During the Know Your Product (KYP) assessment, a portfolio manager is evaluating a new Alternative Investment Fund (AIF) for potential inclusion in client portfolios. The AIF specifies a minimum investment of $150,000, has a redemption lock-up period of 3 years, and assesses performance fees based on a high-water mark. For which type of client would this product most likely be suitable, considering these characteristics?

Question: During the Know Your Product (KYP) assessment, a portfolio manager is evaluating a new Alternative Investment Fund (AIF) for potential inclusion in client portfolios. The AIF specifies a minimum investment of $150,000, has a redemption lock-up period of 3 years, and assesses performance fees based on a high-water mark. For which type of client would this product most likely be suitable, considering these characteristics?

Answer options:

• A retail client with limited investment experience and annual income of $60,000.
• An accredited investor with a high net worth, a long investment horizon, and a need for monthly income.
• An institutional client with a defined contribution pension plan and a short-term liquidity objective. ✅ A high-net-worth accredited investor with a long investment horizon, comfortable with illiquidity, and seeking capital appreciation.

Correct answer: A high-net-worth accredited investor with a long investment horizon, comfortable with illiquidity, and seeking capital appreciation.

Explanation: The high minimum investment, lock-up period, and illiquidity typical of AIFs generally make them suitable only for accredited investors with significant capital, a long investment horizon, and a high tolerance for illiquidity, primarily seeking capital appreciation rather than regular income.