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CAIA Level 2 2021 > Accessing Alternative Investments > Flashcards

Accessing Alternative Investments Flashcards

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1
Q

Alternative betas

A

exposures to risk, risk premiums, and sources of returns not normally available through investments in traditional assets

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2
Q

Algorithmic replication approach

A

Bottom-up approach that tries to replicate trading approaches taken by most active managers within a particular strategy

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3
Q

Three theories/hypothesis for increased beta and decreased alpha in hedge fund returns

A

Fund bubble hypothesis, capacity constraint hypothesis, increased allocation to active funds hypothesis

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4
Q

Fund bubble hypothesis

A

bubbles caused by inferior managers entering a successful market diluting overall performance

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5
Q

Capacity constraint hypothesis

A

Most alpha is a zero-sum game and an increased supply of managers dilutes superior performance

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6
Q

Increased allocation to active hedge funds hypothesis

A

As hedge funds investments become more popular, the risk- adjusted performance of hedge funds will be adversely affected by the trading decisions of investors who have allocations to both hedge funds and traditional assets.

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7
Q

Eight potential benefits from hedge fund replication

A
  1. Liquidity
  2. Transparency
  3. Flexibility
  4. Lower fees
  5. Hedging
  6. Lower DD/Monitoring costs
  7. Diversification
  8. Benchmarking
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8
Q

Four primary issues in constructing a factor-based replication product

A
  1. Choice of benchmark
  2. Choice of factors
  3. Length of estimation period
  4. Number of factors
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9
Q

Three steps to factor-based replication

A
  1. Estimate weight of risky assets
  2. Estimate weight of cash
  3. Invest in different assets
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10
Q

Key concepts regarding factor-based replication

A

View commonality - Individual hedge funds in an index tend to cluster into common themes that drive overall performance of an index

Exposure inertia - Overall exposures change slowly over time

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11
Q

Three main observations regarding systematic and total risk for hedge funds

A
  1. Individual HF have 1/3rd the systematic risk of equities and 1/2nd total risk.
  2. Average HF returns exhibit 1/3rd the total risk of equity indices.
  3. Average HF returns exhibit 1/6th systematic risk of equity indices
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12
Q

Three approaches to access hedge funds

A
  1. Direct approach
  2. Delegated approach
  3. Indexed approached
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13
Q

Advantages of using the Direct Approach to access hedge funds

A
  1. Cost savings
  2. Cost effective
  3. Improved control & transparency in asset allocation and DD process
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14
Q

Bifurcated Fund Analysis Model

A

A model to help determine whether a manager is attractive from (1) a mean variance perspective and (2) rankings from flexible peer group scoring method

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15
Q

Four types of Fund of Hedge Funds

A
  1. Diversified (30-50 managers with low correlations)
  2. Concentrated (5-10 managers)
  3. Single-strategy (5-15 managers with same theme)
  4. Tactical (5-10 managers with exposure to same factors)
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16
Q

Types of open-ended real estate funds

A

Open-ended (allow investments and redemptions)

Property Unit Trusts (used in the UK, Authorized PUTs allow retail investors and are tax efficient)

17
Q

Closed end real-estate fund

A

issue an initial number of shares before investments are made, and have a specific investment period (3). and fund termination period (4-6)

18
Q

Market clientele

A

A certain type of customer that dominates a market

19
Q

Major advantages of listed assets

A
  1. Liquidity
  2. Lower management fees
  3. Easier diversification
  4. Visible indication of market value
  5. Regulatory oversight
  6. Greater access to financing
  7. Tax simplification
20
Q

Major advantages of privately organized assets

A
  1. Illiquidity premium
  2. More incentivized managers
  3. Greater asset targeting
  4. Appearance of stable values
  5. Greater investor oversight
  6. Greater management flexibility
  7. Tax benefits
21
Q

Three ILPA guiding principles

A
  1. Transparency
  2. Alignment of Interest
  3. Governance

Three ILPA employees are playing TAG

22
Q

Calculation of carried interest

A

(1) Calculated on a net after-tax profit basis
(2) Calculated from the capital contribution date to the distribution date
(3) Hard hurdle is preferred

23
Q

Expenses covered under management fees

A
  1. Unforeseen expenses
  2. Consultant fees
  3. Operating partners/consultants
  4. Placement agent fees
  5. ESG related expenses

U COPE?

24
Q

GP commitment requirements

A
  1. Should be substantial
  2. Not be transferable
  3. GP should not co-invest in selected deals
25
Q

Difference between a top-up fund and annex fund

A

top-up fund is used to co-invest in one or more future investments of the main fund while an annex fund is used to invest in existing companies

26
Q

Lock-step provision

A

co-investment agreement that states that the co-investor-GP relationship is equal to the LP-GP relationship

27
Q

Potential advantages of co-investing

A
  1. Potential superior returns
  2. Targeted investment tool
  3. Better management of portfolio diversification
  4. Mitigating dilution
  5. Dual level of review
  6. Improved monitoring
  7. Establishing-relationships to invite-only funds
  8. Reduction of the J-curve effects
28
Q

Potential disadvantages of co-investing

A
  1. Unbalanced portfolios
  2. Increased fiduciary risk
  3. Conflict of interest
  4. Disagreement among LPs
  5. Allocation of fees
29
Q

Funding risk (PE)

A

Risk that an LP isn’t able to meet the capital requirement

30
Q

Four benefits of a Private Equity Cash Flow Model

A
  1. Improve investment return for undrawn capital
  2. Increase profit generated by the private equity allocation through over commitment
  3. Calculate an economic value when a discount rate is available
  4. Monitor the cash flows and risk-return profiles of a portfolio of PE funds
31
Q

Optimal over commitment ratio

A

The sum of two expected discounted costs: (1) opportunity cost of idle capital from excess liquidity, (2) costs of adverse events from inadequate liquidity

32
Q

In what two ways can illiquidity be viewed?

A

(1) the amount of time to close a position at a price that is not affected by matters of urgency, or (2) the amount of lost value from closing a position with urgency rather than with patience.

33
Q

Empirical evidence of an illiquidity premium in US Equities

A

Pastor-Stambaugh (2003): Liquidity risk is related to higher expected returns

Ben-Rephael: Stock liquidity has improved over the last four decades; trading activity has increased; liquidity premium has decreased

34
Q

Time-zero pooling

A

Summing cashflows from different vintages as if they started on the same date

35
Q

Three empirical findings regarding PE performance

A

(1) VC performance exceeds that of buyout funds
(2) PE outperformance and persistance have been lower than before 2000
(3) risk-adjusted net of fees tended to lower private equity performance to unattractive levels

CAIA Level 2 2021 (9 decks)

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