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J10 - Discretionary Investment Management > 3. Alternative Investments and Derivatives > Flashcards

3. Alternative Investments and Derivatives Flashcards

1
Q

A. Derivatives (page 2)

A

Derivatives are widely used in investment management and by fund managers of collective investment vehicles.

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2
Q

A1. Characteristics (page 2)

A1A. The development of derivatives (page 2)

A

Derivatives first used in agriculture in 1848.

Then used in financial markets in the 1970s.

Now mainly used on derivatives markets for speculative or hedging purposes.

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3
Q

A1B. What are derivatives? (page 3)

A

A derivative is a financial instrument based on some other asset (known as the underlying asset or an ‘underlying’).

Examples of underlying asset:

  • equities
  • bonds
  • interest rate movements
  • commodities

Key Difference: when buying a derivative (rather than buying the asset itself), the cost of the derivative is a fraction of what it would cost to buy the actual asset.

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4
Q

A2. Types and methods of investing (page 3)

A

Financial derivatives are traded on:

  • derivatives exchanges
  • directly between counterparties on the over-the-counter (OTC) market

Main types of derivatives:

  • FUTURES
  • OPTIONS
  • SWAPS

These allow traders and hedgers to make profits on upward or downward movements un the underlying asset.

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5
Q

A2A. Futures (pages 3, 4, 5, 6, 7 & 8)

A

A futures contract is:

A LEGALLY BINDING OBLIGATION between two parties for one party to buy, and the other to sell:

  • a pre-specified amount
  • at a pre-specified price
  • on a pre-specified future date

The terms and conditions are standardised so that the futures can be traded on a derivatives exchange. This is known as ‘Contract Specifications’.

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6
Q

A2A. Futures (page 4) - TERMINOLOGY

A

LONG - refers to the buyer of the future (who is committed to buying the underlying asset at the pre-agreed price at the pre-agreed specified future date

SHORT - refers to the seller (who is committed to delivering the asset on the pre-agreed specified future date in exchange for the pre-agreed price)

OPEN - this is when a market participant first enters into futures (entering into a ‘long’ position for buyers and ‘short’ position for sellers)

UNDERLYING - the asset that drives the value of the future

BASIS - quantifies the difference between the cash price of the underlying asset and the future price

DELIVERY DATE - the date on which the agreed future transaction takes place (represents the end of the future’s life)

CLOSE - most futures are opened and do not end up actually being delivered; they are ‘closed out’ instead by making a closing sale before the delivery date

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7
Q

A2A. Futures (pages 4, 5 & 6) - RISK REWARD PROFILE OF FUTURES

A

The buyer of the future is described as ‘going long’.

They hope that the underlying asset will increase in price over time (as they will then be buying it at a discount).

Buyer makes money in a rising market and loses money in a falling market.

The seller of the future is taking the ‘short position’.

They hope that the underlying asset will decrease in price.

Seller makes money in a falling market and loses money in a rising market.

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8
Q

A2A. Futures (page 6) - USES OF FUTURES CONTRACTS

A

Futures can be used to hedge portfolios against adverse market conditions:

  1. the portfolio manager’s mandate may require equities to be held within the portfolio regardless of market conditions
  2. selling a large portfolio of shares would move the price of the shares against the portfolio manager, taking time and resulting in high dealing costs
  3. Futures markets, being more liquid, would not move the shares against the portfolio manager and would be completed swiftly
  4. Future incur lower dealing costs
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9
Q

A2A. Futures (pages 6 & 7) - FTSE 100 INDEX FUTURE

A

The FTSE 100 Index Future is based upon the FTSE 100 Index.

The number of contracts needed to hedge a portfolio is known as the hedging ratio.

The future is priced in index points with a tick value of £10 per index point.

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10
Q

A2A. Futures (page 7) - LONG GILT FUTURE

A

These can be used in exactly the same way as FTSE 100 index futures contracts.

Differences include:

  • based on a notional gilt with a £100,000 nominal value and a 7% coupon
  • each contract had a tick value of £10 per 0.01 movement in the contract price
  • each 0.01 is known as a basis point
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11
Q

A2A. Futures (page 7) - SHORT-TERM INTEREST RATE FUTURES

A

These are based on short-term interest rates such as three-month sterling deposits.

Each contract has a notional value of £500,000 and a tick value of £12.50 per 0.01 movement.

Can be used for hedging:

  • if a speculator believes that short-term interest rates are increasing then they will sell the contract because higher interest rates will cause the price of the contract to fall
  • hedgers will buy the contract to guard against falling interest rates
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12
Q

A2A. Futures (page 7) - STOCK FUTURES

A

These allow a manager to hedge the price risk associated with individual stocks held within a portfolio (rather than an entire portfolio).

They are currently limited to a selection of larger multinational companies.

Each position take in a contract is for 1,000 UK company shares, or 100 US or European.

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13
Q

A2A. Futures (pages 7 & 8) - CONTRACTS FOR DIFFERENCE

A

Contracts for difference are where the futures are settled between the counterparties by cash on the monetary gain or loss.

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14
Q

A2B. Options (pages 8, 9 & 10)

A

Options GIVE BUYS THE RIGHT BUT NOT THE OBLIGATION to buy/sell a specific underlying asset at a specified time (like a Future).

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15
Q

A2B. Options (page 8) - TERMINOLOGY

A

CALL OPTION - see below
PUT OPTION - see below
HOLDER - the buyer of the option
WRITER - the seller of the option
PREMIUM - price paid for an option
STRIKE PRICE - price at which the underlying asset may be bought or sold
AT-THE-MONEY - call option where the strike price is the same price as the underlying asset
IN-THE-MONEY - strike price below the current asset price which could be exercised for a profit
OUT-OF-THE-MONEY - opposite to in-the-money
EXPIRY DATE - last day of the option’s life
EUROPEAN STYLE - options that can only be exercised on their expiry date
AMERICAN STYLE - options that may be exercised at any time during their life including on the expiry date

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16
Q

A2B. Options (pages 8 & 9) - ROLES OF THE OPTION WRITER AND OPTION HOLDER

A

WRITER:

  • confers the right (rather than the obligation) to the holder (they cannot say no)
  • to either buy or sell an asset
  • at a pre-specified price
  • in exchange for the holder paying a premium for this right
  • is required to make initial and variation margin payments to the clearing house

HOLDER:

  • does not have to exercise the right if the transaction does not work in their favour
  • the only loss to them is the premium paid for the right
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17
Q

A2B. Options (page 9) - CALL OPTIONS (HOLDER/BUYER)

A

Call Options:

  • the holder (buyer) takes the long position
  • the writer (seller) takes the short position

HOLDER/BUYER: the holder (buyer) pays a premium for the right to buy the underlying asset at the expiry date

  • the higher the value of the underlying asset the more profit is made
  • profits can be unlimited
  • losses (risk) limited to the price of the premium paid
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18
Q

A2B. Options (page 9) - CALL OPTIONS (WRITER/SELLER)

A

WRITER/SELLER: they receive the premium

  • they want the value of the underlying asset to not rise
  • this is so the holder abandons the option and the writer retains the premium and asset
  • the higher the value of the underlying asset the more loss is made
  • losses can be unlimited
  • gain (profit) limited to the price of the premium paid
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19
Q

A2B. Options (pages 9 & 10) - PUT OPTIONS

A
  • the holder (buyer) takes the long position
  • the writer (seller) takes the short position

HOLDER/BUYER: the holder (buyer) pays a premium for the right to sell the underlying asset at the expiry date if they wish

  • the more the price of the underlying asset falls the more profit is made
  • profits limited to the strike price less the premium paid
  • losses (risk) limited to the price of the premium paid

WRITER/SELLER: takes on the obligation to buy the underlying asset at expiry.

  • hope that the share price will not fall and that the holder will abandon the asset
  • maximum profit is the premium
  • maximum loss is the strike price minus the premium paid
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20
Q

A2B. Options (page 10) - PREMIUMS AND INTRINSIC VALUE

A

Options premiums are affected by many factors:

UNDERLYING ASSET PRICE
- higher the price, the more valuable call options are and the less valuable put options are

EXERCISE PRICE
- higher the price, the less valuable call options are and the more valuable put options are

TIME TO MATURITY

  • longer the term to maturity, more chance that the option will expire in-the-money
  • higher the time value and higher the premium

VOLATILITY OF THE UNDERLYING ASSET PRICE

  • more volatile the higher the chance of the option expiring in the money
  • therefore the greater the premium
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21
Q

A2B. Options (page 10) - PREMIUMS AND INTRINSIC VALUE

CONTINUED

A

Premium = instrinsic value + time value

Instrinsic value: value of the option is exercised now
Time value: difference between the premium and the instrinsic value

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22
Q

A3. Uses of derivatives (pages 10 & 11)

A

Derivatives can be used to increase or decrease risk within a portfolio:

ASSET ALLOCATION - it is possible to move within markets quickly using futures over using physical stocks
CAPTURING VOLATILITY - derivatives can capture gains every time an index moves by more than a pre-set parameter. Physical stocks may have to sit tight during volatility
CURRENCY & INTEREST RATE PLAYS - derivatives allow managers to capture gains on an equity index without being exposed to that index’s base currency or interest rate structure
ANTICIPATING CASH FLOWS - using cash to buy futures or options whilst managers are changed
INCREASING RETURNS BY INCREASING RISK
INCREASING RETURNS BY INVESTING IN CASH
PORTFOLIO INSURANCE USING PUT OPTIONS - put options produce a profit when markets fall. Stops managers having to sell to cash
WRITING OPTIONS - manager may increase income by writing options and receiving the options premium

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23
Q

B. Derivative products (page 11)

A

Structured products now use derivatives.

The products available to retail investors are detailed over the next few cards.

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24
Q

B1. Characteristics (page 11)

A

The versions of derivative product available to retail investors allow them to trade on the LSE or through special intermediaries.

Investors can make significant gains or losses.

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25
Q

B2. Types and methods of investing (pages 11 & 12)

A
  • Traditional warrants
  • Covered warrants
  • Specialised collective investment vehicles (SCIV)
  • Contracts for difference
  • Spread betting

With the exception of SCIVs, these require the establishment of a dealing account with a stockbroker or specialised firm.

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26
Q

B2A. Warrants (page 12)

A
  • Issues by companies, such as Investment Trusts (IT)
  • Traded on the LSE
  • Investors in new ITs usually receive one ‘free’ warrant for every five shares purchased as an incentive
  • Warrant is a long-term call option (have the right, but not the obligation, to buy shares at a fixed price and pre-determined date in the future)
  • Warrants produce no income
  • Warrants are geared so have high risk and reward
  • Investors can sell the warrants, or exercise them
  • Not worth exercising if the exercise price exceeds the market price of the shares
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27
Q

B2B. Covered warrants (page 12)

A
  • is a type of call options
  • issued by investment banks
  • described as ‘covered’ because the writer will often hedge its exposure by buying the underlying asset
  • traded on the LSE
  • always cash settled
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28
Q

B2C. Collective investment vehicles (page 12)

A

Three main types of OEIC set up to deal in futures and options:

  1. Futures and options funds (FOFs): permit managers to invest in derivatives providing the transactions are covered by the underlying assets
  2. Geared FOFs: allows managers to invest in up to 20% of the funds in the derivatives market
  3. Capital protected UTs and OEICs: these offer up to 80% of the rise in the FTSE 100 over a fixed term, with full capital protection if the index falls
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29
Q

B2D. Contracts for difference (page 13)

A
  • can be used for trading shares
  • are geared investments so only a proportion of the value of the trade is needed to fund a trade
  • markets they trade in are very liquid so appeal to stock market traders rather than investors
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30
Q

B2E. Spread and binary betting (page 13)

A
  • requires an account with a spread betting firm
  • they quote on a wide range of indices, equities and commodities
  • high levels of gearing can be used
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31
Q

B3. Risk and return (pages 13 & 14)

A
  • using derivatives, an investor is speculating on the price movements on individual shares or indexes
  • long position betting the price will rise
  • short position betting the price will fall
  • because of their geared nature, a small movement can result in large gains or losses
  • the margin amount required to be paid may change and need to be added to at short notice
  • only those with an adventurous ATR should invest in derivatives
32
Q

C. Hedge funds (page 14)

A
  • pool together investors money to invest using non-traditional investment methods
33
Q

C1. Characteristics (pages 14 & 15)

A
  • hedge funds do not generally adopt a ‘long-only’ strategy
  • they aim for absolute return with limited volatility
  • they generally correlate negatively with the market
  • they use a wide range of investments
  • some use gearing or leverage
  • charge higher fees such as 1-2% IAC and an AMC of 2% plus performance fees of 20% or more
34
Q

C2. Types and methods of investing (page 15)

A
  • usually established in offshore centres
  • usually structured as a collective investment scheme
  • HMRC views them as ‘non-reporting’ funds so liable for capital gains and income tax
35
Q

C2A. ‘Pure’ hedge funds (page 15)

A

There are four broad categories of hedge fund strategy:

  1. LONG/SHORT FUNDS - invest in equity/bond instruments and combine investments with short sales of individual securities and derivatives to reduce market exposure
  2. RELATIVE VALUE FUNDS - use ‘arbitrage’ to produce returns by identifying and exploiting price anomalies between similar investments
  3. EVENT-DRIVEN FUNDS - uses the price movements from anticipated corporate events to achieve returns
  4. TACTICAL TRADING FUNDS - trade in currencies, bonds, equities and commodities, but use the same long/short approach as equity hedge funds for each asset class
36
Q

C2B Funds of hedge funds (page 16)

A
  • allows investors to access a variety on hedge funds through a single instrument
  • the manager of the FOHF does the due diligence and research which the investor then pays for
  • higher fees due to additional management level
37
Q

C3. Returns (page 16)

A
  • high turnover means that many firms have overquoted returns (due to low survivorship within the market)
  • difficult to compare them to benchmarks too
  • concern that these investments are not going to generate above-average returns in the future
38
Q

C4. Risks (page 17)

A

INVESTMENT RISK - understanding of the underlying investments is essential
GEARING - can be as high as 300% or 400%
MANAGER RISK - ‘Madoff scandal’ fabricating returns
LIQUIDITY RISK - can be almost none if invested in certain investments - again, check this
ENCASHMENT RISK - can be a delay in encashment
REGULATORY RISK - based offshore and may be no regulation or only ‘light touch’ which results in little or no protection for investors

39
Q

C5. Advantages and disadvantages (pages 17 & 18)

A

ADVANTAGES:

  • diversification
  • volatility management
  • expertise via fund managers

DISADVANTAGES:

  • lack of regulation and protection
  • high minimum investments (1 million USD)
  • complexity (makes them difficult to monitor)
  • volatility
40
Q

D. Structured products (page 18)

A
  • the return is delivered at a pre-determined point
  • return dependant on the performance of an index
  • return also dependant on the terms of the product
41
Q

D. Structured products (page 18)

CONTINUED

A

Structured products classified into three main groups:

  1. Structured Deposits
    - return the investors capital AS A MINIMUM at maturity
    - FSCS protection available to those authorised by the FCA in the UK
  2. Capital-protected Products
    - return the investors capital at maturity REGARDLESS OF HOW BADLY THE STOCK MARKET PERFORMS
    - do not benefit from FSCS protection
  3. Capital-at-risk Products
    - have the potential for much igher returns but can produce a capital loss at maturity
    - do usually incorporate a barrier that protects the capital until the stock market falls by a certain amount
42
Q

D1. Characteristics (pages 19 & 20)

A

Three elements of a structured products:

  • Zero-coupon bond (to provide repayment of capital at maturity)
  • Derivatives (options are used to provide the returns linked to the referenced asset class)
  • Charges (covers administration, custodian and management costs)
43
Q

D1. Characteristics (pages 19 & 20)

CONTINUED

A

EXAMPLE:

  • Zero coupon bond provides a known amount of capital at maturity (purchased at £800 per £1000 and will provide £1000 at maturity in 5 years time)
  • 5 year Call Option linked to FTSE 100 (will provide the return on the FTSE which could be any rise in the FTSE or any fall)

If the FTSE 100 falls then the zero coupon bond will return the capital value

44
Q

D1. Characteristics (pages 19 & 20)

CONTINUED

A

Other characteristics:

  • usually a stated fixed-term (5 or 6 years are common)
  • some offer a kick-out option where the plan matures earlier than planned based on performance
  • early withdrawal permitted but at a cost
  • min/max returns usually pre-specified
  • either a return of capital or income (barely both)
  • FCA allows guarantees (other than capital protection) if they are deposits or life policies
  • returns on retail products usually linked to an index
  • structured products are usually held to maturity
45
Q

D1A. Capital protection (page 20)

A
  1. Structured Deposits
    - returns from the plan linked to a deposit which pays interest
    - return of initial capital at maturity not linked to the performance of the underlying asset
  2. Capital-protected Products
    - return of initial capital at maturity not linked to the performance of the underlying asset
    - performance limited
  3. Capital-at-risk Products
    - return of initial capital not guaranteed
    - return of capital linked to performance of underlying asset
    - offer either HARD or SOFT protection:

HARD PROTECTION: potential capital loss expressed as a %. So 75% hard protection means that the maximum potential loss is 25% of capital
- lower potential return than soft protection

SOFT PROTECTION: capital is secure providing the underlying index/asset does not fall below a pre-determined barrier

46
Q

D1B. Capital protection barriers (pages 20 & 21)

A

Capital-at-risk structured products have a barrier that is used to limit the risk to capital.

It allows the underlying asset to fall by a fixed amount before triggering a capital loss.

Two types: American and European

European barrier has lower risk so is likey to have a lower return compared to the American one.

47
Q

D1C. Final index levels (page 21)

A

Important to note how the performance of the underlaying asset is measured:

  • either by taking a value on the close of business on the day the product matures

OR

  • averged over a period
48
Q

D2. Types of structured products (pages 21 & 22)

A

Main types:

  1. Income plans (designed to pay a stream of income payments)
  2. Growth plans (designed to pay a single payment at maturity)
  3. Accelerated growth plans (offer geared exposure)
49
Q

D3. Returns (pages 22 & 23)

A

Returns tend to depend on:

  • term of product (longer term, better rate)
  • performance of underlying asset
50
Q

D3. Returns (pages 22 & 23) - BENEFITS

CONTINUED

A

BENEFITS of structured products:

  • wide range of underlying asset combinations
  • no exposure to a single manager’s style
  • return will be explicitly stated
  • risk/return characteristics fixed and transparent
51
Q

D3. Returns (pages 22 & 23) - DRAWBACKS

CONTINUED

A

DRAWBACKS of structured products:

  • kick-out features can mean a product matures early
  • maturity could take place in a market fall
  • early encashment may be costly
  • falls in markets could be severe enough for a product to lose its capital protection
52
Q

D4. Risks (page 23)

A

All risks need to be considered.

  • Counterparty risk is a main one
53
Q

D5. Evaluating structured products (pages 23 & 24)

A

Considerations for the suitability for structured products:

  • attitude to risk of investor
  • capacity for loss of investor
  • objectives of investor
  • return of product
  • risk profile of product (underlying assets / index)
  • costs of product
  • encashment penalties of product
  • credit risk of product issuer

Structured products can be suitable for investors with a wide range of risks. Low (capital protection, Medium (mixture of capital protection and growth) or High (using hedge funds and foreign exchange)

54
Q

E. Commodities (pages 24 & 25)

A

Four main groups of commodities (raw goods):

AGRICULTURAL: wheat, animals, sugar etc
PRECIOUS METALS: gold, silver, platinum
INDUSTRIAL METALS: copper and lead
ENERGY: oil and natural gas

Physical trading of commodities takes place side by side with the trading of deriviatives on the same commodities.

‘Spot’ trading for immediate delivery.
‘Forward’ trading for future delivery.

55
Q

E1. Commodities as an investment class (page 25)

A
  • Commodity price influence a significant proportion of the world economy
  • typically have low correlation to other types of assets
  • influences by supply and demand which can be altered easily so commoditied have high volatility
  • correlate negatively to other assets
56
Q

E2. Investing in commodities (pages 25 & 26)

A

Four ways to invest in commodities:

  1. Buying directly
  2. Investing in companies that produce natural resources
  3. Investing through a collective-investment scheme
  4. Invest via the derivatives markets
57
Q

E3. Returns (page 26)

A
  • commodities tend to provide some protection against inflation
  • tend to rise in line with the overall costs of living
58
Q

E4. Risks (page 26)

A
  • taking positions in individuals commodities is very risky and should only be undertaken by those who can afford to lose large sums of money
  • the market is dominated by large trading interests who will learn information likely to move prices before individuals investors
59
Q

E5. Advantages and disadvantages (pages 26 & 27)

A

ADVANTAGES

  • investing ain a range of commodities can offer diversification to some portfolios
  • negative correlation to other investments to therefore offering further diversification
  • offers a hedge against inflation

DISADVNTAGES

  • different commodities will be in demand at different times due to the change in business cycle
  • imbalances in supply and demand occur frequently, with some years showing a big decline in demand
  • high volatility
60
Q

F. Private equity (page 27)

A

Involves either:

  • taking a stake in; or
  • acquiring companies that are not publicly traded on a stock exchange
61
Q

F1. Characteristics (page 27)

A
  • providing medium-long term finance in return for a stake in an unquoted and potentially high-risk firm
  • venture capital involves investing in start-up or smaller companies that show extreme growth promise

The capital is generally realised through an ‘exit’ such as:

  • selling the shares back to management
  • selling the shares to another investor
  • selling the shares to another company (trade sale)
  • the company achieving stock market listing
62
Q

F2. Types and methods of investing (pages 27, 28, 29, 30 & 31)

A
  • private equity funds
  • listed private equity investment companies
  • VCTs
  • EIS
  • SEIS
  • business angels
  • shares traded on AIM
  • enterprise zone schemes
63
Q

F2A. Private equity funds (page 28)

A
  • seek to raise investment from institutional investors such as pension funds and insurance companies
  • typically hold their investment in the funds for between 3 and 7 years
  • tend to target institutional investors yet retail investors can buy into them via listed private equity companies
64
Q

F2B. Listed private equity companies (page 28)

A

Two types:

  1. Those that invest directly in unlisted companies
  2. Those that invest directly in funds that invest in unlisted companies (funds of funds)

THESE ARE POOLED CLOSED-ENDED INVESTMENTS, SO INVESTMENT TRUSTS

65
Q

F2C. Venture capital trusts (pages 28 & 29)

A
  • aim to encourage investment in smaller unlisted UK comopanies and companies listed on the AIM
  • offer tax incentives over a 5 year period
  • invest in companies that promote innovation, industrial change or modernisation of work practices
  • high risk and complex

TAX BENEFITS:

DIVIDEND RELIEF: dividends from VCT ordinary shares free from income tax
INCOME TAX RELIEF: 30% up to a maximum of £200,000 invested into VCTs - clawed back if not held for 5 years
DISPOSAL RELIEF: no CGT on disposal of VCT shares

66
Q

F2C. VCTs (page 29) - CHANGES TO VCTs, EISs and SEISs

A
  • not allowed to invest in companies whose first commercial sale took place 7 years or more ago
  • cap on how much investment a company can receive from a VCT or EIS
  • knowledge-intensive companies are allowed to employ up to 500 people (twice as many as the 250 allowed for normal companies)
  • VCTs and EISs not allowed to fund buy-outs
67
Q

F2D. Enterprise investment schemes (EISs) - pages 29 & 30)

A

TAX BENEFITS:

INCOME TAX RELIEF: 30% up to a maximum of £1m in normal companies or £2m if half of this (£1m) put into knowledge-intensive companies

Income relief was 20% before 5 April 2011
Investment was £1m before April 2018

CGT RELIEF: CGT can be deferred by reinvesting gains into EIS shares (i.e. investing gains into an EIS). No limit as to how much can be invested

Where income tax relief is given, no CGT payable on EIS gains.

EIS shares qualify for IHT business relief when held for two years and remain unlisted.

68
Q

F2E. Seed enterprise investment scheme (SEIS) - (page 30)

A
  • similar to EIS but invests in even smaller companies and start ups
  • investor needs to invest in 30% or less of the company to benefit from the tax relief
  • shares must be held for up to 3 years for benefit for reliefs

TAX BENEFITS:

INCOME TAX RELIEF: 50% up to a maximum of £100,000

CGT RELIEF: No CGT on gains

SEIS shares qualify for IHT business relief when held for two years and remain unlisted.

69
Q

F2F. Business angels (page 30)

A
  • are private investors who invest in small companies
  • invest at the early stages
  • usually for equity stake or seat on the board
  • usually invest up to £100,000
70
Q

F2G. AIM (pages 30 & 31)

A
  • junior market of the LSE
  • for listing smaller companies
  • higher risk than the LSE
71
Q

F2H. Enterprise zone trusts (page 31)

A
  • set up in the 1980s to faciliate economic regeneration in areas for commercial activity

Benefits:

  • investor entitled to tax reliefs on their share of the expenditure on property or enterprise zones
  • investor liable on their share of the scheme income which may distributed gross
  • in year 1, 100% capital allowances on new buildings if the building is not sold for 7 years
  • tax relief for interest on loans
72
Q

F3. Returns (page 31)

A
  • superior returns can be generated

- reports show that returns from private equity can outperform quotes shares by 2% - 4%

73
Q

F4. Risks (page 31)

A
  • high risk of losses as some companies can fail
  • all companies vulnerable to domestic downturn or recession
  • less liquid
  • gearing can be high
74
Q

F5. Advantages and disadvantages (page 32)

A

Advantages:
- potential for high returns

Disadvantages:

  • higher risk
  • less liquid
75
Q

Chapter 3 Key Points (page 33)

A

DERIVATIVES

  • asset on which a derivate is based is known as the underlying asset or an underlying
  • can be commodities, equities, bonds, index etc
  • futures contract is a legal binding agreement
  • option gives the right but not the obligation
  • buyers of call options take the long position where as the writer takes the short position

HEDGE FUNDS

  • fund of hedge funds allow investors access to a range of hedge funds in a single product
  • rely on management expertise of the managers
  • hedge fund managers actively manage the funds

STRUCTURED PRODUCTS
- are designed to offer a tailored combination of risk and return

COMMODITIES
- can be risks to invest direct because of the volatility but investors can acess them via pooled funds

PRIVATE EQUITY

  • providing medium-long term finance in return for an equity stake in a potentially high growth, unquoted company
  • VCT, EIS and SEIS encourage investment in unquoted companies in exchange for tax reliefs

J10 - Discretionary Investment Management (15 decks)

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