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CFA iii > Alternative rock > Flashcards

Alternative rock Flashcards

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CFA flashcards
1
Q

WHich type of alt is the best return enhancer

A

Private equity

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2
Q

If i have a portfolio of equities, and i want to reduce vol in the SHORT term - what do i do

A

Fixed income, reduced corrlation with equities = reduced vol of returns, but prbably not going to hit long term return objectives

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3
Q

Why would i add alts to an equity portfolio for a long term play?

A

Higher vol and higher correlation with equities, higher returns, but more risk

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4
Q

Why is the volatility of alts UNDERSTATED

A

Backfill bias - only reporting returns when they are good

Smoothed appraisals - for Real estate, no ongoing valutation, just valued when sold

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5
Q

Risk factor based approach to alternative investment allocation - explain

A

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

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6
Q

Vechiles for Alt investment

A 
Hedge funds (Fund of Fund)
SMA
Direct
Short only
mutual fund
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7
Q

What is a side pocket in a hedge fund (REMEMBER THIS)

A

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

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8
Q

How do withdrawrals/redemptions effect returns of hedge fudns

A

Reduces them - why? Because they have to withdraw called capital from investments at potentially bad prices/values

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9
Q

Are fees charged on comitted capital or invested capital

A

Comitted - all money that goes to into the hedge fund is subject to fees

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10
Q

Why may a risk based approach to asset allocation be good and bad

A

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

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11
Q

What is bad about a liqudity based approach to alternative investment management

A

It overesitmates diversification becuase you are not activley diversifying across risk factors

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12
Q

Charevteristics of Hedge funds?

A 
Less regulation
Larger inv universe
Greater flexibility
Less liquid
Less transparency
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13
Q

6types of hedge funds

A 
Equity related
event driven
Reliatve value
Opporunitsitc
Specialist
Multimanager
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14
Q

Name the 3 types of equity hedge fund strategies

A

Long short, short bias/only, Equity market neutral

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15
Q

Explain long short and short bias as well as the beta of each

A

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

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16
Q

Explain equity market neutral

A

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?

17
Q

Are equity related strategies very levered

A

Long short and short bias NO

Equitized - yes

18
Q

Explain event driven strategies

A

Driven by an event. Meaning that for the merger arbitrage or distressed security events, these need to take place

19
Q

Explain merger arbitrage

A

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)

20
Q

Explain distressed debt

A

Taking debt position in a destressed company to create alpha if it rebounds or having first picks on the remains if it liquidates

21
Q

What sort of tail risk are you subject to in merger arbitrage

A

LEFT TAIL

22
Q

What is stub trading

A

Taking positions in parent and subsidiary

23
Q

Are distressed debt strategies long only?

A

Yes

24
Q

Relative value strategies, what the they hedge fund strategies

A

Fixed income arbitrage and convertible bond arbitrage

25
Q

What is fixed income arbitrage

A

Long short fixed income securtities based on yield curve shifts

26
Q

How would you earn return on a fixed income arb

A

Narrowing spreads

27
Q

Convertible bond arb, what is it

A

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

28
Q

Explain the 2 type of opportunitstic hedge fund strategieis

A

Global Macro and Managed futures

29
Q

Explain Global Macro and Managed futures hedge fund strategies

A

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.

30
Q

Specialist hedge fund investment strategy, what is it and explain

A

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

31
Q

What is a reinsurance strategy

A

Buying someone elses insurance contract so you get paid when they die.

32
Q

Identify the 2 types of multimanager hedge funds and the advantage of each

A

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

33
Q

Why add hedge funds to a portfolio?

A

Diversification and higher risk adjuested returns

34
Q

What ratio caputres left tail risk when evaluating a hedge fund>

A

Sortino ratio - only uses downside deviation - great for evaluating those levered strategies

35
Q

Why are multistrategy hedge funds better than FoF

A

Generally cheaper

More easily and tactically move positins to take advantge of mrkt conditionsn

CFA iii (11 decks)

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