MCQ Quiz

Question 1 of 7

A private equity fund has a 'soft' hurdle rate of 8% and a 20% performance fee with a full catch-up provision. The fund invests USD 100 million and exits after one year with proceeds of 115 million. Assuming no management fees, the distribution to the General Partner (GP) is closest to:

$1.4 million
$3.0 million
$1.2 million

Question 2 of 7

A hedge fund with a 20% incentive fee and a high-water mark (HWM) of USD 150 million has a current NAV of 140 million. The fund earns a 10% return in the current year. The incentive fee charged is closest to:

$2.8 million
$0.8 million
$0.0 million

Question 3 of 7

An alternative investment strategy uses leverage of 1.5 (Total Assets / Equity). The underlying assets return 8%, and the cost of borrowing is 4%. If the asset return drops to 2%, the leveraged return will be:

-1.0%
1.0%
3.0%

Question 4 of 7

A private equity fund has committed capital of $200 million and charges a 2% management fee on committed capital. In Year 1, 30% of capital is called and invested. The investments earn a gross return of 15% on invested capital. The net return to investors (as a percentage of invested capital) is closest to:

8.3%
13.0%
15.0%

Question 5 of 7

When alternative assets are valued using 'mark-to-model' rather than market prices, the estimated Sharpe ratio is most likely to be:

Biased upward due to understated volatility.
Biased downward due to understated returns.
Unbiased if the model inputs are Level 3 compliant.

Question 6 of 7

In a 'Deal-by-Deal' (American) waterfall with a clawback provision, the General Partner (GP) receives carried interest:

Only after the investors have received their initial capital and preferred return on the entire fund portfolio.
On each profitable investment individually, but may be required to return fees if subsequent losses occur.
On each profitable investment individually, with no obligation to return fees regardless of future performance.

Question 7 of 7

A private equity fund reports a high Internal Rate of Return (IRR) but a low Multiple of Invested Capital (MOIC). This return profile most likely indicates:

The fund held investments for a long duration, allowing compounding to multiply capital.
The fund exited investments quickly, generating a high annualized rate on a small absolute gain.
The fund failed to beat its hurdle rate and paid no carried interest.

Alternative Investments - Performance and Returns

First Principles Thinking: Soft Hurdle & Catch-Up Mechanics

First Principles Thinking: High-Water Mark Integrity

First Principles Thinking: Mechanics of Leverage

First Principles Thinking: The J-Curve Effect

First Principles Thinking: Volatility Dampening

First Principles Thinking: Incentive Timing vs. Alignment

First Principles Thinking: Time Sensitivity of Metrics