Alternative rock Flashcards
WHich type of alt is the best return enhancer
Private equity
If i have a portfolio of equities, and i want to reduce vol in the SHORT term - what do i do
Fixed income, reduced corrlation with equities = reduced vol of returns, but prbably not going to hit long term return objectives
Why would i add alts to an equity portfolio for a long term play?
Higher vol and higher correlation with equities, higher returns, but more risk
Why is the volatility of alts UNDERSTATED
Backfill bias - only reporting returns when they are good
Smoothed appraisals - for Real estate, no ongoing valutation, just valued when sold
Risk factor based approach to alternative investment allocation - explain
So this is when you have a portfolio that you want to get exposure to certain risk charecteristics - for example, credit, duration, inflation, value, size etc.
THis is SUPERIOR to liquidity or ecnomic based asset allocation because you can target the types of exposures you want to have, ALSO, the other forms of allocation have hefty crossover
Vechiles for Alt investment
Hedge funds (Fund of Fund) SMA Direct Short only mutual fund
What is a side pocket in a hedge fund (REMEMBER THIS)
It is a portion of called capital that is not subject to the normal redemption terms because it may be invested ina highly illiquid investment that needs time to develop
How do withdrawrals/redemptions effect returns of hedge fudns
Reduces them - why? Because they have to withdraw called capital from investments at potentially bad prices/values
Are fees charged on comitted capital or invested capital
Comitted - all money that goes to into the hedge fund is subject to fees
Why may a risk based approach to asset allocation be good and bad
Good - goo diversification across risk factors AND good for a risk management framework
Bad - Hard to explain, risk factors of securities are ALWAYS based on historic simulation, so hard to define real time allocations to certain risk factors
What is bad about a liqudity based approach to alternative investment management
It overesitmates diversification becuase you are not activley diversifying across risk factors
Charevteristics of Hedge funds?
Less regulation Larger inv universe Greater flexibility Less liquid Less transparency
6types of hedge funds
Equity related event driven Reliatve value Opporunitsitc Specialist Multimanager
Name the 3 types of equity hedge fund strategies
Long short, short bias/only, Equity market neutral
Explain long short and short bias as well as the beta of each
Long short strategies have a net long position and have positive beta. It longs and shorts securities
Short bias = more short than long and has negative beta
Explain equity market neutral
It is when there is equal long and short positions, but fund amanager can tactically take beta positions if he thinks there is opportunity. This is a relative value strategy?
Are equity related strategies very levered
Long short and short bias NO
Equitized - yes
Explain event driven strategies
Driven by an event. Meaning that for the merger arbitrage or distressed security events, these need to take place
Explain merger arbitrage
Taking advantage of a merger and taking equity or debt positions in the targets and parents BASED on if you think it will go through (THIS IS HEAVILY LEVERED)
Explain distressed debt
Taking debt position in a destressed company to create alpha if it rebounds or having first picks on the remains if it liquidates
What sort of tail risk are you subject to in merger arbitrage
LEFT TAIL
What is stub trading
Taking positions in parent and subsidiary
Are distressed debt strategies long only?
Yes
Relative value strategies, what the they hedge fund strategies
Fixed income arbitrage and convertible bond arbitrage
What is fixed income arbitrage
Long short fixed income securtities based on yield curve shifts
How would you earn return on a fixed income arb
Narrowing spreads
Convertible bond arb, what is it
Taking postiions in convertible bonds and earning return off the gamma. WHen you short the stock, and buy a BOND that is convertible into the stock, you technically have a slightly net long position in the security without putting out 100% of the outlay
Explain the 2 type of opportunitstic hedge fund strategieis
Global Macro and Managed futures
Explain Global Macro and Managed futures hedge fund strategies
Global macro takes advntage of global events. It is a highly levered strategy which is great to diversify you portfolio. Take positions in inflation, credit risk, IR etc.
Managed futures is also super levered, but it does not buy assets, only futures or other derivatives. It is subject to crowding out (which means if everyone has the same idea, liquidity could be impacted). Great for diversifying because little correlation between stocks and bonds.
Specialist hedge fund investment strategy, what is it and explain
Volatility trading - being a party on these transactions based on your own views. Great for diversifying an equity portfolio, why? because high vol generally means low equity returns. You do this through straddles and spreads.
If you use swaps, there is now counterparty risk
What is a reinsurance strategy
Buying someone elses insurance contract so you get paid when they die.
Identify the 2 types of multimanager hedge funds and the advantage of each
Fund of Funds - great diversification, invest in multiple strategies and once, great for accessing liquidity of hedge funds that may be closed
Multistrategy hedge fund - pretty much a yolo fund that can do anything (specialist, equity driven, event driven etc.) great for efficiency, but subject to left tail risk
Why add hedge funds to a portfolio?
Diversification and higher risk adjuested returns
What ratio caputres left tail risk when evaluating a hedge fund>
Sortino ratio - only uses downside deviation - great for evaluating those levered strategies
Why are multistrategy hedge funds better than FoF
Generally cheaper
More easily and tactically move positins to take advantge of mrkt conditionsn
