Alternative Investments Flashcards
Cap rate
= NOI/value
= discount rate - growth rate
Only applied to first-year NOI
Net operating income for a property
Rental income, if fully occupied
+ other income
- vacancy and collection loss
- operating expense
Excludes financing costs and taxes
Income approach - direct capitalization method
Apply cap rate to first year NOI
Income approach - DCF method
Determine PV of future cash flows using discount rate and PV of terminal value
Cost approach
Replacement cost of land and building, less depreciation and curable problems (economically sensible)
Sales comparison approach
- Use comps to make adjustments
- Take an average
Funds from operations (FFO)
Accounting net earnings
+ depreciation expense
+ deferred tax expenses
-/+ gains/losses from sales of property and debt restructuring
Adjusted funds from operations
FFO
- non-cash rent adjustment
- recurring maintenance-type capital expenditures and leasing commissions
Advantage of AFFO
Considers capital expenditures to sustain property’s economic value
VC ownership %
(Investment)/(PV of exit value)
OR
(FV of investment)/(exit value)
Recommended return metric for private equity
IRR (net IRR for LPs)
Number of shares issued to the VC
Founder’s shares*[f/(1-f)]
Price per VC share
Investment/(# of VC shares)
Adjusted discount rate for probability of failure
(1+r)/(1-q) - 1
r = unadjusted discount rate q = probability of failure in a year
Arbitrage based hedge fund strategy
- profit from security mispricings while matching short exposure to long exposure
- highest Sharpe ratio
- low standard deviation of net returns
- perform well in stable periods (negative skewness and fat tails)
Convertible bond arbitrage hedge fund strategy
- long convertible bond and short underlying equity
- performs well when volatility is increasing and credit spreads are tightening
Equity market neutral hedge fund strategy
Long and short equities with zero beta exposure
Event driven hedge fund strategy
- based on expected outcome of specific events
- includes investing in distressed debt
Risk/merger arbitrage hedge fund strategy
Focused on differences between target’s merger price and market price with the expectation of the completion of the merger
Fixed income arbitrage hedge fund strategy
- short high quality bonds and go long low quality bonds
- spread provides income if spreads remain the same or tighten and liquidity is available
Medium volatility hedge fund strategy
Long and short with net long positions
Global macro hedge fund strategy
Broad market bets on indices, currencies, commodities and other asset classes
Long-short equity hedge fund strategy
Long and short equities with flexibility to adjust beta exposures
Managed futures hedge fund strategy
- speculate in futures
- offers diversification and hedging benefits as part of a portfolio
