Schweser ID#: 47223

A

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Does anyone else think the answer should be D?
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Ben Leesom, CFA, thinks distressed securities are appropriate for one of his clients. If liquidity is important for the client, then Leesom should recommend:
A) investments with either a hedge fund structure or a private equity structure.
B) an investment with a private equity structure over a hedge fund structure.
C) an investment with a hedge fund structure over a private equity structure.
D) neither an investment with a hedge fund structure nor a private equity structure.
Your answer: D was incorrect. The correct answer was C) an investment with a hedge fund structure over a private equity structure.
Distressed securities can be divided by the two indicated structures. Hedge fund structured investments are usually more liquid than investments in distressed equity using the private equity structure.
 
It probably depends on what is meant by “liquidity”. PE often has two year lock-ups. You can find distressed securities hedge funds with quarterly liquidity and no lock-up (but probably a gate) and maybe even better.
 
I agree with JD, although it is becoming harder to find distressed HF’s without a lock, you can find ones that don’t have one with Quaterly liquidity with anywheres from 45-90 days notice plus 10% holdback for audit if full redemption, but you can also find ones with a soft lock which will allow you to redeem before the lock is up but at a fee, typically 3%. But in all a Distressed HF will be more liquid than a PE structured fund. Even more liquid would be an RV or especially EH funds which can be found with Monthly liquidity but the move is towards quarterly so that non-performance related redemptions dont effect current investors…ok that was enough of a tangent.
 
I’m not disputing that hedge funds would be more liquid relative to p/e funds.
what i’m disputing is that if you’re a client who values liquidity, depending on the definition, even a 45 - 90 day with a 3% penalty or a 10% holdback would be contrary to a client who values liquidity.
?
 
well the CFAI text doesn’t go into that level of detail, they just talk about I think Quarterly liquidity probably. I think the key phrase is that “distressed securities are appropriate for one of his clients” so he is already prequalified and has high net worth. So the question then comes to liquidity and HF’s are in general more liquid than a PE vehicle. Most PE vehicles have a life of say 5 years with 1 or 2 possible extension periods of say 1 year each, so the life may be 7 years, plus the drawdown period where the capital is handed back to investors over a certain time frame. So PE vehicles are in general longer term in nature. Yes a lot do offer liquidity after 2-3 years but a lot of those are Hard locks which mean you can’t get you money back even if you pay a fee.
 
strikershank Wrote:
——————————————————-
> I’m not disputing that hedge funds would be more
> liquid relative to p/e funds.
>
> what i’m disputing is that if you’re a client who
> values liquidity, depending on the definition,
> even a 45 - 90 day with a 3% penalty or a 10%
> holdback would be contrary to a client who values
> liquidity.
>
>
> ?
Striker, I have noticed that Schweser Qusestion suffer severely from “Frame Dependent” bias. In a bigger picture, answer D is correct…however, the questions is only comparing the liquidity feature between hedge fund and PE. Once again, I think those questions suffer from “Frame Dependent bias”.
 
Distressed securities with lots of liquidity? He can just buy S&P Futures! (Gallows humor, I know, not funny)
 
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