Alternative Investments Flashcards
Alt Inv Role in PM
- exposure to risk/ return stocks and bonds cannot provide – real estate, long only commodities
- inc return b/c manager skill – hedge funds, managed funds
- combo – PE, distressed securities
Alt Inv Characteristics
- illiquid
- diversification benefits
- due diligence costs
- difficult performance eval
Traditional Alt Inv
- private equity
- commodities
- real estate
Modern Alt Inv
- hedge funds
- managed funds
- distressed securities
Special Issues for Clients Investing in Alt Inv
- taxes
- suitability
- communication
- decision risk
- concentrated positions
Direct Real Estate Inv
residents, commercial real estate, land
+ leverage, tax deductible exp, control, geographical diversification
- indivisible, high idiosyncratic risk, management costs, transaction costs
Indirect Real Estate
REITS, infrastructure funds, CREFs, separately managed accounts
+ more liquid, less expensive, less risky
- smoothed data (under estimate risk, overstate diversification benefit), correlated w/ stocks and bonds
Buyout Funds
acquire firms w/ established cash flow to improve efficiency of firm; private equity
exit: dividend recapitalization, IPO, sale
Venture Captial
investing in new firm, convertible preferred stock; compare to VC firms from other years; private equity
exit strategy: IPO, sale
Private Equity
acquire firm with existing cash flows
+ high return, control
- illiquid, uncertain time horizon, high risk, limited info, lack of maretability and control
Hedge Funds
+ high reward
- unregulated, high risk, high fees, managers can distort sharpe ratio, difficult to benchmark, illiquid (smoothing returns)
BIASES: relevance of past data, popularity bias, survivorship bias, stale price bias, backfill/ inclusion bias
Downside Deviation
focus on neg returns, not penalize manager for high pos returns
Commodities
direct (purchase commodities or derivatives) or indirect (inv in related firms); managed futures = commodity pool operation (systematic or discretionary)
+ diversification, inf hedge (storable and economy linked)
- survivorship bias, relevance of past data, populatiry bias, stale price bias, backfill/ inclusion bias
Distressed Securities
long only value investing, distressed debt arbitrage, private equity
+ high return, diversification
- event risk, market liquidity risk, market risk, j factor (judge)
