Asset Allocation to alternatives assets Flashcards
role of Hedge fund, Private equity, Private credit, Commercial real estate, Real estate
(1) hedge fund:
* reduce equity beta
* increase return
* less corellate with traditional asset
(2) Private equity
* increase expected return
* limited diversification
(3) Private credit:
* direct lending
* disstressed debt
(4) commercial real estate: inflation hedge
(5) real estate: inflation hedge
fund of one
a limited partnership with a single client
UCITS
Undertakings for collective investment in transferable securities
general partner
A general partner is an owner of a partnership = manager
Limited Partner
as a silent partner, has limited liability for the company’s liabilities and debts
side pocket
The redeeming investor’s pro rata share of the side pocket would remain in the fund and be distributed
at such time as the fund manager liquidates these assets, which could take quarters or even years to accomplish
capital contribution in period t
percentage to be called in period t × (committed capital – capital previously called)
distributions in period t
percentage to be distributed in period t × [NAV in period t – 1 × (1 + growth rate)]
NAV in period t
NAV in period t – 1 × (1 + growth rate)
+ contributions in period t
– distributions in period t
risk-based approach to asset selection
+ modeling (1) risk factors & (2) factor return expectation
+ optimized risk exposure with respect to an overall risk budget -> translate to AA
+ Disadvantages:
* return sensitivity to risk exposure is not stable
* increase risk corelation during financial stress
2 traditional approach to Asset classification
classifying assets group by:
+ liquidity-based approach (Marketable - Liquid, Priave - Illiquid)
+ Expected performance under Distint macroeconomic regime (Capital growth asset, Inflation-hedge, Deflation-hedge)
investment oppotunity set
all possible combinations of portfolios drawn from every risky asset
Monte carlo simulation approach
- Decide between asset class returns or risk factors as the variables to be simulated
- Define how the model should behave statistically
- If model is based on risk factors, -> translate them to asset class return
- Develop meaningful output
Liquidity provision of hedge fund
- Subscription: monthly / quaterly
- Redeemtion: quaterly / annually
- Lock up: 1 year, prior penalty 10%
Liquidity provision of Private Equity, Private Credit, Real Estate, and Real Asset Funds
- Subsciption: 1 year, commited capital call for 3-year period
- Redeemtion: no redeemtion provision, sold on the secondary market,
subject to GP approval - Lock up: 10 year
investor should monitor these issues with respect to an alternative investment fund’s management
(1) A fund’s “key persons” are typically specified in its document
(2) The manager’s interests should be aligned with the investor’s interests
(3) monitor a fund’s holdings over time for signs of style drift.
(4) Monitoring a fund’s risk management framework is important, especially for
leveraged strategies
(5) An investor should observe the profile of the fund investor & judge
whether they are likely to remain committed for the long term
(6) A large or unexpected increase in new investors may make more capital available to a manager than he has attractive opportunities to use
(7) A fund should have reliable auditors, custodians, and other third-party service
providers
7 Key factors investor want to monitor in investment of alternatives
(1) key person risk
(2) Alignment of interest
(3) Client profile: assure that other client is long-term + similar investment goal
(4) Risk management: assure that PM is abiding the process
(5) Style drift: Investor must understand:
+ fund management competitive advantage + skill
+ investment consistent with manager advantage
(6) Risk management
+ must assure that the fund is abiding processes & management philosophy
(7) Client/asset turnover: gian/loss of the client/asset -> signal
(8) Service provider: must be independent + reputable
common roles of Alternatives investment
R-I-S-C
(1) Risk diversification
(2) Income generation
(3) Safe haven
(4) Capital growth
Strength/Limitation of traditional approaches
(1) Strength:
+ Easy to communicate
+ Relevance for liquidity management and operational considerations.
(2) Limitation:
+ Over-estimation of portfolio diversification
+ Obscured (hide) primary drivers of risk
stale pricing
An old price of the asset that does not reflect the most recent information
role of alternative
(1) Capital growth
(2) Income generation
(3) Risk diversification
(4) Safety
