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IMC Unit 2 - 14 Alternative Investments > Alternative Investments > Flashcards

Alternative Investments Flashcards

1
Q

What are the three principle commodities markets?

A 
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
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2
Q

How can commodities be invested in?

A

o Direct investment
o Indirect investments
- Funds
- Companies whose business is closely related to commodities

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3
Q

List the priciple commodity derivative markets

A

o New York Mercantile exchange (NYMEX)
o Ice futures
o London metal exchange (LME) – base metals

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4
Q

What are the principle commodity indices

A
  • 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
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5
Q

In terms of investment what are features of commercial property for investment?

A 
Commercial 
•	Long leases 
•	Tenant liable for upkeep 
•	Return: rental income
•	Relatively high capital value
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6
Q

In terms of investment what are features of residential property for investment?

A
  • Shorter leases
  • Landlord liable for repairs
  • Return: capital growth
  • Relatively low capital value
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7
Q

What are Investment property database (IPD) property futures traded on?

A

Traded on EUREX (quarterly or annual total return indices)

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8
Q

What are Investment property database (IPD) index swaps traded on

A

OTC transaction, swapping LIBOR plus margin for property returns measured by IPDs annual index

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9
Q

How are Investment property database (IPD) Property income certificates traded?

A

Quarterly returns based on IPD’s all-property total return and a payment reflecting index movements on maturity

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10
Q

How can an investor indirectly invest in property?

A

Real estate investment trusts (REITs) conditions:

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11
Q

Detail conditions of a REIT

A
  • 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

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12
Q

what does an ETF usually track?

A

price of a single commodity / group of commodities

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13
Q

what is the most direct way to invest in a commodity?

A

physically (but storage) or buying a futures contract

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14
Q

why are commodities futures used?

A

to hedge a risk

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15
Q

what is a commodity trading advisor

A

a particular type of investing in futures via a collective investment vehicle (often a hedge fund)

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16
Q

main exchanges for energy derivatives>

A

NYMEX - New York Mercantile exchange - part of CME group

Ice Futures london

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17
Q

what index is traded on ICE futures exchange?

A

Thomson Reuters / Core Commodity CRB index

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18
Q

how can commodity expose be viewed as a hedge against inflation and event risk

A

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

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19
Q

what is direct property investment?

A

buying the long leasehold or freehold of, primarily, commercial property

20
Q

what three property sectors are usually invested directly into in terms of property

A

retail office and industrial

Other less common = leisure and hotels

21
Q

why is property seen as an attractive asset?

A
  • 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
22
Q

list ways in which the commercial property market is different to the residential

A
  • 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
23
Q

generally what is commercial property said to offer

A

a secure and stable cash flow, low volatility and diversification benefits

24
Q

what is the role of the investment property database

A

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

25
Q

who are the the main investors in commercial property market?

A

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
26
Q

what does freehold ownership refer to

A

ownership effectively in perpetuity

27
Q

what does leasehold ownership refer to

A

contractually limited length of time, though a break clause may be present

28
Q

what is the cost approach to valuation of property investment?

A

replacement cost of the asset, including both land and building costs

29
Q

what is the sales comparison approach to valuation of a property

A

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

30
Q

what is the income approach to valuation of a property

A

involves discounting a perpetual income from owning the investment

31
Q

what is the NOI / market cap rate approach to valuation of a property

A

involves gross potential income less expenses such as insurance repairs, vacancy periods and so on

32
Q

how are environmental issues becoming more important in the real estate sector

A

include pollution, land contamination, air and water quality and accompanying regulatory compliance, along with resource scarcity and climate change

33
Q

how are social issues becoming more important in the real estate sector

A

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

34
Q

how are governance issues becoming more important in the real estate sector

A
  • environment and social issue management
  • anti-bribery and corruption
  • business ethics and transparency
  • quality of management
  • functioning of boards
  • diversity of thought and reflection
35
Q

from an investment perspective who needs to be aware of SI and ESG factors in property valuation and investment

A
  • 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
36
Q

what are the routes to indirect property investment?

A
  • 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
37
Q

how much can a UK authorised property unit trust invest into property directly?

A

100%

38
Q

talk about a REIT in terms of company structure

A
  • UK based
  • close ended company
  • traded on stock exchange recognised by HM revenue and customs
39
Q

what is the main pro of a REIT

A

double taxation at the corporate and investor level is removed - they are not required to pay corporation taz

40
Q

when will an investor in the REIT lose tax benefits

A

when they ow more than 10%

41
Q

what aspect of a REIT in % must be the property lettings business that is tax exempt

A

75% of the overall business with regard to both assets and income

42
Q

in a REIT how many properties must be owned by the reit and what can one property not be more than

A

three properties

with no one = more than 40%

43
Q

what % of the REITs taxable profits must be distributed to investors?

A

90%

44
Q

why is an interest cover test performed on a REIT

A

to ensure it is not highly Geared

45
Q

where are investment trusts listed

A

on the london stock exchange

46
Q

what are investment trusts exempt from

A

CGT

47
Q

what are the risks of investing in a collective property produce?

A

illiquidity
concentration (subject to risk if there is a downturn in the property market
price volatility risk (for listed vehicles)
gearing

IMC Unit 2 - 14 Alternative Investments (1 decks)

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