Alternative Investments Flashcards
Limited partnerships
GP, LP relationship
- less regulated than publicly traded companies
soft hurdle rate
incentive fee is calculated based on total performance (as long is above the hurdle)
hard hurdle rate
incentive fee is calculated based the performance above the hurdle
waterfall (deal-by-deal/American waterfall and European waterfall)
American waterfall: profits and losses are allocated on a deal-by-deal basis
European waterfall: profits and losses are allocated on an aggregate level (considering all deals)
clawback
Ability of LPs to recover losses, if they had previously paid incentive fees (at a particular point in time)
Event-driven strategies
seeks to exploit pricing inefficiencies that may occur before or after a corporate event
e.g. merger arbitrage, distressed/restructuring, special situations
Relative value strategies
seek profits from unusual pricing issues
e.g. convertible arbitrage fixed income, asset-backed fixed income, general fixed income, volatility, and multi-strategy.
impact of adding commodities to a traditional portfolio
decrease portfolio variance
- low correlation with traditional investments
- commodities have lower expected returns (no difference)
Appraisal index
based on estimates of property values
- estimating values tends to introduce smoothing into returns data, appraisal index returns are likely to have lower standard deviations than index returns based on repeat sales or trading prices of REIT shares
Repeat sales index
based on price changes for properties that have sold multiple times
- the sample of properties sold and thus included in the index is not necessarily random and may not be representative of the broad spectrum of properties available (an example of sample selection bias).
Stratified sampling
divides the population according to common characteristics and then selects samples from each subgroup in proportion to the subgroup’s representation in the overall population.
high water mark
incentive fee is used to pay back prior losses, before paying management (on an ongoing basis)
Angel investing
financing the formation of a business
Mezzanine-stage financing
capital provided to a firm as it prepares for an IPO
Backwardation
futures price < spot price (positive roll yield)
When a futures market is in backwardation, the roll yield is positive because the futures price moves towards the spot price over the life of the contract.
