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CFA level 2 > Alternative Investments > Flashcards

Alternative Investments Flashcards

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1
Q

Backwardation

A

Downward sloping curve.
Todays spot price > future price.
Bearish indicator.
Expected future spot price is lower than current spot price.

Positive calander spread, convience yield doesn’t limit slope of the curve.

Positive Roll Yield and Positive Calander Spread

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2
Q

Contango

A

Bullish indicator
Current spot prices < Future spot price.
Expected future price is higher

There is a limit to the slope of the curve due to arbitrage limit.

Negative Calander spread and negative roll yield.

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3
Q

Trading Strategy for Backwardation

A

Strategy 1: Buy short dated contract, Sell long dated contract.

Strategy 2: Buy long dated contracts.

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4
Q

Trading Strategy for Contango

A

Strategy 1: Buy Long dated contract, Sell Short dated contract.

Strategy 2: Buy short dated contracts.

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5
Q

Insurance Theory (Keynes)

A

Theory of normal backwardation

Producers will use commodity futures for insurance by locking in prices. Thereby having more predictible revenue.

This selling forward pushed down prices in the future.

Prices would have to be lower in the future to induce a buyer to take a price risk.

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6
Q

Hedging pressure hypothesis

A

Producers want to sell to hedge
End users want to buy to hedge

If hedging demand from producers and users are equal, then the future curve should be flat.

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7
Q

Hedging pressure hypothesis

Producers demand > Consumers Demand

A

Backwardation.

Future prices has to be lower to induce speculators to fill gap.

This is part of Insurance theory.

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8
Q

Hedging pressure hypothesis

Producers demand < Consumers Demand

A

Contango

Future prices will be higher

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9
Q

Positive Calender Spread

A

Backwardation

Future < Spot

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10
Q

Negative Calender Spread

A

Contango

Spot < Future

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11
Q

Total Return Swap

A

One party receives payment based on the change in the level of an index

Total Return Swap = Notional Principal (△ Commodity Price - Fixed Payment)

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12
Q

Basis Swap

A

Periodic payments are exchanged based on the values of 2 related commodity reference prices that are not perfectly correlated.

Often used between highly liqiuid futurers contract and an illiquid but related material.

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13
Q

Variance Swap

A

For a specific commodity

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14
Q

Volatiltiy Swap

A

Relative to the volatility of a reference commodity

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15
Q

What is Calender Yield

A

Future prices converge to spot prices over the term of futures contract. The difference between the futures price of a nearer maturity and the futures price of a more distant maturity is known as Calendar Spread

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16
Q

Positive roll yiled

A

Backwardation.

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17
Q

Formula for total return of future commodity contracts

A

Total Return = Spot Price Return + Roll Return + Collateral Return

Total Return = Spot Return + (Excess Return - Spot Return) + (Total Return - Excess Return)

Spot Price Returns: Usually Fluctuates

Roll Return and Collateral Return: Usually remains constant.

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18
Q

Variance Swap

Actual Variance > Fixed Variance

A

Long receives payment

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19
Q

Variance Swap

Actual Variance < Fixed Variance

A

Long makes payment

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20
Q

Commodity Volatility Swap

Volatility of Commodity’s Price > Expected Level of Volatility

A

Long receives payment

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21
Q

Commodity Volatility Swap

Volatility of Commodity’s Price < Expected Level of Volatility

A

Long makes payment

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22
Q

Excess Return Swap

A

Excess Return Swap = Notional Principal (Fixed Payment - Variable Payment).

the variable payments are based on the difference between a commodity price and a
benchmark value.

In months in which the commodity price doesn’t exceed the fixed value, no payments are
made.

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23
Q

Roll Return Formula

A

[(Near Term Future Price) - (Farther Term Future Price)]/ (Near Term Future Price) x % of position being rolled

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24
Q

What does a negative calander spread mean

A

That the near-dated futures contracts are priced lower than farther-dated ones.

Contango.

25
Q

What does a Positive calander spread mean

A

Backwardation

That the near-dated futures contracts are priced higher than farther-dated ones.

26
Q

Theory of storage

A

It is based on the idea that whether a futures market is in backwardation or contango, depends on the relationship between the costs of storing and the benefits of holding physical inventory of the commodity.

Futures Price = Spot Price + Storage Costs - Convenience Yield

Convenience Yield: The benefits of having physical inventory available

27
Q

Real Estate Index: Appraisal Index

A

Member contribute information about the appraisal value of the same house every quarter.

Index is constructed by first calculating the appraisal for each proprty, then value-weighted to get a return for all index.

28
Q

Return formula for Appraisal Index

A

NOI - Capex + (Ending Mv - Beginning MV) / Beginnign MV

29
Q

Income return from Appraisal Index

A

NOI / Beginning MV

30
Q

Cash return from Appraisal Index

A

(NOI - Capex) / Beginning Value

31
Q

Capital return from Appraisal Index

A

(Ending Mv - Beginning MV) -Capex / Beginning MV

32
Q

Real Estate Index: Transaction Based Index

A

2 types

Repated Sales index
Hedonic Index

33
Q

Characteristics of REITS

A

More than 75% of their income comes from rents or interest.

Very stable and reoccuring reported incomes

REITS payout more than 90% of their taxable accounitng net income as dividends

They offer frequent secondary equity offerings.Becuase they pay so much of their income in taxes, they need to raise new equity. Which may dulute EPS.

34
Q

Hedonic Index

A

Part of transaction based index

Does not require repeat sales of the same property, only 1 sale.

Uses Regression analysis with many IV, such as age, size, quality of construction, and other variables.

35
Q

REOC

Real Estate Operating Company

A

Companies that develop and sell real estate.

Primary source of income is from the sale of properties developed by them.

Does not have the Tax advantage as a REIT.

36
Q

Net lease

A

Tenates pay operating expense.

37
Q

Gross lease

A

Owner pays operating expense

38
Q

Triple net lease

A

Tenants will pay common area, repairs, property taxes ect.

39
Q

Real Estate relationship with interest rates

A

Inverse relationship
High interest rates push down real estate prices and credit avalibaility

40
Q

Net Asset Value Per Share

A

(MV Asset - MV Liabilities) / Shares outstanding

[Tangible assets + (Net income / Cap Rate) - Liabilites] / Shares outstanding

41
Q

Hedge Fund Strategy: Equity

A

Long Short Equity
Market Neutral
Short Biased

42
Q

Hedge Fund Strategy: Event Driven

A

Merger Arbitrage
Distress Securities

Highest correlated with the equity market

43
Q

Hedge Fund Strategy: Relative Value

A

Fixed Income Arbitrage
Convertible Bond Arbitrage

44
Q

Hedge Fund Strategy: Oppertunistic

A

Global Macro
Managed Future

45
Q

Hedge Fund Strategy: Specialist

A

Volatility Strategy
Reinsurance Strategies

Relative Valuation between two or more securites. Exposed to credit & Liquidity Risk

46
Q

Hedge Fund Strategy: Muli-Manager

A

Multi Strategy
Funds of Funds

47
Q

Characteristics of Equity long-Short

A

Reliance on Fundamental research
Diverse Investment style
40-60% Exposure to Net long positions
Gross long exposure 70-90%.
Some managers are able to add alpha by timing the market. Few are successful though.

Variable Leverage
High volatility
Positive beta exposure
Absolute valuation approach
Concertrated position size

Leverage levels are negativly related to the level of risk factors exposure the portfolio has.

48
Q

Characteristics of Short Biased

A

Dedicated to short only position
60-120% Short position at all times
30-60% net short position
Bottom up approach
Takes short position, then present market research

Attempts to deliver returns that are negativly correlated with the market.

  • Low Leverage
  • High Volatility
  • Negative Beta exposure
  • Absolute Valuation approach
  • Concentrated positioning sizes

Successful short only fund manager: Increasily positive market returns as the market declines and Risk-free-Rate when the markets increases

49
Q

Characteristics of Market Neutral

A

Modest return profile
Aim is to be market neutral
High levels of diversification and liquidity
Purely quantitative managers

Not useful in upward trending markets

High leverage
Low volatility
Beta Exposure is neutral (0)
Relative Valuation approach
Diverse Position Sizing.

50
Q

Characteristics of Merger Arbitrage

A

Relativly liquid strategy
Moderate to high level of leverage

Soft Catalyst Approach: Trade in the anticipation of an event
Hard Catalyst Approach: Trade in the reaction of an event.

Typically trades are done using common stock.

Cash for stock deal: Buy Target Company shares.

Stock For Stock Deal: Buy target and sell aquirer.

Relative high Sharpe Ratio

Low correlation to market return.

Uncorrelated source of Alpha.

51
Q

Characteristics of Event Driven: Distress Securities

A

Return profile investing typically at the high end of event driven strategies with more volatility.

Usually Long biased, subjected to security specific outcomes, still impacted by the health of the macro-economy.

Liquidation: Assets are sold and paid out according to the capital strucutre.

Reorganization: Capital Strucutre Arbitrage, buy securities that would survive. Long Senior Debt, short junior debt or equity.

Moderate or low levels of leverage.

Long Lock up periods.

52
Q

Characteristics of Relative Value: Fixed Income Arbitrage

A

Risk/return profile is derived from the high correlation found across different securities.

High amounts of leverage.

The more correlated, the lower the risk of the leverage involved.

Pricing inefficinies are small, but high correlated between securities.

53
Q

Characteristics of Relative Value: Convetible Bond Arbitrage

A

Strive and benefit from strucutally cheap source of implied volatility.

Embedded options trade at lower volatility levels compared to the underlying asset, making the calls cheap.

Must accept or hedge away interest rate, credit and market risk.

High levels of leverage

works best during times of high convertiblility insurance, moderate volatility, and reasonable market liquidity.

54
Q

Characteristics of Oppertunistic Strategies: Global Macro

A

Wide range of asset classes.
Focus on theme or regions.
Top-Down Fundamental approach
Fiarly hemogenous

High leverage -6-7 times leverage
Mean reverting

mean-reverting low volatility markets offer few oppertunities

highly liquid

55
Q

Characteristics of Oppertunistic Strategies: Managed Futures

A

Uncorrelated with stocks and bonds
Returns tend to be positivly skewed

85-90% of assets are invested in short term government debt.

Time Series Momentum: Trend following. Long assets that are rising in price, and short assets that are dropping.

Cross-sectional Momentum: Same as TSM but a group of large positions against a group of short positions.

highly liquid

56
Q

Characteristics of Specialist Strategies: Volatility Trading

A

Long volatility position exhibits positive convexity, which can be useful for hedging strategies.

Relative value volatility arbitrage (buy cheap volatility, and sell more expensive volatility).

Long short VIX futures, Options, or swaps.

57
Q

Characteristics of Specialist Strategies: Reinsurance/Life Settlement

A

Insurance company has to much risk exposure for a specific event and at a geographical areas.

Sells a bit of the risk to a reinsurance.

uncorrelated with other assets classes.

Life settlement: Policy holder surrender their policy by selling it to a fund.

58
Q

Characteristics of Specialist Strategies: Multi-Manager Strategies

A

Designed to offer steady low-volatility returns via strategy diversification.
Mullti-Manager have outperfomed Funds of Funds.

Multi-Strategie offers potentially faster tatical asset allocation and improved fee strucutre.

Funds of Funds offer potentially offer more diverse strategy mix, and slower tatical reaction time.

Mulit-Strategy uses more leverage than Funds of Funds.

CFA level 2 (10 decks)

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