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
