Alternative Investments Flashcards
AFFO
adjusted funds from operation
AFFO = net Income +
depreciation and amort. +
(gains)/losses from sales of depreciable real estate -
non cash rent adjustment -
recurring maintenance capital expenditures -
leasing commissions
Theory of storage
Futures price = spot price + direct storage costs - convenience yield
Total Return
Price Return + Roll Return + Collateral Return
Price Return
(Current price - previous price) / previous price
Roll Return
(Near-term futures price - farther-term futures price) / near-term futures price * percent being rolled
Collateral Return
Annualized return * fraction of the year being held
when calendar spread is negative that market is in
contango
when calendar spread is positive that market is in
backwardation
Insurance theory of futures returns
producers of a commodity would prefer to accept a discount on the futures price if it meant a guaranteed price
implies markets are in backwardation
Hedging pressure hypothesis
a market in contango results when excess demand for price insurance outweighs the sellers
hedging activity of futures buyers exceeds that of sellers
Under theory of storage, when is convenience yield high
When the scarcity of resource is high
Three different approaches to value real estate
1) Cost approach
2) Income approach
3) Sales comparison approach
What is cost approach of valuation and when is it useful
1) estimate market value of the land +
2) estimate the buildings replacement cost -
3) depreciation, including function/locational/economic obsolescence
Most useful when subject property is relatively new, or for unusual properties where comparable transactions are limited
Valuation methods under income approach of valuation
1) Direct capitalization method
2) Discounted cash flow method
Net operating income from real estate property
amount of income remaining after subtracting vacancy and collection losses, as well as operating expenses such as insurance, property taxes, utilities, maintenance, and repairs from gross income
before financing costs and income taxes
value of real estate property using cap rate
NOI (1) / cap rate
cap rate
1) discount rate - growth rate
2) NOI (1) / comparable sales price)
gross income multiplier
sales price / gross income
all risks yield (ARY)
when tenants are required to pay all expenses, a cap rate is applied to rent instead of NOI
rent / comparable sales price
DSCR
debt service coverage ratio
first year NOI / debt services
LTV
loan to value ratio
loan amount / appraised valuee
equity dividend rate
first year cash flow / equity
used when debt is used to finance real estate, equity dividend rate used to measure the cash return on the amount of cash invested
Net asset value per share for REIT
market value assets - market value liabilities
market value assets are found by capitalizing NOI
Funds from operations
accounting net earnings +
depreciation charges (expenses) +
deferred tax charges (deferred tax expenses) -
gains (losses) from sale of property and debt restructuring
AFFO vs. FFO as measure of economic income
AFFO is better because it considers the capital expenditures that are required to sustain the property’s economic income, but FFO is more used because AFFO relies more on estimates that are considered more subjective
Sources of Value creation from Private equity
1) Ability to re-engineer the firm and operate it more efficiently
2) Ability to obtain debt financing on more advantageous terms
3) Superior alignment of interests between management and private equity ownership
Control mechanisms used by private equity
1) Compensation
2) Tag-along, drag-along clauses
3) Board reps
4) Noncompete clauses
5) Priority in claims
6) required approvals
7) earn out
Exit routes for private equity firms
1) IPO
2) Secondary market sales
3) Management buyout
4) Liquidation
PIC
paid in capital: the percent of committed or absolute amount of capital utilized by the GP to date
DPI
distributed to paid-in-capital: cumulative distributions paid to LPs divided by cumulative invested capital
“cash on cash return”
RVPI
residual value to paid in capital: LP’s unrealized return and the value of the LP’s holdings in the fund divided by the cumulative invested capital
TVPI
total value to paid in capital: measures the LP’s realized and unrealized return, the sum of DPI and RVPI
Soft commodities
Coffee, sugar, cocoa, cotton
Rebalancing commodities index in mean-reverting levels vs. trending levels
more important in mean-reverting levels because you can take advantage of the peaks and valleys, so you can outperform
negative in trending markets
Production-weighting vs. Fixed weighting
Production weighting - weighs the more valuable commodities more
Fixed weighting - predetermined levels of weighting
Heterogeneity in real estate vs. stocks & bonds
more heterogeneity in real estate
Correlation between appraisal based indices and other asset classes
low because the appraisal lag leads to appraised values lagging behind market upturns and downturns
Holding period return for for real estate
capital return and income return
Calendar spread
Near term futures contract - longer-term futures contract
Basis on contract
spot price - near term futures
Net lease vs gross lease
net lease - the tenant pays operating expenses
gross lease - the owner pays operating expenses
Repeat sales index
Based on the difference in the sales price of the same property to show the change in market conditions
Hedonic Index
Requires only one sale, but controls for other characteristics, such as size, age, quality of construction, etc.
Two types of transaction-based indexes for real estate
1) Repeat sales index
2) Hedonic index
Performance of appraisal-index and transaction-based index
appraisal index has less volatility and so it has less correlation with other asset classes than transaction based
which real estate investment has the most operating and financial flexibility
REOC
Seven main hedge fund strategy groups
1) Equity hedge
2) Event driven
3) Fund of funds
4) multi-manager
5) relative value
6) opportunistic
7) specialist
equity market neutral strategy
takes opposite positions in similar or related equities that have divergent values and attempt to maintain a near net zero portfolio exposure to the market
construct portfolios so that beta is equal to 0
stub trading
equity market-neutral strategy that capitalizes on misalignment in prices and entails buying and selling stock of a parent company and its subsidiaries, typically weighted by the percentage ownership of the parent company in the subsidiaries
soft vs hard catalyst event driven approach
soft - event has not yet occurred
hard - event has occurred
Fund of fund fee structure
double layer of fees without being able to net performance on individual managers
Best measure of risk adjusted return with the expectation of large negative events
Sortino Ratio
hedge fund strategy with highest volatility
global macro
Two types of opportunistic hedge fund strategies
1) Global macro
2) Managed futures
Difference between long/short equity and equity market neutral
Long/short - buy shares that are expected to go up and short shares that are expected to go down
equity market neutral - takes one position based on research and another to neutralize the position, such as a short in a competitor they are long it
Trendiness
directionality of markets
Conditional Linear Factor Model
useful for uncovering and analyzing hedge fund risk exposures
When would EMN equity strategy be used and why
During periods of non-trending or declining markets because EMN managers neutralize risk and typically deliver return profiles that are steadier and less volatile than those of many other hedge strategy
They use a lot of leverage though
Convertible Bond Arbitrage strategy
Buy the convertible bond and short the stock
Result of short selling when using convertible bond arb strategy
short squeeze and significant losses
time horizon and turnover of equity market neutral portfolios
short and high turnover
Two types of specialist strategies
1) Volatility trading
2) Life insurance trading
hedge fund strategy most exposed to momentum
opportunistic strategies
correlation between leverage and factor exposure in long/short strategy
negative
Hedge fund strategy most subject to crowding out
managed futures because it is more systematically executed than other strategies
Risk and volatility of Soft vs. Hard catalyst event driven strategies
Soft is more volatile and more risky
Hedged equity vs. convertible arb, which uses more leverage
convertible arb
effect of including hedge funds on a portfolio’s Sharpe and sortino ratios
improves both
Least desirable market regime for opportunistic hedge funds and global macro
mean reversion
Which hedge fund strategy is most exposed to concentration risk
Distressed
Which hedge fund style is a replacement to fixed income when yield curve is flat or fixed income returns are low
equity market/neutral
Which hedge fund strategy is the Sharpe ratio the most appropriate
equity long/short
a merger arb manager that is worried about the deal failing would do what
buy a put on the target’s stock and a call on the acquirer’s stock
Which hedge fund strategy is most correlated with the equity markets
Event-driven
Which equity hedge fund strategy employs the most bottom-up strategy
Dedicated Short
Which equity hedge fund strategy has the highest volatility of returns
dedicated short
Equity hedge fund strategy with lowest level of leverage
Dedicated short
when is equity market neutral approach least useful
when market trends up
Which hedge fund strategy provides the most global diversification
opportunistic
Which hedge fund strategy is most tax efficient
distressed
