Canadian Securities Course (CSC) Level 2 Practice Exam

What applies to interval/closed-end discretionary funds?

1. Can short and don't need reserves.

2. Usually trade at a premium.

3. High volatility given their flexibility.

4. Must reinvest gains and interest directly to investors.

The correct answer is: Can short and don't need reserves.

The nature of interval or closed-end discretionary funds is that they are typically managed investment funds that allow a certain degree of freedom in their investment strategies, including the ability to short securities. This flexibility distinguishes them from traditional mutual funds, which often have restrictions against short selling. Additionally, these funds do not require substantial liquidity reserves since they do not need to redeem shares on a daily basis, unlike mutual funds that have daily redemption requirements. This characteristic enhances their ability to capitalize on market movements and exploit various investment opportunities. The ability to short also aligns with their discretionary management style, where fund managers can adjust positions based on market conditions without being constrained by liquidity requirements. While other features, such as their volatility due to investment strategies, trading at premiums or mandates to reinvest gains, can be pertinent to understanding their investment structure, the fundamental advantage of being able to short securities and not needing to maintain reserves directly aligns with their operational capabilities and flexibility.