Alternative Investments Flashcards
What are some examples of traditional investments?
Examples of traditional Investments:
publicly traded stocks,
bonds,
cash
What are some examples of alternative investments?
Examples of Alternative Investments: hedge funds, private equity, real estate, commodities, infrastructure, ETFs
How do fee structures differ between traditional investments and alternative investments?
Fee structures for alternative investments typically charge higher management fees on average and often incur additional incentive fees based on fund performance
What are the factors that make alternatives different from traditional investments?
Less liquidity of the assets in their portfolio,
Investment management personnel are more specialised,
Lower regulation and red tape,
Lower availability of historical risk and return data,
Differing legal issues,
Differing tax requirements,
What is alpha?
Alpha: Excess return over and above the return generated if we just invested in a market tracking index
What financial instruments do hedge funds tend to make use of more so compared to traditional investment funds?
Derivatives
Are hedge funds available to everyday retail investors? Why?
Hedge funds are generally only accessible to accredited investors as they require less SEC regulations than other funds.
The amount of time after the initial investment during which withdrawals are not allowed, is known as a…?
Lockup period
The amount of time a fund has after receiving a redemption request to fulfil the request, is known as a…?
Notice period
An investment company that invests in a pool of hedge funds rather than just one individual hedge fund, is known as a…?
Fund-of-funds
What is the difference between absolute and relative performance?
Absolute performance: A percentage return ie. 5%
Relative performance: A percentage return relative to a benchmark ie. 5% above the S&P 500
What are the four different hedge fund strategies?
- Event-driven strategies
- Relative-value strategies
- Macro-driven strategies
- Equity hedge fund strategies
Brokers to the hedge funds are known as…?
Prime brokers
What is an advantage of investing directly through a hedge fund over investing in a fund of funds?
Less complex fee arrangements available if go direct to a hedge fund
What is a similarity between hedge funds and private equity in terms of legal structure?
Both are structured as partnerships (LLPs)
What are the differences between hedge fund and private equity fee structures?
Hedge funds charge their management fees on AUM whereas PE charge on committed capital
Private equity funds that invest in early stage companies are known as what type of fund?
Venture capital fund
What is private equity?
Private Equity: Private equity funds typically invest in private companies but can also take public companies private through a leveraged buyout (LBO)
What are the PE exit strategies?
Trade sale Secondary IPO Liquidation Recapitalisation
What is the typical fee structure for private equity?
Management fees are charged at 1-3% of committed capital with c. 20% performance fee
What is the name of funds that use borrowed money to purchase equity in established companies and comprise the majority of private equity investment funds?
LBO funds
What type of debt do LBO funds usually raise?
Bank debt
High yield bonds
Mezzanine debt
What are the 5 stages of early stage investing?
- Angel investing
- Seed stage
- Early stage
- Later stage
- Mezzanine stage (IPO)
What is the difference between an MBO and an MBI?
management buyouts (MBOs): The existing management team is involved in the purchase and remain in charge after the transaction
management buy-ins (MBIs): An external management team will replace the existing management team
How does direct investment in real estate make money?
Income is generated through rental income and capital gains
What is a REIT?
REIT: a company that owns, and in most cases operates, income-producing real estate. Can be listed, typically valued using NAV. Dividends are paid out to shareholders
What are the 3 index’s that can measure real estate performance?
Appraisal Index
Repeat sales index
REIT index
Which of the real estate indices is most susceptible to sample selection bias?
Repeat sales index
What are three valuation models for real estate?
Comparable sales approach
Income approach
Cost approach
What is the benefit of investing in commodities?
Historically the correlation between stocks and commodities has been low
What is the formula for the futures price of commodities?
( Futures\ price = Spot\ price * (1+ risk\ free\ rate) + storage\ costs - cost\ of\ carry )
The benefit or premium associated with holding an underlying product or physical good, rather than the associated derivative, is known as…?
Convenience yield
Through which vehicles can one invest in commodities?
ETFs
Equities that are directly linked to a commodities
Managed futures funds
What is the difference between contango and backwardation?
Contango: When there is no convenience yield or when futures prices are higher than spot prices
Backwardation: When the convenience yield is high or when futures prices are less than spot prices
What are the three sources of commodities futures returns?
- Roll yield
- Collateral yield
- Change in spot prices
Long-lived assets that provide public services. Examples include roads, airports, hospitals etc, are known as…?
Infrastructure assets
What is the difference between brownfield and greenfield investments?
Brownfield Investments: Investments in infrastructure assets that are already constructed
Greenfield Investments: investments in infrastructure assets that are to be constructed
What are the benefits of investing in brownfield investments over greenfield investments?
stable cash flows and relatively high yields, but offers little potential for growth
Outline some typical due diligence considerations for hedge funds?
Investment strategy and process, track record / longevity of fund, size of fund, character of management, key man risk
What is the management fee charged on?
AUM at the beginning or end of period
What is the incentive fee charged on?
portion of profits including any gains in value or any gains in value in excess of the management fee, or gains in excess of a hurdle rate.
What is the difference between a hard and soft hurdle rate?
A hard hurdle rate: means that incentive fees are earned only on returns in excess of the benchmark.
A soft hurdle rate: means that incentive fees are paid on all profits, but only if the hurdle rate is met.
What is a high water mark?
A fee structure where an incentive fee is charged only on a portion of the returns above the historical highs for the fund.
