SAMPLE WORK
QUESTION 1
August 2025 Question Three A
- Distinguish between “alternative investments” and “traditional investments” based on the following areas:
- Information asymmetries.
- Incomplete markets.
Answer
| Feature | Traditional Investments | Alternative Investments |
| Information Asymmetries | Low: Public markets have strict disclosure rules, ensuring information is widely and quickly available. | High: Information is often private and proprietary; specialized knowledge or “insider” expertise creates an edge. |
| Incomplete Markets | Minimal: High liquidity and standardized products mean most risks can be hedged or traded easily. | Significant: Markets may lack liquidity or standardized contracts, meaning some risks cannot be fully hedged or priced. |
| Innovation | Standardized: Focuses on efficiency, low cost, and accessibility (e.g., ETFs). | Dynamic: Constantly evolving with complex structures, unique underlyings, and creative strategies to find alpha. |
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QUESTION 2
April 2025 Question One A
Describe FOUR challenges experienced during the historical evolution of alternative investments.
Answer
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Limited Accessibility: Historically reserved for ultra-high-net-worth individuals and large institutions due to high entry minimums.
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Opacity and Lack of Data: A lack of historical performance benchmarks made it difficult for investors to conduct due diligence.
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Regulatory Scrutiny: Early alternative vehicles operated in “shadow” areas, leading to periodic crackdowns or restrictive legal frameworks.
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High Fee Structures: The “2 and 20” model (management and performance fees) was often seen as a barrier compared to cheap index funds.
QUESTION 3
December 2024 Question One A
- Outline THREE differences between “traditional investment and “alternative investment” based on return characteristics.
- Advise a client on THREE benefits of introducing alternative investment in a portfolio.
Answer
(i) Differences in Return Characteristics
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Skewness and Kurtosis: Alternative returns often exhibit “fat tails” (extreme outcomes) compared to the more “normal” distribution of traditional stocks.
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Correlation: Alternatives typically have low correlation with public markets, providing a buffer during market crashes.
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Alpha vs. Beta: Traditional returns rely heavily on market movement (Beta), whereas alternatives focus on manager skill and unique market inefficiencies (Alpha).
(ii) Benefits of Introduction to a Portfolio
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Enhanced Diversification: Adding assets like real estate or private equity reduces the overall volatility of the portfolio.
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Higher Potential Returns: The “illiquidity premium” often results in higher long-term yields than public bonds or equities.
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Inflation Hedge: Hard assets (like commodities or infrastructure) often maintain value or appreciate when inflation rises.
QUESTION 4
August 2024 Question One A& B
- Highlight FOUR motivating goals for a pension fund in rendering alternative investment.
- Explain THREE types of alternative investment structures.
Answer
(a) Motivating Goals for Pension Funds
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Liability Matching: Finding long-term cash flows (e.g., infrastructure) to pay out future retiree benefits.
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Risk Reduction: Hedging against systematic market downturns through non-correlated assets.
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Yield Enhancement: Meeting high actuarial target returns in a low-interest-rate environment.
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Inflation Protection: Ensuring the purchasing power of the fund’s capital remains stable over decades.
(b) Types of Alternative Investment Structures
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Limited Partnerships (LPs): The most common for private equity/hedge funds, where the General Partner manages the fund and LPs provide capital.
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Special Purpose Vehicles (SPVs): Entities created for a single investment (e.g., one specific real estate project) to isolate financial risk.
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Managed Accounts: Tailored structures where a fund manager handles a specific portfolio directly for one large institutional client.
QUESTION 5
April 2024 Question Three B
Describe FOUR similarities between alternative investments and conventional investments.
Answer
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Profit Motive: Both aim to maximize risk-adjusted returns for the investor.
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Valuation Principles: Both ultimately rely on the present value of future cash flows, regardless of the asset type.
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Risk Exposure: Both are subject to market, interest rate, and operational risks.
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Regulatory Oversight: Both are subject to the legal frameworks and anti-money laundering (AML) laws of their respective jurisdictions.
QUESTION 6
December 2023 Question Three A
Describe FOUR lessons learnt from historical evolution of alternative investments.
Answer
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Due Diligence is Paramount: History (e.g., the 2008 crisis) showed that understanding the underlying “plumbing” of an investment is vital.
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Liquidity Risk is Real: Investors learned that during a crisis, “paper wealth” in alternatives can be impossible to exit quickly.
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Transparency Matters: The shift toward better reporting and independent valuations followed various scandals.
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Diversification within Alternatives: It is not enough to just “buy an alternative”; one must diversify across different alternative strategies.
QUESTION 7
August 2023 Question Two A
Argue TWO cases why alternative investments are complement to traditional investments.
Answer
- Diversification: Alternative assets typically show little or even inverse correlation with traditional investments like equities and bonds. Because they do not move in tandem, they help lower overall portfolio risk.
- Improved Return Potential: Some alternatives, such as private equity and venture capital, can deliver higher returns than conventional assets, thereby enhancing overall portfolio performance when properly managed.
- Protection Against Inflation: Assets like real estate and commodities often increase in value during inflationary periods, helping to preserve the investor’s purchasing power.
- Exposure to Distinct Opportunities: Alternative investments open the door to opportunities outside standard markets, including startups, property developments, and specialized hedge fund strategies.
- Greater Portfolio Flexibility: Incorporating alternative assets allows investors to design portfolios that better match their specific risk tolerance, return goals, and individual preferences.
QUESTION 8
April 2023 Question Two A
Analyse FOUR benefits of incorporating alternative investments in a portfolio.
Answer
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Risk Mitigation through Diversification: Alternative assets typically exhibit low correlation with public equities and fixed-income securities. Because these assets respond differently to market cycles, they help stabilize a portfolio by minimizing systemic risk.
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Enhanced Alpha Generation: Vehicles such as venture capital and private equity offer the prospect of superior long-term growth. When executed with rigorous due diligence, they can significantly outperform conventional market benchmarks.
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Inflationary Protection: Tangible assets, including commodities and real property, often serve as effective shields against rising prices, as their intrinsic value typically appreciates alongside the consumer price index.
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Exposure to Niche Markets: These investments unlock entry into exclusive sectors—such as early-stage tech startups or bespoke hedge fund maneuvers—that are otherwise inaccessible via public exchanges.
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Strategic Portfolio Tailoring: Incorporating alternatives allows for a more granular approach to asset allocation, enabling investors to align their holdings with very specific risk appetites and financial goals.
QUESTION 9
December 2022 Question One B
Explain THREE types of alternative investment structures.
Answer
- Limited Partnerships (LPs): A widely used structure in private equity and venture capital where limited partners supply the funds, and a general partner is responsible for managing the investments.
- Limited Liability Companies (LLCs): Provide flexibility in both governance and tax treatment, allowing members to participate either actively or as passive investors.
- Master-Feeder Structures: Combine capital from different investor groups into a central fund while accommodating varying regulatory and tax requirements.
- Fund of Funds: Allocate capital across multiple hedge funds or private equity funds, offering diversification and exposure to a range of investment strategies.
- Closed-End Funds: Issue a fixed number of shares that are traded on exchanges, offering liquidity, though prices may differ from the net asset value (NAV).
- Open-End Funds: Permit investors to enter or exit at the fund’s NAV, providing higher liquidity, although withdrawals may sometimes be restricted.
- Exchange-Traded Funds (ETFs): Bought and sold on stock exchanges like ordinary shares, these funds offer transparency and ease of trading, with some focusing on alternative assets.
- Private Investment in Public Equity (PIPE): Refers to private investors purchasing shares in a publicly listed company, typically at a discounted price.
- Special Purpose Vehicles (SPVs): Entities created for specific transactions, such as securitizing assets or holding investments that are not easily tradable.
- Separately Managed Accounts (SMAs): Investment portfolios managed by professionals on behalf of individual clients, customized to meet their specific goals and risk preferences.
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