Alternative Investments: 3

Question 1

Structured Products

Answer 1

• It generates a return based on the performance of an underlying asset according to a pre-set formula.
• Investors may have the option to en-cash the investment early subject to certain penalties.

Question 2

Advantages of structured product

Answer 2

• High returns within an investment, depending on the type of structured investment and may be accompanied by higher.
• Tax efficient access to investment products that are fully taxable.
• Ability to generate positive returns in low-yield investments.
• Some structured products offer principal protection.

Question 3

Disadvantages of structured product

Answer 3

• Lack of transparency and clarity on the functionality of product.
• Highly complex products that are difficult to understand their functionality.
• Lack of liquidity.
• Unsecured debt.

Question 4

Life Settlement Funds

Answer 4

• They purchase life insurance plans at a discount from individuals with low life expectations.
• Returns are not correlated with the market and hence may provide diversification benefits when mixed equities and bonds.
• Some investors may not find this practice ethical since returns are based on someone else’s misfortune.

Question 5

Risks of life settlement funds

Answer 5

• Longevity risks
• Liquidity risks
• Offshore distributors
• Counter-parties
• Location of the underlying asset (exchange rates)

Question 6

Zeros (investment funds)

Answer 6

• A bond that pays no interest. It is sold at a discount from par and matures at par.
• Zero dividend preference shares provide a ‘pre-determined’ return at maturity as long as the company’s assets grow by a fixed amount.
• Main issue with zero’s is that they are associated with equity-type risks since they actually invest in other companies.

Question 7

Convertible Bonds

Answer 7

• They carry a rate of interest giving the holder the right to exchange the bonds at some stage in the future into ordinary shares according to some pre-arranged formula.
• Usually the conversion price is 10-30%, greater than the share price at the date of the bond issuance.

Question 8

Art & Wine

Answer 8

• They have some value and there may be cases where they can generate strong in the long-run.
• They have been recently used by long-term institutional investors as ‘long-term’ alternative investments.
• Negative side of investment type is that some investors fail to take into account insurance and other storage costs that can often be significant over the long term.