Alternative Investments Flashcards
Learn the fundamentals of alternative investments and their role in investment portfolios.
Define:
Cost of carry
aka carry
Net costs associated with carrying, storing, or holding, an asset or position.
Define:
Clearinghouse
An intermediary which acts as middleman between contracting parties, typically in the futures market.
Provide credit gaurantee to buyer and seller of futures contract.
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Committed capital
Money which limited partners have made a commitment to provide to the private equity fund.
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Commodity swap
A swap in which the underlying is a commodity.
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Convenience yield
A non-monetary advantage of holding an asset.
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Counterparty risk
Risk that the other party to a contract or transaction may default on the contractual obligation.
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Funds of hedge funds
aka fund of funds
Investment vehicle that pools money from multiple investors and invests that money in a diversified portfolio of other investment funds (mutual funds, hedge funds) rather than in individual securities or assets.
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Hedge funds
Private investment fund that pools money from multiple investors and employs a range of investment strategies (including leverage and derivatives) with the goal of generating returns that are uncorrelated with traditional asset classes.
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High-water marks
The highest value, net of fees, that the fund has previously reached. This mechanism is used to determine the performance fees that hedge fund managers charge to their clients, and discourages them from collecting performance fees on profits that simply recover previous losses.
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Limited partners
LPs
Partners with limited liability. They play a passive role (not directly involved in managing the fund).
Define:
General partner
GP
The partner that does directly manage the business/fund (theoretically bears unlimited liability).
Define:
Management buyout
MBO
A leveraged buyout with existing management purchasing controlling interest of its outstanding shares (May purchase all shares and take company private).
uses leverage (debt)
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Management fee
A fee charged for investment management services, based on assets under management or committed capital.
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Private equity securities
Securities not listed on public exchanges (no active secondary market). Issued to institutional investors via non-public offerings (ex. private placements).
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Venture capital
VC
Investments that provide “seed” or start-up capital, early-stage financing, or later-stage financing (including mezzanine-stage financing) to young companies in early development stages/requiring additional capital for expansion.
Define:
Backwardation
In futures markets: spot price > futures price. Forward curve is downward sloping
Convenience yield is high with backwardation, can think “better to already hold the item today” (rather than having to pay such a high spot price).
Define:
Calmar Ratio
Avg annual return (compounded) / max drawdown risk (for the period)
Often calculated using prior three years performance.
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Cap rate
Annual rent collected (net of vacancies) / price paid for property
or NOI/V
Key metric in Real Estate
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Catch up clause
Clause allowing GP to receive 100% of distributions after hurdle rate is achieved, until total performance fee is received, after which regular distributions resume.
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Contango
In futures market: spot price < futures price.
Forward curve is upward sloping.
Convenience yield is low
Define:
Hard commodities
Natural resources which are consumed/used in industry and therefore are traded with physical delivery common upon settlement.
Metals and minerals, Energy, lumber
Define:
Limited partnership
Partnership with a general partner (unlimited liability) who is responsible for managing the business/fund, and other partners who are limited partners with limited liability.
Define:
Limited partnership agreement
LPAs
Legal document outlining the partnership and framework for operations of a limited partnership.
Define:
MAR ratio
Avg annual compounded return / max drawdown risk (over full history of investment).
as opposed to calmar ratio
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Partnership agreement
legal document outlining the partnership (outlines how much each partner owns, their share of profits, and duties).
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Public-private partnership
PPP
Agreement between public and private sector to finance, build, and operate infrastructure.
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Real estate investment trusts
REITs
Tax advantaged entities which owns and operates income producing real estate properties. Provide investors an indirect means on investing in RE and gaining exposure to cashflows generated by RE.
Can also be involved in RE development.
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Side letters
Side agreement between LPs and GP (outside of the LPA).
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Soft commodities
Agricultutal products which tend to be perishable. They are traded and often involve physical delivery upon settlement.
ex. grains, livestock, coffee, sugar
As opposed to hard commodities
Define:
Title search
Done to ensure that the seller actually owns the property without liens or claims against the asset.
Part of Real Estate due dilligence.
