CH 9 - Analyzing Non-Conventional Asset Classes and Their Structures Flashcards
Three main reasons why an investor would include alternative investments
- To incrementally increase returns more than incrementally increasing risk.
- To incrementally decrease risk more than incrementally decreasing returns.
- To increase the portfolio’s absolute return nature, making it more resistant to capital erosion in market downturns.
3 Types of Hedge Fund Risks
- First order
- Second Order
- Operational
First-order risk
Refers to the exposure to changes in the general direction of equity, fixed income, currency, and commodity markets
Second-order risks
- liquidity
- leverage
- deal break
- default
- Counterparty
- Trading
- Concentration
- Pricing model
- Trading model risks
Operational risk
relates to the hedge fund as a business entity
Reasons it is hard to evaluate Real Estate
- Uniqueness
- Interrelationships
- Immobility
- Illiquidity
- Market inefficiencies
4 types of Private equity investments
Leveraged buyout
Mezzanine Capital (high yield debt)
Venture Capital
Infrastructure
The market for hedge funds can be split into two segments:
- Funds targeted toward high-net-worth and institutional investors.
- Funds and other hedge fund-related products targeted toward broader individual investors
Four steps for hedge fund inclusion in a portfolio
- Assess the investor’s suitability in terms of risk/return
- assess percentage of the total portfolio
- Select specific hedge funds
- Monitor performance
Example of Relative value equity strategy and exposure to equity market
Equity market-neutral
low market exposure
Example of Event-driven equity strategy and exposure to equity market
Merger arbitrage.
medium market exposure
Example of Directional equity strategy and exposure to equity market
Long/short equity, global macro, emerging markets
High Market Exposure
Hedge Fund: eight key areas of due diligence
- Fund track record
- Risk characteristic
- Hedge fund managers
- Hedge fund features
- Return statistics
- Tax treatment
- Currency risk
- Operational risk
An investor can trade commodities via futures and futures options through one of two means
- Standard managed futures account
2. Commodity trading account
What is a managed futures account?
Account is managed on a discretionary basis by someone licensed in one or more Canadian provincial securities regulators as a commodity trading manager (CTM)
What is a commodity trading account?
permits individual investors to trade and manage their commodity futures portfolio themselves
Commodity-related ETFs are categorized into the following major types:
- Index ETFs
- Commodity ETFs
- Leveraged ETFs
2 types of commodity ETF’s
- Physical ownership
2. Synthetic Replication
Three operational variables that determine a
firm’s profitability.
- The quantity of commodity produced.
- The cost of production.
- The selling price of the commodity.
What is a pure play?
A commodity-producing company’s operation whose revenues are 100% dependent on the production of the raw commodity itself
types of real estate syndications
- Land banking
- Brownfield development
- Redevelopment projects
- The purchase of mature properties
- The purchase of distressed properties or mortgages in default
- Mortgage syndications
- A mortgage fund on a specific project
- Blind pools
What is Land banking?
involves the purchase of a tract of raw land outside of an urban area with the expectation that the urban area will expand because of economic growth in the region
What is a brownfield development?
The redevelopment of an abandoned or underused commercial or industrial property,
What is a Redevelopment project?
involves purchasing income-producing properties with the longer-term objective of redeveloping the properties and increasing the income they generate.
Explain a purchase of a mature property and it’s objective.
A partnership is formed to purchase a specific income-producing property or properties.
The objective is to increase income by improving the properties and benefit from rising rents or decreasing costs, or both.
Purchase of distressed properties or mortgages in default
A partnership is formed for the purpose of buying homes that are sold under power of sale at a deep discount to market value
What are Mortgage syndications?
They are offered as exempt investment products that invest in higher-risk mortgages that do not meet the criteria established by banks
What are Blind Pools
Investors presented with information but the exact specifications of the investments are unknown and unavailable at the time when the investor commits.
Explain what is a collateralized mortgage obligation (CMO)
A mortgage-backed bond that separates mortgage pools into staggered maturity groups (tranches) that reallocate the interest and principal payments.
Each tranche is sold as a separate security and has a different claim on the underlying cash flow.
Explain what is a Stripped MBS
divides the cash flows from the underlying mortgage security into two or more new securities.
Stripped securities can be partially stripped, so that each investor receives a combination of principal and interest payments, or they can be completely stripped
2 ways an MBS can be stripped
interest-only (IO), receiving only interest
principal-only (PO), receiving only principal payments
Private equity investors, whether institutional or individual, participate through three product structures:
- Direct investing
- Direct funds
- Funds of funds
