Asset Allocation to alternatives assets

Question 1

role of Hedge fund, Private equity, Private credit, Commercial real estate, Real estate

Answer 1

(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

Question 2

fund of one

Answer 2

a limited partnership with a single client

Question 3

UCITS

Answer 3

Undertakings for collective investment in transferable securities

Question 4

general partner

Answer 4

A general partner is an owner of a partnership = manager

Question 5

Limited Partner

Answer 5

as a silent partner, has limited liability for the company’s liabilities and debts

Question 6

side pocket

Answer 6

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

Question 7

capital contribution in period t

Answer 7

percentage to be called in period t × (committed capital – capital previously called)

Question 8

distributions in period t

Answer 8

percentage to be distributed in period t × [NAV in period t – 1 × (1 + growth rate)]

Question 9

NAV in period t

Answer 9

NAV in period t – 1 × (1 + growth rate)
+ contributions in period t
– distributions in period t

Question 10

risk-based approach to asset selection

Answer 10

+ 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

Question 11

2 traditional approach to Asset classification

Answer 11

classifying assets group by:
+ liquidity-based approach (Marketable - Liquid, Priave - Illiquid)
+ Expected performance under Distint macroeconomic regime (Capital growth asset, Inflation-hedge, Deflation-hedge)

Question 12

investment oppotunity set

Answer 12

all possible combinations of portfolios drawn from every risky asset

Question 13

Monte carlo simulation approach

Answer 13

1. Decide between asset class returns or risk factors as the variables to be simulated
2. Define how the model should behave statistically
3. If model is based on risk factors, -> translate them to asset class return
4. Develop meaningful output

Question 14

Liquidity provision of hedge fund

Answer 14

1. Subscription: monthly / quaterly
2. Redeemtion: quaterly / annually
3. Lock up: 1 year, prior penalty 10%

Question 15

Liquidity provision of Private Equity, Private Credit, Real Estate, and Real Asset Funds

Answer 15

1. Subsciption: 1 year, commited capital call for 3-year period
2. Redeemtion: no redeemtion provision, sold on the secondary market,
   subject to GP approval
3. Lock up: 10 year

Question 16

investor should monitor these issues with respect to an alternative investment fund’s management

Answer 16

(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

Question 17

7 Key factors investor want to monitor in investment of alternatives

Answer 17

(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

Question 18

common roles of Alternatives investment

Answer 18

R-I-S-C
(1) Risk diversification
(2) Income generation
(3) Safe haven
(4) Capital growth

Question 19

Strength/Limitation of traditional approaches

Answer 19

(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

Question 20

stale pricing

Answer 20

An old price of the asset that does not reflect the most recent information

Question 21

role of alternative

Answer 21

(1) Capital growth
(2) Income generation
(3) Risk diversification
(4) Safety