Alternative Investments Flashcards
What are the three principle commodities markets?
o Energy (oil/gas) - hard o Metals (hard): precious (gold, silver, platinum, palladium) perform well in low markets or base (copper, aluminium, zinc, lead, nickel and tin) – perform well in growth periods. o Agricultural / livestock are softs
How can commodities be invested in?
o Direct investment
o Indirect investments
- Funds
- Companies whose business is closely related to commodities
List the priciple commodity derivative markets
o New York Mercantile exchange (NYMEX)
o Ice futures
o London metal exchange (LME) – base metals
What are the principle commodity indices
- Thomson/Jefferies CRB index: US and UK commodity futures index
- S&P GSCI: production weighted global (rebalanced annually)
- Bloomberg Commodity Index (BCOM) (rebalanced annually)
- Rogers International Commodity Index (RICI): global commodity futures index
In terms of investment what are features of commercial property for investment?
Commercial • Long leases • Tenant liable for upkeep • Return: rental income • Relatively high capital value
In terms of investment what are features of residential property for investment?
- Shorter leases
- Landlord liable for repairs
- Return: capital growth
- Relatively low capital value
What are Investment property database (IPD) property futures traded on?
Traded on EUREX (quarterly or annual total return indices)
What are Investment property database (IPD) index swaps traded on
OTC transaction, swapping LIBOR plus margin for property returns measured by IPDs annual index
How are Investment property database (IPD) Property income certificates traded?
Quarterly returns based on IPD’s all-property total return and a payment reflecting index movements on maturity
How can an investor indirectly invest in property?
Real estate investment trusts (REITs) conditions:
Detail conditions of a REIT
- UK closed end company listed on a UK stock exchange
- No investor can own more than 10% of the shares
- Property letting must comprise 75% (of income and assets)
- At least three properties must be owned (no single property over 40% of total assets)
- At least 90% of profits must be distributed to investors
Taxation
o No corporation tax paid by REITs
o Basic rate tax withheld on profit distributions
what does an ETF usually track?
price of a single commodity / group of commodities
what is the most direct way to invest in a commodity?
physically (but storage) or buying a futures contract
why are commodities futures used?
to hedge a risk
what is a commodity trading advisor
a particular type of investing in futures via a collective investment vehicle (often a hedge fund)
main exchanges for energy derivatives>
NYMEX - New York Mercantile exchange - part of CME group
Ice Futures london
what index is traded on ICE futures exchange?
Thomson Reuters / Core Commodity CRB index
how can commodity expose be viewed as a hedge against inflation and event risk
Investors own commodities to protect themselves against unanticipated inflation that may result from other events (e.g. natural disasters/wars/macro-events). Equity returns generally show a low or negative correlation with commodity indices and so they offer diversification possibilities.
commodity futures have an opposite exposure to inflation compared to stocks and bonds; the correlation of commodity futures with inflation is positive at all horizons
what is direct property investment?
buying the long leasehold or freehold of, primarily, commercial property
what three property sectors are usually invested directly into in terms of property
retail office and industrial
Other less common = leisure and hotels
why is property seen as an attractive asset?
- a less volatile investment than other asset classes
- a risk diversifier
- high income return
- hybrid investment return that combines both features of equities and bonds
- partial hedge against inflation
- has residual value
- well established asset class with a transparent market
- illiquid asset with costly and slow transactions
list ways in which the commercial property market is different to the residential
- residential tenants usually commit to relatively short renewable leases, which commercial tenants usually sign long-term contracts of ten or more years
- commercial tenants are usually liable for repairing the property while landlords of residential are usually responsible
- the returns for residential property have historically been dominated by increases in capital value whereas a large part of the commercial property return is rental income
- commercial property usually has a much higher cost
generally what is commercial property said to offer
a secure and stable cash flow, low volatility and diversification benefits
what is the role of the investment property database
provides a standard benchmark for property investors based on records from portfolio valuations rather than transaction data
measures total returns for all directly held real estate assets and four main market sectors: retail, office, industrial and residential
who are the the main investors in commercial property market?
UK
- overseas
- UK CIS
- UK REITS and listed property companies
- UK private property companies
- UK insurance funds
- UK pension funds
- UKEstates and charities
- UK other
- UK private investors
what does freehold ownership refer to
ownership effectively in perpetuity
what does leasehold ownership refer to
contractually limited length of time, though a break clause may be present
what is the cost approach to valuation of property investment?
replacement cost of the asset, including both land and building costs
what is the sales comparison approach to valuation of a property
market value is estimated against a benchmark, such as a similar property or group of properties which transacted about the time of the appraisal
hedonic price variation is a variation of this which identified key features of a property
what is the income approach to valuation of a property
involves discounting a perpetual income from owning the investment
what is the NOI / market cap rate approach to valuation of a property
involves gross potential income less expenses such as insurance repairs, vacancy periods and so on
how are environmental issues becoming more important in the real estate sector
include pollution, land contamination, air and water quality and accompanying regulatory compliance, along with resource scarcity and climate change
how are social issues becoming more important in the real estate sector
the health and safety of employees
overall labour conditions throughout the supply chain
- human rights more generally treating customers fairly
- employee engagement
- culture
- customer satisfaction
how are governance issues becoming more important in the real estate sector
- environment and social issue management
- anti-bribery and corruption
- business ethics and transparency
- quality of management
- functioning of boards
- diversity of thought and reflection
from an investment perspective who needs to be aware of SI and ESG factors in property valuation and investment
- asset owners and trustees and their investment advisors
- direct real estate investment managers
- real estate equity and real estate investment trust bond and debt investors
what are the routes to indirect property investment?
- UK authorised property unit trusts
- Unauthorised property unit trusts
- Unit-linked life and pension funds
- UK life bonds
- REITs
- UK property companies share
- Investment trusts
- Offshore UK-listed property companies
- UK limited partnerships
how much can a UK authorised property unit trust invest into property directly?
100%
talk about a REIT in terms of company structure
- UK based
- close ended company
- traded on stock exchange recognised by HM revenue and customs
what is the main pro of a REIT
double taxation at the corporate and investor level is removed - they are not required to pay corporation taz
when will an investor in the REIT lose tax benefits
when they ow more than 10%
what aspect of a REIT in % must be the property lettings business that is tax exempt
75% of the overall business with regard to both assets and income
in a REIT how many properties must be owned by the reit and what can one property not be more than
three properties
with no one = more than 40%
what % of the REITs taxable profits must be distributed to investors?
90%
why is an interest cover test performed on a REIT
to ensure it is not highly Geared
where are investment trusts listed
on the london stock exchange
what are investment trusts exempt from
CGT
what are the risks of investing in a collective property produce?
illiquidity
concentration (subject to risk if there is a downturn in the property market
price volatility risk (for listed vehicles)
gearing
