3. COLLECTIVE INVESTMENT SCHEMES Flashcards
Reasons for collective investment
- reduces risks
- access services provided by profesh managers
- diversification benefits for small investors who could not otherwise access wide pool of investments
- gain exposure to difficult to access markets (emerging/smallcap)
- switches within the fund are free from CGT for the investor
HFs
Broad application but no precise legal definition
Employ various strats (often outside of those permitted in authorised schemes) to generate alpha for investors
Often non tradiitonal strats/assets - can be riskier though this was not the original intention
often goal is to outperform in both rising and falling markets
uncorrelated returns
absolute return
often based in low tax jurisdictions where there may be little regulation
often high min investments and high fees (2 and 20%)
Hedge fund strats
Non directional and Event driven)
Non direction
-relative value
- FI arb
-market neutral
-convertible arb
-stat arb
- vol arb
Event driven
-special sits
-merger arb
-distressed comps
Directional
- long/short
-short only
-EM
-Global macro
-systematic
Many HF employ multi strat, multi manager approaches with various sleeves for different strategies
Non directional HF strats
Non directional = stable, positive absolute returns regardless of market
- must remove market risk to isolate funds from market
RV
- exploits temp differences in prices of related secs, often with pairs trading (long/short)
-mean reversion on spread on between 2 assets
FI arb
- exploit inefficiencies in rates, yield curves, pricing of bonds, corp spreads, swaps
-relies on stats and mathematical models
- exploit expected changes in yield curves
Equity market neutral
- provides returns uncorrelated to market with combo of L/S positions and management of B to be zero or negligible - also uses arb
-often has more directional risk than they are supposed to as correlations of pairs trading can be unstable
Convertible arb
- aims to capitalise on mispricing between convertible bond an underlying stock
-typically long bond and short stock
Statistical arbitrage
-any strat that uses stat/econometrics tech to provide signals for trade execution
-predicated on mean reversion
-algo trading
Volatility Arbitrage
- profit from difference between forecast volatility of asset and implied vol of options on that asset
- if u think implied vol of UL (based on option) is too low, long call + short UL
- v complex, investor must be correct on assessment of vol, and timescale
Event driven hedge fund strategies
Aim to take adv of temp stock mispricings before/after corporate events
Special sits
- target profit from change in val as result of corp action/takeover/spin off/bankprupty, generally not LT
Merger Arb
- profit from spreads in announced or suspected M&A/takeovers
- typically buy target and sell acquirer
- risk if deals fall through
Distressed securities
-e.g. corp bonds, bank debt, stock of distressed comps (heading to bankruptcy)
- debt secs are substantially reduced in value when company is in distress -HF assessing that comp not in as difficult position as market thinks
Directional HF strats
Aim to profit from directional moves in the market - speculating on absolute value of secs
Long/Short Equities
- identify mispricings vs internal val models (fundamental and technical analysis)
- differ from non-directional as typically take net market direction risk
-tends to outperform in bear markets and underperform rising markets
Short only
-rare as many switched to L/S, focused on finding overvalued stocks
-can be a portfolio hedge in bear markets
EM
- come into fray due to massive growth of EM markets
Private placements
- strategies that focus on secs issued without public offering or propsectus publication
Tactical trading
Global macro
- trategy that bases its holdings primarily on the overall economic and political views of various countries or their macroeconomic principles
- cross asset class, can be long and short
Systematic
- use mathematic models and algos to evaluate markets, detect trading ops and generate signals and investment decisions
- trend following
- often ‘black box’ proprietary methods
Investment trusts key features
- Public limited comps listed on XC
- regulated by comp law
- articles and memorandum of association
- Closed ended - finite number of shares
- Often more specialized investment areas
- Can gear more than other collective structures
- Run by board of directors (who may undertake IM of trust = self managed trust or may use external management group)
- can invest in property via REITs
- can invest in unquoted private comps
- shares often bought and sold through broker
- can trade at prem/discount to NAV
-bid offer spread
closed ended vs open ended
unlike unit trusts and OEICs
open ended can cancel/create new shares to meet demands
Closed ended funds trade between investors - number of shares in issue not affected by market moves so
trust doesnt have to sell assets to meet liquidity reqs = can investment in more illiquid assets with less risk
Premium and discount ITs
Share price can be a premium or discount to NAV
Trusts can also buyback their own shares and either cancel or hold in treasury until later date
Reasons inv trust may trade @ discount/premium
How do trusts manage discount?
Prem/discount related to supply and demand
Discount
- risk that trust is illiquid
- ongoing charges may drag on share price perf (admin costs, management fee etc)
- Poor performance
- Investor concerns about management
-perceptions around asset class
- out of favour investment style
- high rates and long duration assets
Narrowing discount
- increased transparency about time horizon, assets etc
- buybacks
- increase marketing and sales to improve popularity
Reasons for premium
- in favour style
- High quality management team
- Performance track record
Diluted and undiluted NAV
Diluted NAv = assumes all outstanding warrants and loan stocks have been exercised
Warrant = right to subscribe for ord share @ fixed price within fixed timeframe often issued as sweetener with new trusts
Undiluted NAV = assumes all warrants and outstanding loan stocks not exercised
conventional IT
- issue one ord share class
- indefinite term
- investors entitled to all income/capital gains during trust life and on sale of shares
limited life IT
- start with a limited life/term
- SH then have a vote - should trust be wound up or continued in e.g. 3 yrs
Split capital IT
- more than one share class entitled to diff returns
-e.g. growth or income - can offer packages of different share classes
- different priority order on wind up
- limited life span of 5-10 years
-SHs can buy/sell @ any time
income shares = pay regular divi from surplus income on trust assets and have predetermined mat value
ZCB = pays no income but corps subject to income tax on sale
ZDP shares = no divi so no income tax, subject to CGT only
capital shares = no divi, holders receive all remaining capital after pref and income SHs have been paid
Offshore funds taxation
= CIS domiciled in offshore financial centre - often investor friendly tax havens
Reporting = Income subject to income tax. Gains subject to CGT
- must prepare accounts in accordance with acceptable acc policy and report ‘reportable income’ to HMRC
Non reporting = gains and income subject to CGT
- under no obligation to provide any info to HMRC (tho local law prob requires something)
- cannot use allowances to offset divi/interest
- cant use CGT allowance as all taxed as income
