SIE Understanding Products and Their Risks Question 87: Answer and Explanation

Question: 87

Which of the following statements is true regarding types of investors investing in a hedge fund?

• A. A hedge fund that plans to charge performance-based fees may have "qualified" investors.
• B. An "accredited" investor must have a higher net worth than a "qualified" investor.
• C. An accredited investor is an individual with annual income greater than $200,000 or a couple with annual income greater than $400,000.
• D. A "qualified" investor is also a "super-accredited" investor.

Correct Answer: A

Explanation:

A: Choice A is correct because a hedge fund that charges performance fees must restrict investors to "qualified" investors, that is, those with assets in excess of liabilities by $2.1 million or more. Choice B is incorrect because a "qualified" investor must have net assets of $2.1 million, whereas an "accredited" investor must have net assets of $1 million, excluding the primary residence. Choice C is incorrect because a couple need only have annual income of $300,000 or more. Choice D is incorrect because a "super-accredited" investor is either a natural person with investments of at least $5 million, a trust that was set up primarily to purchase ownership in this particular fund, or a firm managing invested assets of at least $25 million.