Analysis of Alternative Investments

Correct Answer: The multi-strategy hedge fund would be more appropriate for the investor's objectives, as it combines various strategies that can potentially provide diversification benefits and mitigate drawdowns during market downturns by adapting to different market conditions.

The multi-strategy hedge fund is the most appropriate choice for the investor's objectives. This type of fund combines various strategies, such as long/short equity, event-driven, and relative value arbitrage, which can provide diversification benefits and help mitigate drawdowns during market downturns by adapting to different market conditions. The global macro hedge fund focuses on a single strategy based on macroeconomic trends, which may provide targeted exposure to specific market opportunities but may not offer the same level of diversification and risk mitigation as a multi-strategy approach. While both strategies aim to generate higher risk-adjusted returns and provide diversification benefits, the multi-strategy fund is better suited to minimize drawdowns and navigate varying market conditions due to its more diverse approach.

Correct Answer: Lack of transparency and regulatory oversight compared to traditional investments

The correct answer is 'Lack of transparency and regulatory oversight compared to traditional investments'. Hedge funds are less regulated and have less disclosure requirements compared to traditional investments like mutual funds. This lack of transparency can make it challenging for investors to fully understand the risks involved and the strategies employed by hedge fund managers. The other two answers, while related to hedge funds, do not directly address the risks: - 'Hedge funds typically have lower management fees than mutual funds, which can impact returns' is incorrect. Hedge funds often have higher fees than mutual funds, which can eat into returns. - 'Hedge fund managers often employ complex trading strategies that can be difficult for investors to fully comprehend' is true but does not necessarily represent a direct risk. The complexity of strategies alone is not a risk if they are well-executed, although it can make it harder for investors to evaluate the fund.

Correct Answer: Illiquidity risk due to the long-term nature of the investments and limited secondary markets

The key risk associated with investing in real assets such as farmland and timberland is illiquidity risk. These investments are typically long-term in nature and have limited secondary markets, making it difficult for investors to quickly sell their holdings if needed. Market risk arising from fluctuations in commodity prices and demand for the underlying assets is also a factor, but it is not the primary risk. Real assets can provide a hedge against inflation and diversification benefits, even with some market volatility. Operational risk related to the management and maintenance of the physical assets and potential environmental liabilities is also present, but can be mitigated through due diligence and proper oversight. It is not the defining risk of this asset class.