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Alternative Investments > Alternative Investment > Flashcards

Alternative Investment Flashcards

1
Q

(Advanced) Which of the following alternative investments is least likely classified as investing in commodities?

A) Managed futures fund specializing in livestock.
B) Common shares of a copper mining firm.
C) Direct ownership of a natural gas distribution pipeline.

A

C
Utility assets such as natural gas distribution pipelines are best classified as infrastructure investments. Managed futures funds and common shares of commodity producers are among the methods for investing in commodities.

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2
Q

_____ are investment companies that use a variety of strategies and may be highly leveraged, use long and short positions, and use derivatives.

A

Hedge funds

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3
Q

Hedge funds are investment companies that use a variety of _____ and may be highly ____, use _____ positions, and use _____.

A

strategies; leveraged; long and short; derivatives

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4
Q

______ usually invest in the equity of private companies or companies wanting to become private, financing their assets with high levels of debt.

A

Private equity funds

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5
Q

Private equity funds usually invest in the equity of ____ or _____, financing their assets with high levels of debt.

A

private companies; companies wanting to become private

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6
Q

what alternative investment category includes venture capital funds?

A

Private equity funds.

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7
Q

____ funds provide capital to companies early in their development

A

venture capital funds

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8
Q

Venture capital funds provide capital to companies _____

A

early in their development

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9
Q

_____ refer to physical assets such as agricultural products, metals, oil and gas, and other raw materials used in production.

A

Commodities

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10
Q

Name the main categories of AI (6)

A
  • Hedge fund
  • PE fund (includes VC funds)
  • Commodities
  • Infrastructure
  • Real Estate
  • Various types of collectibles, such as cars, wines, and art, are considered alternative investments as well.
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11
Q

What does commodities market exposure provide?

A

an inflation hedge and diversification benefits.

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12
Q

Give some examples of commodities

A
  • agricultural products,
  • metals,
  • oil and gas,
  • and other raw materials used in production.
    • does not include pipe line (That is infrastructure)
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13
Q

____ refers to long-lived assets that provide public services and are often built or operated by governments.

A

Infrastructure

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14
Q

Infrastructure refers to long-lived assets that provide _____ and are often built or operated by ____

A

public services; governments.

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15
Q

Real estate as an asset class includes?

A
  • residential and commercial real estate,
  • individual mortgages,
  • pools of mortgages or properties
  • direct investment in single properties or loans
  • indirect investment in limited partnerships (private securities)
  • mortgage-backed securities (public traded)
  • and real estate investment trusts (public traded)
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16
Q

(intermediate) The formative stage of venture capital investing when capital is furnished for market research and product development is best characterized as the:

A) angel investing stage.
B) early stage.
C) seed stage.

A

C
In the seed stage of venture capital investing, capital is furnished for product development, marketing, and market research. The angel investing stage is when investment funds are used for business plans and assessing market potential. The early stage refers to investments made to fund initial commercial production and sales.

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17
Q

(Basic) Victrix is a hedge fund that has a 3-and-15 fee structure. Compared to hedge funds with 2-and-20 fee structures, Victrix charges higher:

A) management fees.
B) load fees.
C) incentive fees.

A

A
Hedge fund fee structures indicate management fees as a percentage of assets under management and incentive fees as a percentage of gains in value. A 3-and-15 fee structure means a fund charges a 3% management fee and a 15% incentive fee. Sales load is typically associated with mutual funds and is not indicated by hedge fund fee structures.

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18
Q

(Intermediate) The most prevalent type of private equity fund is:

A) distressed securities funds.
B) venture capital funds.
C) leveraged buyout funds.

A

C

Leveraged buyout funds comprise the majority of private equity investment funds.

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19
Q

____ incur an additional level of management fees.

A

Funds of funds

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20
Q

(Advanced) Under which approach to valuing real estate properties is an analyst most likely to estimate a capitalization rate?

A) Comparable sales approach.
B) Cost approach.
C) Income approach.

A

C
The income approach estimates values by calculating the present value of expected future cash flows from property ownership or by dividing the net operating income (NOI) for a property by a capitalization rate. The comparable sales approach estimates a property value based on recent sales of similar properties. The cost approach is based on the estimated cost to replace an existing property.

21
Q

A private equity portfolio company may be valued using _____ method (3)

A
  • a market/comparables approach (multiple-based)
  • a discounted cash flow approach, or
  • an asset-based approach.
22
Q

A private equity portfolio company may be valued using _____ method (3)

A
  • a market/comparables approach (multiple-based)
  • a discounted cash flow approach, or
  • an asset-based approach.
23
Q

(Intermediate) To which of the following categories of alternative investments is an investor most likely to gain exposure through derivatives?

A) Hedge funds.
B) Commodities.
C) Private equity.

A

B (picked A)
For many commodities, liquid markets exist in derivatives such as futures contracts. Derivatives are less likely to be available on hedge funds or private equity.
*hedge funds use derivatives, but it’s not a derivative. Here it is asking which investment could be a derivative (basically)

24
Q

(Advanced) A Hong Kong hedge fund was valued at HK$400 million last year. At year’s end the value before fees was HK$480 million. The fund charges 2 and 20. Management fees are calculated on end-of-year values. Incentive fees are independent of management fees and calculated using no hurdle rate. The previous year the fund’s net return was 2.5%. The annualized return for the last two years is closest to:

A) 8.1%.
B) 13.6%.
C) 7.9%.

A

C

  • Management fee is HK$480 million × 0.02 = HK$9.6 million.
  • Incentive fee is (HK$480 million − HK$400 million) × 0.20 = HK$16.0 million.
  • Total fee is HK$9.6 million + HK$16.0 million = HK$25.6 million.
  • Net of fee: HK$480.0 − HK$25.6 = HK$454.4 million
  • Net return: (HK$454.4 / HK$400.00) − 1 = 13.6%
  • Two year annualized return is (1.136 × 1.025)1/2 − 1 = 7.9%
25
Q

(Advanced) A form of direct investment in mortgages is:

A) whole loans.
B) commercial mortgage-backed securities.
C) mortgage real estate investment trusts.

A 
A
Whole loans (i.e., commercial property mortgages) are considered direct investments. Commercial mortgage-backed securities (CMBS) and mortgage REITs are indirect investments.
26
Q

What are the reasons to invest in real estate?

A
  • potential long-term total returns,
  • income from rent payments,
  • diversification benefits,
  • and hedging against inflation.
27
Q

Examples of direct (private) debt investment in real estate?

A

Mortgage and construction loans

28
Q

Examples of direct (private) equity investment in real estate?

A
  • Sole ownership
  • Joint ventures
  • Limited partnerships
  • Commingled funds
29
Q

Examples of direct (private) equity investment in real estate?

A
  • Real estate corporation shares

- Real estate investment trust shares

30
Q

Examples of indirect (public) equity investment in real estate?

A
  • Mortgage-backed securities

- Collateralized mortgage obligations

31
Q

What are some Real estate investment categories?

A
  • residential properties,
  • commercial real estate,
  • REITs,
  • mortgage-backed securities,
  • and timberland and farmland.
32
Q

Historically, real estate returns are ____ correlated with global equity returns and ____ correlated with global bond returns.

A

highly ; less

33
Q

The _____ of real estate indexes may contribute to the low correlation with bond returns.

A

construction method

34
Q

Due diligence factors for real estate include?

A
  • global and national economic factors,
  • local market conditions,
  • interest rates,
  • and property-specific risks (including regulations and abilities of managers.)
35
Q

For real estate due diligence, _____ and _____ have additional risk factors to consider.

A

Distressed properties investing; real estate development

36
Q

(Advanced) An example of a relative value hedge fund strategy is:

A) merger arbitrage.
B) convertible arbitrage.
C) market neutral.

A

B
Relative value strategies include convertible arbitrage fixed income, asset-backed fixed income, general fixed income, volatility, and multi-strategy. Market neutral is an equity hedge strategy. Merger arbitrage is an event driven strategy.

37
Q

What are the four strategies of hedge fund?

A
  • Event-driven strategies
  • Relative value strategies
  • Macro hedge strategies
  • Equity hedge strategies
38
Q

_____ include merger arbitrage, distressed/restructuring, activist shareholder and special situations.

A

Event-driven strategies

39
Q

Event-driven strategies include?

A
  • merger arbitrage,
  • distressed/restructuring,
  • activist shareholder
  • and special situations.
40
Q

Relative value strategies seek profits from ______

A

unusual pricing issues.

41
Q

Macro hedge strategies are _____ strategies based on ____ economic trends.

A

“top down”; global

42
Q

Equity hedge strategies are ____ strategies that take _____ positions in _____.

A

“bottom up”; long and short; equities and equity derivatives

43
Q

What are included in equity hedge strategies?

A

Strategies include

  • market neutral,
  • fundamental growth,
  • fundamental value,
  • quantitative directional,
  • short bias,
  • and sector specific.
44
Q

Relative value strategies include?

A
  • convertible arbitrage
  • fixed income,
  • asset-backed fixed income,
  • general fixed income,
  • volatility,
  • and multi-strategy
45
Q

In periods of _____, the correlation of returns between global equities and hedge funds tends to increase

A

financial crisis

46
Q

In periods of financial crisis, the correlation of returns between _____ and _____ tends to increase, which limits ________

A

global equities; hedge funds

hedge funds’ effectiveness as a diversifying asset class.

47
Q

Due diligence factors for hedge funds are? What are some other qualitative factors?

A
  • investment strategy,
  • investment process,
  • competitive advantages,
  • track record,
  • longevity of fund,
  • and size (assets under management).

Other qualitative factors include management style, key person risk, reputation, investor relations, growth plans, and management of systematic risk.

48
Q

_____ and _____ are the two dominant strategies for PE funds. (which one is the most prevalent?)

A 
Leveraged buyouts (LBOs) and venture capital
LBOs are most prevalent/common.

Alternative Investments (4 decks)

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