Chapter 1 CAIA Flash Cards
Define Alternative Investments
Alternative Investments are any investments that is not simply a long position in traditional investments
Define an Institutional Quality Investment
A type of investment that financial institutions such as pension funds or endowments might include in their holdings, because they are expected to deliver a reasonable return at an acceptable level of risk
List the four types of Alternative Investments
Real Assets
Hedge Funds
Private Equity
Structured Products
Real Assets
Natural Resources, commodities, real estate, infrastructure, & intellectual property
Hedge Funds
includes Managed Futures
Private Equity
includes mezzanine and distressed debt
Structured Products
includes credit derivatives
Real Assets
Real assets are investments in which the underlying assets involve direct ownership of nonfinancial assets rather than ownership through financial assets, such as the securities of manufacturing or service enterprises. Real assets tend to represent more direct claims on consumption than do common stocks, and they tend to do so with less reliance on factors that create value in a company, such as intangible assets and managerial skill. So while a corporation such as Google holds real estate and other real assets, the value to its common stock is highly reliant on perceptions of the ability of the firm’s management to oversee creation and sales of its goods and services.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 4). Wiley. Edición de Kindle.
Commodities
Commodities are homogeneous goods available in large quantities, such as energy products, agricultural products, metals, and building materials.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 5). Wiley. Edición de Kindle.
Commodity Exposure
Commodity Exposure can be obtained through futures contracts, physical commodities, natural resource companies, & ETF’s
Infrastructure Invesments
Claims on the income of toll roads, regulated utilities, ports, airports, and other real assets that are traditionally held and controlled by the public sector (i.e., various levels of government). Investable infrastructure opportunities include securities generated by the privatization of existing infrastructure or by the private creation of new infrastructure via private financing.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 6). Wiley. Edición de Kindle.
Hedge Fund
a privately organized investment vehicle that uses its less regulated nature to generate investment opportunities that are substantially distinct from those offered by traditional investment vehicles, which are subject to regulations such as those restricting their use of derivatives and leverage. Hedge funds represent a wide-ranging set of vehicles that are differentiated primarily by the investment strategy or strategies implemented.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 6). Wiley. Edición de Kindle.
Private Equity
The term private equity is used in the CAIA curriculum to include both equity and debt positions that, among other things, are not publicly traded. In most cases, the debt positions contain so much risk from cash flow uncertainty that their short-term return behavior is similar to that of equity positions. In other words, the value of the debt positions in a highly leveraged company, discussed within the category of private equity, behaves much like that of the equity positions in the same firm, especially in the short run.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (pp. 6-7). Wiley. Edición de Kindle.
Venture Capital
Venture capital refers to support via equity financing to start-up companies that do not have a sufficient size, track record, or desire to attract capital from traditional sources, such as public capital markets or lending institutions. Venture capitalists fund these high-risk, illiquid, and unproven ideas by purchasing senior equity stakes while the start-up companies are still privately held. The ultimate goal is to generate large profits primarily through the business success of the companies and their development into enterprises capable of attracting public investment capital (typically through an initial public offering, or IPO) or via their sale to other companies. In the context of investment management, venture capital is sometimes treated as a separate asset class from other types of private equity.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 7). Wiley. Edición de Kindle.
Leveraged Buyouts
(LBOs) refer to those transactions in which the equity of a publicly traded company is purchased using a small amount of investor capital and a large amount of borrowed funds in order to take the firm private. The borrowed funds are secured by the assets or cash flows of the target company. The goals can include exploiting tax advantages of debt financing, improving the operating efficiency and the profitability of the company, and ultimately taking the company public again (i.e., making an IPO of its new equity). Management buyouts and management buy-ins are types of LBOs with specific managerial changes.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 7). Wiley. Edición de Kindle.
Mezzanine Debt
Mezzanine debt derives its name from its position in the capital structure of a firm: between the ceiling of senior secured debt and the floor of equity. Mezzanine debt refers to a spectrum of risky claims, including preferred stock, convertible debt, and debt that includes equity kickers (i.e., options that allow investors to benefit from any upside success in the underlying business, also called hybrid securities).
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 7). Wiley. Edición de Kindle.
Distressed Debt
Distressed debt refers to the debt of companies that have filed or are likely to file in the near future for bankruptcy protection. Even though these securities are fixed-income securities, distressed debt is included in our discussion of private equity because the future cash flows of the securities are highly risky and highly dependent on the financial success of the distressed companies, and thus share many similarities with common stock. Private equity firms investing in distressed debt tend to take longer-term ownership positions in the companies after converting all or some portion of their debt position to equity. Some hedge funds also invest in distressed debt, but they tend to do so with a shorter-term trading orientation.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 7). Wiley. Edición de Kindle.
Structured Products
Instruments created to exhibit particular return, risk, taxation, or other attributes. These instruments generate unique cash flows as a result of partitioning the cash flows from a traditional investment or linking the returns of the structured product to one or more market values.
Chambers, Donald R.. Alternative Investments: CAIA Level I (Wiley Finance) (p. 7). Wiley. Edición de Kindle.