed, timely information than investors due to limited transparency and private structures — making strong governance, due diligence and incentive alignment critical.

Direct investing — the investor makes asset selection, management and exit decisions. Fund investing cedes control to the manager; co-investing offers partial control alongside a lead investor.

European (whole-of-fund) waterfall: GP receives carried interest only after the entire fund has returned all LP capital and the agreed preferred return/hurdle. Protects LPs from early GP payouts.

Management fee = 2% × $5,000,000 = $100,000 for the year. (No incentive fee unless there are profits.)

Question 7

Multiple Choice

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What is a clawback provision in private equity or hedge fund agreements?

Private equity funds. They commonly charge a management fee on committed capital and carried interest on profits, aligning GP and LP incentives for long-term value creation. Hedge funds usually charge on AUM; mutual funds rarely include incentive fees.

A clawback requires the manager to return previously taken incentive fees if overall returns later fall such that investors would otherwise receive less than their agreed share of profits.

Management fees based on committed capital. This gives managers steady compensation regardless of deployment speed, encouraging disciplined, selective investing. By contrast, AUM-based or short-term performance-linked fees can incentivize faster deployment to grow assets or generate quick returns.

European (whole-of-fund) waterfall: GP receives carried interest only after the entire fund has returned all LP capital and the agreed preferred return/hurdle. Protects LPs from early GP payouts.

Question 8

Multiple Choice

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With a high water mark: fund falls from $10M to $8M and then rises to $9M. Are incentive fees charged?

To avoid charging incentive fees on gains that merely recover past losses: performance fees are only charged when the fund's value exceeds its previous highest net asset value, protecting investors from paying for recoveries.

A clawback provision: requires the GP to return excess performance fees if subsequent losses mean the GP was overpaid over the fund’s life, aligning GP compensation with total fund performance.

No. Incentive fees are not charged until the fund surpasses the prior peak ($10M). The high water mark prevents paying performance fees on recovery below the previous high.

Question 9

Multiple Choice

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Which private equity distribution method pays the general partner after each individual investment is sold?

Lower overall fees because you avoid external manager management and performance fees. Trade-offs: typically requires more capital, expertise, and offers less diversification.

Fund investing — pools capital from many investors to provide diversified access to alternative assets (e.g., real estate) without large individual commitments; direct or co-investing typically need more capital and offer less diversification.

Deal-by-deal waterfall: carried interest is distributed as each investment is realized, allowing the GP to receive profits earlier compared with a whole-of-fund (European) waterfall.

Question 10

Multiple Choice

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In private equity, what does a "drawdown" (capital call) mean?

Long-term infrastructure projects that provide essential public services (roads, bridges, hospitals, schools). PPPs finance, build, and operate long-lived public assets — not early-stage startups or standard commercial real estate driven solely by private rental income.

A drawdown is a request for committed capital from investors to fund an investment. Investors transfer the called amount from their committed capital; it is not a NAV reduction or early return of capital.

A clawback requires the manager to return previously taken incentive fees if overall returns later fall such that investors would otherwise receive less than their agreed share of profits.

Alternative Investment Features, Methods, and Structures - AI Test

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Creating Copy

Question 1

In a 2-and-20 fee structure, what does the "20" represent?

Explanation

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Question 2

How does a 2.5-and-10 fee structure differ from a 2-and-20 structure?

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Question 3

A 2-and-20 fund grows $1,000,000 to $1,200,000. What is the incentive fee?

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Question 4

What is a primary advantage of direct investing vs investing via a fund?

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Question 5

Compared with mutual funds, what are hedge funds typically known for?

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Question 6

If $5,000,000 is invested in a 2-and-20 fund and value doesn't change, what's the annual management fee?

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Question 7

What is a clawback provision in private equity or hedge fund agreements?

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Question 8

With a high water mark: fund falls from $10M to $8M and then rises to $9M. Are incentive fees charged?

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Question 9

Which private equity distribution method pays the general partner after each individual investment is sold?

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Question 10

In private equity, what does a "drawdown" (capital call) mean?

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Alternative Investment Features, Methods, and Structures - AI Test

Test Options

Reset All Confidence Levels

Creating Copy

Question 1

In a 2-and-20 fee structure, what does the "20" represent?

Explanation

Tags

Question 2

How does a 2.5-and-10 fee structure differ from a 2-and-20 structure?

Tags

Question 3

A 2-and-20 fund grows $1,000,000 to $1,200,000. What is the incentive fee?

Tags

Question 4

What is a primary advantage of direct investing vs investing via a fund?

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Question 5

Compared with mutual funds, what are hedge funds typically known for?

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Question 6

If $5,000,000 is invested in a 2-and-20 fund and value doesn't change, what's the annual management fee?

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Question 7

What is a clawback provision in private equity or hedge fund agreements?

Tags

Question 8

With a high water mark: fund falls from $10M to $8M and then rises to $9M. Are incentive fees charged?

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Question 9

Which private equity distribution method pays the general partner after each individual investment is sold?

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Question 10

In private equity, what does a "drawdown" (capital call) mean?

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