6. PROPERTY + ALTS Flashcards
advantages and disadv of property investment
ADV
- historically attractive absolute returns
-diversification (low corr to trad investments)
DISADV
- liquidity
- lumpy returns
-transaction and maintenance costs
-effect of gearing
-correlation with economic prosperity
- risk of void periods
Methods of getting property exposure in portfolio
- Direct - physically owning properties (stamp duty, insurance, estate agents etc)
- listed property companies
Funds (lock in periods)
- Unit trusts
-PAIFs
-ETFs
-REITS
-Limited partnerships
DISADV of property funds
asset price bubbles
relative liquidity of listed vehicles vs funds
permitted levels of gearing
redemption charges and notice periods
directly invested open ended property vs REITS
Open ended
- GFC caused significant losses in value for investors
- Post BREXIT vote 2016 - many open ended funds suspended
-mismatch between liquidity of open ended fund with illiquidity of underlying
REITS
- closed ended w/ fixed no. of shares traded between investors - so UL doesnt have to be sold to fund redemptions
Indirectly invested open ended funds invest in real estate secs on stock exchange
4 main types of real estate fund
Core = low risk low return. Similar to benchmark. Usually open ended so may be hard to redeem when market is stressed
Core plus= low.moderate risk. High qual properties (like core). but with 40-60% leverage
Value add funds = growth, more gearing (60-75), and more active management. Higher returns
Opportunistic funds = exploit ops to buy from distressed sellers, redevs + EM. Similar in nature to PE. usually closed ended
authorized property unit trusts vs unauth
Authorized (by FCA) designed mainly for retail, unauth only allowed to be offered to instit
AUTH
- exempt from CGT on gains
- income liable to corp tax (currently) 25%
-designed for UK domestic market, unfavourable tax treatment makes them unsuit for overseas investors
Offshore prop unit trusts
- more tax effective
-less heavily regulated
-not liable to income tax or CGT, end investor is taxed according to end position
-weaker level of investor protection in terms of gov/compensation
IA property classifications
UK direct property
- 70% assets invested directly in UK prop (avg 5yr rolling)
- if <70% for >12m period, or below 60% or 1 month = can be removed from sector
Property other
- invest predominantly in prop but dont meet criteria of UK property direct. EITHER
- >70% in property over 5 year periods (either mostly overseas or dips below 60)
-invest 80% of assets in property securities
- invest 80% of assets in combo or direct and property secs
allows like for like comparison
UK PAIF
UK property auth unit trusts
- since 2010, many open ended prop auth unit trusts converted to PAIF structure
= tax efficient, open ended, auth fund
-retail, sophis and instit clients UK and globally
- OEIC structure
-Must carry out property rental bis that generates income from land/share ownership (UK or foreign equiv) - UK tax purposer = must separate income into 3 stream (UK prop income, interest income, other income)
-must take steps to avoid corp ownership >10% NAV
With PAIF status (given by HMRC) - property investment income is tax exempt, also CGT exempt
income distro subject to 20% witholding tax
tax charges for PAIFs with excessive debt, pay distros from exempt income to any comp holding >10% of shares
Property ETFs
Track perf of range of real estate indices
FTSE EPRA Nareit UK/ Europe/Asia Pac/Global/Dev/Emerging
EPRA = European Public RE Association
Nareit = National association of real estate investment trusts
ETFs give prop exposure via REITs and shares of prop companies
REIT
REAL ESTATE INV TRUST
closed ended
Company that owns and operates income producing real estate (can be commercial or resi)
differs from quoted comp that holds a portfolio of preoperty because it isnt liable to tax on income/gains made in portfolio
- distributed income with tax liability of SH
No CGT on disposals so long as they distribute 90% of taxable income to SH as divi
SH is liable to CGT on REIT
Investment trust (liquid, easy to trade, prem/discount)
Limited partnerships
Unlisted property vehicle
Complex structure = general partner who is lead investor with unlimited liability
Any number of limited partners with limited liability
Key features
- income/gains taxed on partners (investors)
-usually established for limited no. of years then assets disposed of and procedds distributed (unless partners vote to expand life)
- general partner appoints operators to oversee admin
-limited partners not involved in decision making or lose limited liability
-Jersey and Guernsey are home for many limited partnership property funds
Characteristics of infra funds
- large physical assets (often essential services/facilities)
- long duration
- diversification = uncorrelated returns
-stable and predictable cash flows - high barriers to entry
-regulated assets (water, electricity) = essential services, lower risk
-unregulated (schools, hospitals) = social infra, prices based on negatations
lumpiness/indivisibility of returns in infra
Lumpy inputs = large financial outlay (e..g building a runway) and lumpy returns on asset sales
Smooths with portfolio of operational assets with income streams
diversification by geog, asset class, etc
return characteristics of infra funds
Typically less cyclical/have inverse correlation with other asset classes
- useful diversification
-many have highly contracted inflation linked revenue so useful to diversify against inflation shock
-stable CF through cycle
- derated recently as many increased yields make them relatively less attractive vs government bonds
-early stage projects offer higher return profiles but are riskier as they are exposed to more vol (economic cycle, wage inflation, inflation in supply chain)
What is a commodity
a raw material or primary agricultural product that can be bought and sold = relatively homogenous allowing standardized contracts
Direct Commodity Investment
Cash market (physical purchase)
- expensive to store and insure
-large min quantities
-risk of deterioration (especially for softs)
-standard contract size with gradings to specify quality
-gives fungibility to wholesale market
-more for whole/industry than investors
FUTURES MARKET
- contract to buy/sell set quant of asset on fixed future date @ price agreed today
- delivery is deferred
- no need to take delivery
-standardised parcels (contracts) e.g. 25 tonnes of copper
- must trade in whole numbers of contract (limitation that favours OTC swaps)
-homogenous specified asset
FORWARDS/SWAPS
- forward = private customisable, OTC
-commodity swap (floating commodity price vs fixed) = used to hedge against swings in market and lock in price
Indirect commodity investment
Shares of commodity comps
- e.g. miners/oil producers, revenues and therefore share price linked to commodity price
-correlation not perfect as there are many other factors + hedging costs
Commodity funds
- hedge against inflation, more cap growth focused>income
-retail UCITS cant invest in commodities, but nonretail and QIS can (UCITS can use derivs to invest in commodity index)
- commodity ETF = provide exposure to commodities/basket by buying UL commodities/futures/shares in comps
-ETCs typically track a single commodity, share price moves with spot/futures price of UL
Commodity categories
HARD
- metals and energy =most common
- natural resource that must be mined/extracted
SOFT
-agricultural prods or livestock
Hard commodities -metals
- include natural resources that must be mined or extracted
BASE
- AKA industrial (Copper, lead, tin,nickel, steel etc)
- big expense to extract from ground + then to refine
- Demand is taken as indicator for global economic demand
- energy transition goals likely to see demand increase
PRECIOUS
- gold, silver, platinum, palladium
-gold is a traditional hedge against inflation acting as a store of value + benefitting from flight to safety
Prices are influenced by supply and demand
-avail of raw mats, costs of extraction and processing
-demand (Rapidly industrializing economies, hedge funds buying futures)
Energy
Principally traded through crude oil and derivs (gasoline + other fractions - butanes, kerosene)
2 main benchmarks
- Brent Crude (North sea extraction, most important for europe, trades on ICE)
- WTI (lighter crude oil, primarily sourced in US, traded on NYMEX)
Oil = usually largest component of commodity indies due to volume required globally
priced in USD (moves inversely to USD over medium term)
Demand for oil driven by consumption generally (WTI price went neg for 1st time during COVID, fears storage capacity would run out)
OPEC = coordinates and unifies petroleum policies of member states. Recently have prolonged supply cuts to support price
SOFT commodities
Agricultural prods with varied uses
textiles (e.g. wool.cotton)
foodstuffs (sugar, wheat, rice, coffee)
Livestock (pigs, cattle)
Softs have the characteristic of being renewable, usually on an annual cycle. Crops can be grown season after season
Many are perishable (both before and after harvest) which can make prices v volatile
supply factors
- good/poor harvests
-livestock diseases
-weather
-political unrest
-climate events
Hedge funds
HF = broad with no specific definition
wide range of strats
most aim to deliver positive abs returns - often with cash + benchmarks
traditionally earn high fees often with a performance fee
often managers take high risk high return view
diversifier from traditional markets
often domiciled in juris with favourable tax + low disclosure reqs
Regulators are increasingly introducing short selling regs after the 2021 game stop led market vol
- in UK funds must report net shorts in shares or sovereign debt once limits have been breached
Naked shorting is banned in the UK (and most other places)
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
Adv and disadv of HF fund of dunds
FOF - fund that invests in selection of HF
ADV
- diversification
-easy access to HF for retail investors
- may be able to access closed funds
-PM does more HF DD
DISADV
- double layer of fees
- less visbility of UL investments
- low possibility of manager interaction
- diversification of strategies can be counterproductive
Antidote to FOF funds is multi manager discretionary sleeve strategy
VCTs
Publicly listed comps in UK similar to IT - invests in new and young businesses with potential for rapid growth
- closed ended
-trades on LSE
Tax relief (must apply to HMRC to be a VCT
INCOME TAX
-30% up to max subscription of 200k
-must be held for 5 years
-must be newly issued shares
-cant be carried back
INCOME TAX RELIEF ON DIVI
-VCT itself is exempt from corp tax
-divis are exempt from
CGT RELIEF
-exempt with no min holding period
-losses cant be used to offset gains
Higher returns and highe risk
UL often illiquid as unlisted
SMID risk (failure, write down, IR sensitivity)
prem/discount to NAV
EIS
Direct investment into small/med unquoted comps in UK
<250 employees
<15mn gross assets
<£5mn annual amount raised per comp
INCOME TAX
- 30% up to max contribution of 1mn (further 1mn for knowledge intensive companies)
- can be carried back to previous tax year unliek VCTs
CGT GAIN RELIEF- no CGT if held for 3 years (pre 2000, 5 yrs)
CGT LOSS RELIEF
-losses are allowable where IT or CGT relief has been given
CGT DEFERRAL
- CGT can be deferred by reinvesting gain into EIS company (1yr before to 3yrs after disposal)
-deferred gain is charged when EIS shares are disposed of
IHT Business Relief
- qualify for bis relief if owned for 2 years
tax breaks only avail for UK residents
SEIS
Similar to EIS - designed to stimulate entrepreneurship (smaller, riskier, earlier stage)
Must be <2 yrs old, <25 employees, assets <200k, not controlled by other comps
Cannot raise >150k total in SEIS
INCOME TAX RELIEF
- 50% up to 100k contribution pre year
- can be carried back
- must hold for 3 years+
CGT DEFERRAL
- same as EIS, CGT deferred by investing -1yr to 3 years post disposal
CGT LOSS RELIEF
-Losses allowable when either IT or CGT relief provided
IHT BR
- same as EIS - 2yr holding 100% BR
tax breaks for UK resi only, must have <30% stake in company
Can follow share issue with SEIS with EIS/VCT but must have spent >70% of money
2017 budgets risk to capital condition
Some argue VCTs/EIS etc are more about tax relief than addressing LT barriers to finance for high growth/innovative firms
Risk 2 capital condition = principles based test to ensure VCT,EIS,SEIS only invest in businesses that arent simply low risk tax shelters but focus on growth ops
Patient capital
2018Long term investments often into early stage enterprises
focus on LT gains over ST
provide support to entrepreneurs
Intitally 2.5bn fund with British business bank
then additional 30bn announced during covid to ensure firms could continue to access capital
Woodlands relief
Relates to forestry and woodlands devoted to growing timber - IHT can be deferred until timber is cut and sold
Value of timber (not land) can be excluded from estate when someone dies
BR may be available on woodland that qualifies as a business asset
