ENVIRONMENT‐RELATED NEGATIVE SCREENING IS MOST LIKELY TO LEAD T...

42. Environment‐related negative screening is most likely to lead to funds being overweight which of

the following styles?

A. Value and small‐cap.

B. Value and large‐cap.

C. Growth and small‐cap.

Portfolio Management—Alternative Investments

Question 8

Use the following information to answer the next six questions.

The Baracas Foundation is considering adding alternative assets to what has historically been a portfolio

invested entirely in traditional publicly listed equities and bonds.

The investment committee is meeting to decide which of the major types of alternative asset is most likely

to meet their requirements.

During the meeting, committee members make the following comments:

Comment 1: “We look to real estate primarily to provide diversification and lower the downside risk of

the portfolio. It is not a major objective that any allocation to real estate–related products should boost

returns of the portfolio.”

Comment 2: “Due to the size of the foundation, any allocation to private equity is likely to not be

large enough to meet the minimum commitment levels of more than two or three private equity limited

partnerships. On this basis the foundation should consider allocating to a private equity fund of funds

since the diversification benefits achieved in doing so are likely to outweigh any extra layer of fees in the

fund‐of‐funds structure.”

The committee has also concluded that an allocation to commodities would be appropriate for the

foundation, given the principal roles commodities are expected to play in an investment portfolio with

respect to diversification and inflation hedging. They are looking at adding a position in three potential

commodity investments displayed in Exhibit 1:

Exhibit 1

Three Potential Commodity Investment Positions Considered by the Baracas Foundation

Investment

Commodity

Commodity

Type

Price

Spot Price

Gold

Spot

$1,300

$1,300

Gold

Futures

$1,250

$1,300

Crude Oil Services Company

Equity

$12.31

$61.55

The committee is also considering the performance data of several hedge fund indices, and the

performance data of several large hedge funds of various strategies. One of the committee members who

has previous experience working in a hedge fund environment cautions the committee about nạve use of

this data. Specifically, they state that biases such as survivorship bias, stale price bias, and inclusion bias

can significantly inflate hedge fund index returns. They also state the following issues with the Sharpe

ratio when applied to hedge fund returns: