Alternavtive investments Flashcards
What are alternative investments?
Various types of investments that do not fall under regular investments type
What are traditional invetments?
They are long-only investments in cash or publicly traded stocks/bonds
What are types of alternative investments? (3)
Private capital, real estate and hedge funds
What are real estate categories? (4)
Residential, commercial, properties and ABD
What are natural resources categories? (4)
Commodities, farmland, and timberland
What are infrastructures?
Long-lived assets that provide public services
What is fund investing?
Investing in a pool of assets alongside other investores, using fund manager who selecr and manages investments using upon agreed strategy
What is term-sheet?
It describrs investment policy, for strucuture and requirements
What is co-investing?
It is live fund investing, but investors can manage alongside the fund managers
What are side letters?
It is special terms that apply to one LP, but not the other
What is master limited partnership?
It is publicly traded, most common in natural resources and real estate
What fees of a fund consists of?
Management fee and performance fee
How is management fee calculated for hedge funds?
As % of assets under management
How is management fee calculated for PE funds?
As % of commited capital
What is soft hurdle rate?
It is performance fee as % of total increase in each partners investment
What is hard hurdle rate?
It is performance fee as % of gains above te hurdle rate
What is catch up clause?
It allows fund manager to receive higher share of profits over certain threshold received
What is high-water mark?
There is no performance fee paid on gains that only ofsset prior losses
What is deal-by-deal waterfall?
It is when profits are distributed as each fund investment is sold
What is whole of fund waterfall?
LPs receive all distributions until 100% of their initial investment & hurdle rate
What is clawback provision?
It is if GP accrues or receives incentive payments on gains that are reversed as deals exit, LPs can recover previous payments
What are lifecycles of alternative investments?
Capital commitment, deployment and distribution
What is capital commitment phase?
It is identifying investments and making capital calls
What is capital deployment stage?
It is when managers engage themselves in projects/firm they invest in
What is capital distribution phase?
It is when returs are positive and accelerate
Formula of multiple of invested capital
(total capital retained+value of remaining assets)/total capital paid in
Formula of levered return
(r(V0+Vb)-rbVb)/V0
What is fair value assumptions level 1?
Assets trade in active markets and have quoted prices readility available
What is fair value assumption level 2?
There are no quoted prices available, but they can be valued on directly or indirectly observable inputs
What is fair value level 3?
Assets require unobservable inputs to establish fair value
What is lockout period?
It is when LPs cannot request redemptions or incur significant fees for it
What is notice period?
It is timeframe within a fund has to fulfill redemption request
What is founder class shares?
It is interest in early who receives better terms
Formula of total fees
mV1+max[0; p(V1-V0)]
Formula of rate of return for investors
(V1-V0-total fees)/V0
What is pre-seed capital used for?
Idea stage
What is seed-stage used for?
Product, development, marketing, market research
What is early stage or start-up used for?
It is investments made for operations
What is later stage financing/expansion venture capital?
It is after productions and sales have begun
What is mezzanine-stage financing?
It is capital contributed for IPO
What is trade sale?
It is sale of portion to a strategic buyer directly
What is direct listing?
It is when only existing shares are sold with no underwritter
What is special purpose aquisition company?
It is set up to raise capital that will be used to acquire on unspecified private company
What is recapitalization?
It is issuing debt to funds dividend distribution to equity holders
What is mezzanine debt?
It is private debt that is subordinated to senior secured debt
What is distressed debt?
It is debt of mature companies in financial trouble
What is unitranche debt?
It is combined debt of different types into a single loan
What is vintage year?
It is the year the first investment was made by the fund
What is core real estate strategies?
It is high quality properties with stable returns
What is value-added real estate strategies?
It is development and redevelopment on larger scale than core-plus strategies
What is opportunistic real estate strategies?
It is large scale redeveloping&repurchasing of assets, distressed properties and speculate on upturns in real estate markets
How can you invest in infrastructure assets? (3)
-Construct and sell or lease to the government
-Operate directly
-Buy from gov and operate or lease
What is take or pay arrangements?
You are required to pay minimum purchase price for agreed upon value
What are brownfield investments?
Infrastructure already constructed
What are greenfield investments?
Assets that are to be constructed
What are alternative ways for exposure besides futures, forwards and options?
ETFs, ETNs and managed future funds
Formula of the future prices
spot prices*(1+risk-free rate)+storage costs-convenience yield
What is contago?
When convenience yield is small, future prices>sport prices
What is backwardation?
It is when convenience yield is high, future prices<spot prices
What are fundamental long/short hedge fund strategy?
Long positions in undervalued security based on fundamental analysis also having short position portfolio of stocks/index
What are fundamental growth hedge fund strategy?
Fundamental analysis to find high growth companies
What are fundamental value hedge fund strategy?
Buy undervalued, short overvalued
What are marekt neutral hedge fund strategy?
Hold equal amount in long and short positions so it cancels out
What are short bias hedge fund strategy?
Take mostly short positions
What are margin arbitrage hedge fund strategy?
Buy shares of the firm being aquired and short firm making aquisition
What are distressed/restructuring hedge fund strategy?
Buy securities of a distressed company and short overvalued securities
What are activist shareholder hedge fund strategy?
Buy equity shares to make influence
What are relative value strategies?
It is buying a security and selling short related security with goal of profiting when pricing discrepancy is resolved
What are opportunistic strategies?
They focus on macro events
What are funds of funds?
It is investment company that invests in hedge funds
What is market beta?
It is return attributable to broad market index
What is strategy beta?
It is return attributable to specific sector
What is alpha?
It is additional return delivered by the manager
What is survivorship bias?
Hedge fund might not be included in the index unless it has existed for a minimum time or reached minimum risk
What is selection bias?
Index providers assigning funds to categories inconsistently or having different requriements
What is backfill bias?
It is effect on historical index return of adding fund returns for prior years to index returns when fund in added to an index
What are smart contracts?
Self-executed contracts based on predetermined terms and conditions
What is blockchain?
It is digital ledger that records information sequentially within blocks that are linked together and information is secured
What is consesus protocols?
They determine how blocks are chained together
What is proof of work protocol?
Miners use computers to solve cryptographic problem which verifies transactions
What is proof of stake protocol?
It is network participants that pledge collateral to guarantee validity of the block
What are permisionless network?
Transactions that are visible to all users within the network and any user can execute transaction
What are permissioned network?
Users might be restricted from some network activities and permissions can modify the level of ledger accessibility
What is cryptocurrency?
It is digital currency issued privately with no backing from a central bank
What are stablecoins?
They offer stable digital currency values and are linked to the value of another asset secured by a basket of assets
What is central bank digital currency?
It is digital version of banknote or coin issued by central bank
What is tokenization?
It uses DLT to streamline tracking historical record of ownership
What is security token?
It tracks ownership rights in publicly traded securities
What are governance tokens?
They offer permissionless networks and act as voting rights to determine how networks should operate
What are inheritent value differences?
Digital assets have no fundamental value
What are transaction validation differences?
Digital assets are recorded on decentralized DL.
What are medium of exchange differences?
Digital assets are used as alternative fiat currencies, mainly for online transactions
What are centralized exchanges?
They are privately held and offer trading platforms for price transparency and value information
What are decentralized exchanges?
It does not have a centralized authority and operates on distributed network
What is crypto coin trust?
It offer shares in trust that holds large amount of crypto and futures
What is crypto exchanged-traded products?
It aims to mimic returns of digital assets
What are crypto stocks?
It is indirect exposure through business connection to digital assets
What are asset-backed tokens?
It is digital ownership of physical or digital assets
What is decentralized finance?
It seeks to develop sophisticated financial products and services using open-source financial applications
