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Portfolio Theory Management > Alternative Investments (Ch11) > Flashcards

Alternative Investments (Ch11) Flashcards

1
Q

why are alternative investments attractive? (4)

A
  • high returns
  • Low correlation with traditional asset classes
  • better risk and reward characteristics
  • allows investor to diversify
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2
Q

Why are alternatives considered more risky? (3)

A
  • lack of transparency
  • they are illiquid
  • not regulated by the government
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3
Q

how can the agency problem/cost be minimised?

A

through incentives and controls

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4
Q

what are some examples of incentives? (3)

A

compensation
reputation
mgmt ownership

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5
Q

what are some examples of alternative assets? (5)

A
  • real estate
  • hedge funds
  • commodities
  • private equity
  • gold
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6
Q

what super category do FIS, equity and real estate come under?

A

capital

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7
Q

what is alpha a measure of?

A

return generated above the compensation for taking on risk.

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8
Q

what are the two different ways to invest in real estate?

A

directly (buying commercial property) and through REITs (indirectly)

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9
Q

what are the benefits of investing in real estate directly? (2)

A
  • tax benefits

- personal preferences

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10
Q

what are the disadvantages of investing in real estate directly? (4)

A
  • illiquid
  • concentrated risk
  • hard to value due to personal preferences
  • maintenance and admin
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11
Q

what are the benefits of investing in real estate indirectly (REITs)? (5)

A
  • liquidity (90% of income distributed as dividends)
  • diversification
  • no admin or maintenance
  • professional management
  • high returns on a consisted basis through dividends
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12
Q

what are the disadvantages of investing in real estate indirectly (REITs)? (2)

A
  • lack of transparency

- possible agency problem

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13
Q

what are four return factors of REITs?

A
  • supply and demand (development)
  • replacement costs (inflation)
  • economic factors
  • interest rates
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14
Q

how are traditional assets correlated with REITs?

over long and short term compared to equities and real estate?

A

low correlation over all

over short term: more highly correlated with equities

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15
Q

how are REITs correlated over long and short term with equities and real estate?

A

equity: short term a higher positive correlation, over long term low positive to negative correlation

real estate: short term low positive correlation, long term high positive correlation

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16
Q

What is private equity?

A

buying a company and selling parts of it

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17
Q

what are key aspects of venture capital? (3)

A
  • invest in intellectual capital
  • high risk high returns
  • information asymmetries

venture capital invests in start ups that go all the way to IPO

18
Q

Why are hedge funds so risky?

A
  • because they are not regulated
  • they can invest in any type of asset they want
  • they can use derivates, sell short and use leverage.
19
Q

what are the implications of not being regulated?

A
  • retail investors can not invest in these funds

- hedge funds can not market themselves

20
Q

how are interests for hedge fund managers and investors aligned? how does this differ from mutual funds? which aligns interests directly

A

Compensation structure

  • management fees (% x AUM)
  • hedge funds also have incentive fees

incentive fees align interests directly

21
Q

what are two things that incentive fees can be dependant on?

A
  • the hurdle rate (the minimum required rate of return)
  • the high watermark (highest value the fund has ever reached must be reached again before managers receive incentive fee)
  • either one or both of these can apply
22
Q

how do management fees align interests in the short and long term?

A

it can be said that they don’ align interests in the short term because managers get these fees regardless of how the fund performs, however they do align interests in the long terms as the larger the amount of AUM the larger the fee based on percentage. if a fund isn’t performing well there will be no increase in AUM.

23
Q

why can a retail investor not invest in hedge funds?

A
  • hedge funds are risky
  • require large initial investment
  • Low liquidity
24
Q

if a retail investor could afford the initial investment why would a hedge fund still be considered a bad investment?

A

even if retail investor could afford to invest their wealth would be concentrated, and they wouldn’t be able to bare the risk of a market downturn

25
Q

why is a hedge fund considered to have low liquidity? (4)

A

they have features that restrict liquidity

  • redemption frequency is less (i.e. quarterly)
  • notification period
  • lock up period (initial period during which no withdrawal can be made)
  • gate (eg only 20% of assets are allowed to be with drawn at any one point)
26
Q

why is there often bias when hedge funds report?

A
  • end of life bias (funds no longer alive/seeking capital don’t report)
  • back-fill bias (only report fund when it has good performance, includes stressful prior years = stronger upward trend)
  • survivor bias (funds that no longer exist are removed from database)
27
Q

would hedge funds be considered an asset class?

A

no, they are not an asset class they are a structure through which investors can access various asset classes

28
Q

what is the best way to invest in a hedge fund overall?

A

as a part of a diversified portfolio, as they offer improved risk and return characteristics

29
Q

Why is it unlikely that hedge funds will achieve the same level of risk adjusted returns as in the past?

A
  • large inflows of capital lead to strategy saturation/fund saturation
  • Skill shortage
  • investors prefer performance and risk reduction
30
Q

how are hedge funds structured?

A
  • as limited partnerships, or

- as limited liability companies

31
Q

what are four hedge fund styles and strategies?

A
  • relative value
  • event driven
  • hedged equities
  • trading
32
Q

what does the relative value strategy do?

A

exploit mis-pricing between equivalent securitiesPosti

33
Q

what does the event driven strategy do?

A

exploit mis-pricing due to market events

34
Q

what does the hedged equities strategy do?

A

exploit mis-pricing between equity securities

35
Q

what does the trading strategy do?

A

exploit expected price movements using fundamental and technical analysis

36
Q

if hedge fund reporting is optional why do they report? give two reasons

A
  • preforming well

- seeking capital

37
Q

out of private equity, venture capital and hedge funds which are the most liquid?

A

hedge funds

38
Q

what is the correlation between hedge funds and FIS and Equities? what are the return characteristics?

A

Low correlation with FIS and LCaps
Positive correlation with SCaps

High probability of small positive return
Low probability of large negative returns
hedge against market downturns

39
Q

what is the correlation between Venture Cap and Priv Equity and FIS and Equities? what are the return characteristics?

A

Low negative correlation with FIS
High positive correlation with Equities

High probability of small positive return
Low probability of large negative returns
hedge against market downturns

40
Q

what is the correlation between REITs and FIS and Equities? what are the return characteristics?

A

low correlation with both FIS and equity

High liquidity characteristics- reduce price risk

41
Q

what is the correlation between Commodities and Equities? what are the return characteristics?

A

negative correlation with equity, perform best at the end of a business cycle

Portfolio Theory Management (8 decks)

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