Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

PMT 2019 > Chapter 11 > Flashcards

Chapter 11 Flashcards

1
Q

An investment is generally considered alternative if it meets what 6 criteria?

A
  1. Has different performance characteristics from traditional assets (non normal distribution)
  2. Rarely traded
  3. Relatively illiquid
  4. Relatively uncommon in portfolios
  5. Has a relatively limited investment history
  6. Requires unconventional investment skills on the part of an investment manager
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the four major categories of alternative investments?

A
  1. hedge funds
  2. private equity
  3. real estate
  4. commodities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define and describe hedge funds

A
  • lightly regulated pools of capital whose managers have great flexibility in their investment strategies
  • no restrictions on short positions, use derivatives for leverage and speculation performance arbitrage transactions, and invest in any situation where they see an opportunity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are three characteristics that mutual funds and hedge funds share?

A
  1. they are pooled investments that may have front end or back end sales commissions
  2. they charge mgmt fees
  3. they can be bought and sold through an investment dealer
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the three major categories of of HF strategies?

A
  1. Relative value strategies
  2. Event driven strategies
  3. Directional strategies
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Describe relative value strategies

A
  • attempt to profit by exploiting inefficiencies or arbitrage opportunities in the pricing of related stocks, bonds etc.
  • HFs using these strategies generally have low or no exposure to the underlying market direction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Describe event drive strategies

A
  • seek to profit from unique events such as mergers and acquisitions
  • HFs using these have medium exposure to the underlying market direction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Describe directional strategies

A
  • bet on the anticipated movements in the market price of equity securities, debit securities, foreign currencies, and commodities
  • HFs using these have high exposure to trends in the underlying market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the types of relative value strategies?

A
  • equity market neutral (simultaneous long and short)
  • convertible arbitrage
  • fixed income arbitrage
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the types of event driven strategies?

A
  • merger or risk arbitrage
  • distressed securities
  • high yield bonds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the types of directional strategies?

A
  • long/short equity (most popular HF strategy) (buy more of what they like and short what they don’t)
  • global macro
  • emerging markets
  • dedicated short bias
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are FoFH and what are the two main types?

A
  • fund of HFs (FoHF) is portfolio of HFs overseen by a manager who determines which HFs to invest and how much to invest in each
  • the two main types are single-strategy and multi-strategy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the main advantages of FoHFs?

A
  • due diligence
  • reduced volatility (diversification)
  • professional management
  • access of HFs
  • ability to diversify with a smaller investment
  • manager and business control risk (“blow up risk”)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the main disadvantages of FoHFs?

A
  • additional costs
  • no guarantee of positive returns
  • low or no strategy diversification
  • insufficient or excess diversification
  • additional sources of leverage
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How does one invest in commodities?

A

Directly or indirectly (through derivatives)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are managed futures funds?

A
  • funds that invest in listed financial and commodity futures markets and currency markets around the world
  • fund managers = commodity trading advisors (CTAs)
17
Q

What is mezzanine capital?

A
  • financing by floating high yield unsecured preferred equity or subordinated loans
  • ranks just above common stock in seniority but is a comparatively cost effective way for firms to raise capita l
18
Q

What are six key facts about private equity?

A
  1. Shares are illiquid with no resale value
  2. Long maturity
  3. High risk-return profile
  4. Proven that long term returns are higher than traditional equity (but with higher volatility)
  5. Often investment is by invitation only
  6. Usually fits in a portfolio as an equity substitute
19
Q

What are 9 distinguishing features of real estate as an investment?

A
  1. People feel more comfortable leveraging it
  2. Costs are high
  3. There are added due diligence, maintenance, and repair costs
  4. Tax liabilities can be significant
  5. Real estate my represent a significant portion of net worth
  6. Real estate market returns compete with other asset market returns
  7. Positively correlated with inflation
  8. Long holding periods
  9. Considered to be a bond substitute
20
Q

What are 4 main features of REITs?

A
  1. Publicly traded (liquid, accessable)
  2. High and stable average rate of return
  3. Tax efficient
  4. Correlated to equities but can also be a high yield bond substitute
21
Q

What was the catalyst for people to start investing in alternative investments more often?

A

-the sharp technology-led sell off in the global equity markets in 2000 coupled with low yields available encouraged investors to shift a portion of their investments in traditional asset classes into different forms of alternative investments

22
Q

What are the 9 potential benefits of alternative investments?

A
  1. Improved diversification
  2. They can realize profit in any economic environment
  3. Reduce portfolio volatility
  4. Enhance long-term total risk-adjusted returns
  5. Investors gain access to investment managers that are not generally available to the public
  6. Preserve capital in volatile markets
  7. Provide access to global markets
  8. Align with investors interests through variable performance fees
  9. Align the interests of investors with those of the investment managers
23
Q

Describe the relationship between MPT/mean-variance optimization and alternative investments

A
  • MPT contends that a portfolio’s diversification across different asset classes with low or negative correlation characteristics will minimize risk
  • these types of asset allocation models make strong assumptions about market structure, statistical pricing dynamics, investor behaviour etc.
  • alternative investments do not conform well to many of the key assumptions underlying standard mean-variance optimization
24
Q

Security pricing for unlisted and non-marketable securities and assets is often a mix of _______ and _______ and sometimes the _____ component can lead to serious issues for a fund and its investors.

A
  • art and science

- art

25
Q

What are the elements of performance attribution that are difficult with alternative investments?

A
  • lack of suitable benchmarks
  • lack of mandate definition and standardization
  • lack of investment strategy transparency
26
Q

What are the 13 unique risks of alternative investments?

A
  1. Less regulatory oversight
  2. Transparency risk
  3. Manager and market risk
  4. Complexity of investment strategies
  5. Liquidity risk
  6. Product liquidity constraints (lock up periods and liquidity dates)
  7. Limitations on transferability
  8. Income tax implications
  9. Pricing risk
  10. Short squeeze risk
  11. Counterparty risk
  12. Financing risk
  13. Business risk
27
Q

Define due dilligence

A
  • a reasonable investigation of a proposed investment and its principals
  • the goal of due diligence is to ascertain an investment’s worthiness and appropriateness for particular types of investors
  • the primary objectives are to properly determine the risk and profile of an investment and to address as many of the risks as possible
28
Q

When investing in any type of investment fund, whether it involves traditional or alternative investments, the investor is buying into four main factors:

A
  1. The expertise and capabilities of the investment managers principal officers
  2. The investment manager’s specific investment strategies, processes, and systems
  3. The fund’s historic performance
  4. The fund’s corporate tax, regulatory, and custodial structure
29
Q

What are the four stages of due diligence?

A
  1. Screening potential investments
  2. Identifying potential investment opportunities through performance reviews and presentations from investment managers
  3. Conducting full due diligence reviews and analysis
  4. Continuously monitoring the fund and its investment manager after the investment has been made
30
Q

A comprehensive due diligence process of investment funds should address what 8 main areas?

A
  1. Structure of the investment management organization
  2. Investment management information
  3. Fund or product risk analysis
  4. Operations and an assessment of operational risks
  5. Fund or product structure
  6. Investment performance and attribution analysis
  7. Investment manager’s account structure and composition
  8. Compensation and fee structure
31
Q

What are the key areas of assessing an alternative investment fund’s risk profile?

A
  1. Investment manager’s investment process and strategy
  2. Fund details
  3. Investors legal and taxation issues
  4. Business issues
  5. Hypothetical questions
32
Q

What are three major trends and developments in alternative investments?

A
  1. Increased government regulation
  2. Institutionalization
  3. Continued innovation

PMT 2019 (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions