Alternative Investments Flashcards
Contrast commodity valuation with equity/bond valuation.
Commodities derive value from being consumed or transformed, not from generating cash flows like stocks/bonds. Valuation is complex, often based on supply/demand dynamics, storage costs, and convenience yield, rather than discounted cash flow.
Who are the main participants in commodity futures markets?
Hedgers (producers/consumers managing price risk), Speculators (seeking profit from price movements), Arbitrageurs (exploiting price discrepancies, often involving storage), Analysts.
Define Contango and Backwardation and the related theories.
Contango: Futures Price > Spot Price (upward sloping curve). Backwardation: Futures Price < Spot Price (downward sloping curve). Theories: Insurance Theory (producers sell futures, driving FP down; weak evidence). Hedging Pressure (net hedging by producers -> backwardation; net hedging by users -> contango). Theory of Storage (FP = SP + Storage Costs - Convenience Yield; High convenience yield -> backwardation).
What are the components of return for a collateralized commodity futures contract?
Price Return: Change in spot price over the period. Roll Return: Gain/loss from rolling expiring contract into a new one. Positive in backwardation, negative in contango. Collateral Return: Interest earned on the cash collateral posted for the futures position.
How do construction methods (weighting, rebalancing, roll yield) affect commodity index returns?
Weighting: Production vs. fixed weights significantly impacts long-term returns based on constituent performance. Rebalancing: More frequent rebalancing helps mean-reverting prices, hurts trending prices. Roll Methodology: Passively rolling vs. actively seeking lowest contango/highest backwardation impacts roll yield. Weighting/mix have bigger long-term impact than rebalancing/roll method.
What are the distinctive investment characteristics of commercial real estate?
Heterogeneity (unique properties), Immobility, Indivisibility (large units), Illiquidity, High transaction costs, Need for management, Depreciation (tax shield), Use of leverage, Cyclicality.
What are the main approaches to valuing real estate?
Cost Approach: Land Value + Replacement Cost (adjusted for depreciation). Sales Comparison: Adjusting prices of recently sold comparable properties. Income Approach: Discounted Cash Flow (DCF) or Direct Capitalization (Value=NOI1/CapRate).
How is the Cap Rate determined and used?
Represents the expected rate of return on a property based on its expected income. CapRate=Discount Rate−Growth Rate. Often estimated from recent comparable sales (CapRate=NOIcomp/Pricecomp). Used in direct capitalization to estimate value. All Risk Yield (ARY) is similar concept (ARY=RentComp/PriceComp).
What are key metrics used in real estate debt financing?
Loan-to-Value (LTV): Loan Amount / Appraised Value. Debt Service Coverage Ratio (DSCR): First Year NOI / Debt Service. Lenders use Max LTV and Min DSCR to determine max loan amount.
What is Net Asset Value Per Share (NAVPS) for REITs and how is it estimated?
NAVPS is an estimate of a REIT’s per-share market value if assets were sold and liabilities paid off. Estimate: (Market Value of Properties + Other Assets - Total Liabilities) / Shares Outstanding. Property value often estimated by capitalizing expected NOI (NOI1/CapRate).
Define Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) for REITs.
FFO: NetIncome+Depreciation−GainsonSale+LossesonSale. Proxy for operating cash flow, adjusts GAAP NI for real estate specific items. AFFO (or CAD): FFO−Non-cash Rent−Recurring/Maintenance Capex. Aims to be better measure of economic income/dividend-paying capacity.
Contrast advantages/disadvantages of investing in real estate via public vs. private vehicles.
Public (REITs, etc.): Advantages: Liquidity, Lower minimum investment, Diversification, Transparency, Easier access. Disadvantages: Market volatility affects price (may deviate from NAV), Costs (management fees). Private: Advantages: Potential for higher returns (illiquidity premium), More control (direct ownership), Tax advantages (depreciation pass-through). Disadvantages: Illiquidity, Large investment required, Higher transaction costs, Need for expertise/management.
Describe Equity Long/Short, Market Neutral, and Short-Biased hedge fund strategies.
L/S: Long undervalued, short overvalued stocks; typically net long exposure (e.g., 40-60%). Aims for equity-like returns with lower volatility. Market Neutral: Aims for zero beta/market exposure via balanced L/S positions (e.g., pairs trading). Generates alpha independent of market direction. Short-Biased: Net short exposure (e.g., 30-60%); bets on market declines or overvalued stocks.
Describe Merger Arbitrage and Distressed Securities hedge fund strategies.
Merger Arb: Buys target stock (and shorts acquirer in stock deals) after deal announced, capturing spread if deal completes. Left-tail risk if deal fails. Distressed: Invests in securities of firms near/in bankruptcy/reorganization. Aims to profit from recovery/restructuring value > purchase price. Often illiquid, requires legal expertise.
Describe Fixed Income Arbitrage and Convertible Bond Arbitrage strategies.
FI Arb: Exploits small price discrepancies in related fixed income securities (e.g., yield curve trades, carry trades). Often uses high leverage. Convertible Arb: Long convertible bond + Short underlying stock (delta-hedged). Profits from mispricing (implied vol vs actual), yield advantage, gamma trading. Affected by credit risk changes.
Describe Global Macro and Managed Futures (CTA) strategies.
Global Macro: Top-down bets on macro trends (interest rates, FX, commodities) across global markets using various instruments. Can be discretionary or systematic. Managed Futures (CTA): Typically systematic, trend-following strategies using futures/forwards across asset classes. Often use time-series or cross-sectional momentum signals.
What are Fund-of-Funds (FoF) and Multi-Strategy hedge funds?
FoF: Invests in multiple underlying hedge funds. Offers diversification, manager selection expertise. Issues: Double layer of fees, potential netting risk. Multi-Strategy: Single fund allocates capital internally across various hedge fund strategies. Advantages: potentially lower fees, easier capital reallocation, centralized risk management. Disadvantages: operational risk concentration
