Chapter 1 - What Is an Alternative Investment Flashcards
Keyword ‘Absolute return products’
Investment products viewed as having little or no return correlation with traditional assets (since their returns should generally be analysed on an absolute basis rather than relative to the returns of traditional investments).
Keyword ‘Absolute return standard’
Returns are to be evaluated relative to zero - or relative to the riskless rate - and therefore independently of performance in equity markets, debt markets, or any other markets.
Keyword ‘Active management’
Efforts of buying and selling securities to earn superior combinations of risk and return.
Keyword ‘Active return’
Difference between the return of a portfolio and its benchmark that is due to active management. An important goal in AI is often to use active management to generate an improved combination of risk and return.
Keyword ‘Active risk’
Risk that causes a portfolio’s return to deviate from the return of a benchmark due to active management.
Keyword ‘Alternative investment’
Definitions of what constitutes an alternative investment vary substantially. Alternative investments are sometimes viewed as including any investment that is not simply a long position in traditional investments. An investment opportunity with returns that are uncorrelated with or only slightly correlated with traditional investments is often viewed as an AI.
Keyword ‘Arbitrage’
Active, absolute return strategy. Pure arbitrage is the attempt to earn risk-free profits through the simultaneous purchase and sale of identical positions trading at different prices in different markets. Investment professionals define it as the investment programs can be said to contain active risk and to generate relative returns.
Keyword ‘Benchmark’
An investor’s target risk and return is often expressed in the form of a benchmark, which is a performance standard for an index or portfolio that reflects the preferences of an investor with regard to risk and return.
Keyword ‘Benchmark return’
Return of the benchmark index or benchmark portfolio.
Keyword ‘Commodities’
Homogeneous goods available in large quantities, such as energy products, agricultural products, metals, and building materials. Commodities as an investment class refer to investment products with somewhat passive (i.e. buy and hold) exposure to commodity prices. This exposure can be obtained through futures contracts, physical commodities, natural resource companies, and exchange-traded funds.
Keyword ‘Compensation structures’
Refers to the ways that organisational issues, especially compensation schemes, influence particular investments.
Keyword ‘Distressed debt’
Debt of companies that have filed or are likely to file for bankruptcy protection in the near future. Even though the securities are fixed-income securities, distressed debt is included in PE because of 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.
Keyword ‘Diversifiers’
(EDIT) Diversification can lower risk without necessarily causing an offsetting reduction in expected return and is therefore generally viewed as a highly desirable method of generating superior risk-adjusted returns.
Keyword ‘Efficiency’
Refers to the tendency of market prices to reflect all available information. Efficient market theory asserts that arbitrage opportunities and superior risk-adjusted returns are more likely to be identified in markets that are less competitively traded and less efficient.
Keyword ‘Financial assets’
Opposite of a real asset. A direct claim on cash flows such as provided by a share of stock or a bond.
Keyword ‘Hedge funds’
Privately organized investment vehicle that uses its less regulated nature to generate investment opportunities that are substantially distinct from opportunities offered by traditional investment vehicles, which are subject to regulations such as those restricting their use of derivatives and leverage.
Keyword ‘Illiquidity’
Means that the investment trades infrequently and/or with low volume. Illiquidity means that returns are difficult to observe due to lack of trading and that realized returns may be affected by the trading decisions of a few participants.
Keyword ‘Inefficiency’
Refers to the deviation of actual valuations from those valuations that would be anticipated in an efficient market. Ai ma be more likely than traditional investments to offer returns based on pricing inefficiencies.
