Chapter 13 - Non-Conventional Asset Classes and Their Structures Flashcards
What are alternative assets?
Asset classes different from the traditional 3 broad asset classes of equities, bonds, and cash.
What are the 3 main reasons to include alternative investments in a portfolio?
- Increase returns without increasing risk (at least not too much)
- Decrease risk without losing returns
- Increase the portfolio’s absolute return, making it more resistant to capital erosion during market downturns
They essentially allow the investor to move to a higher efficient frontier.
What are hedge funds?
Lightly regulated pools of capital with managers that have great flexibility in their investment strategies, through the use of short positions, leverage, derivatives, arbitrage, and investment in almost any situation in the market.
What are the two major categories of commodities?
Those that are mainly used for consumption and those mainly used for investment purposes.
What are the advantages of commodities in a portfolio?
Commodities can have high returns and tend to produce relatively high returns when traditional assets perform poorly. They also have low correlations to traditional asset classes but positive correlation to inflation, supporting the idea that they can exhibit real inflation-adjusted returns.
What are the 3 segments of the real estate market?
Commercial, industrial, residential
When does real estate as an asset become a liquid investment?
When it is securitized. This is done by reselling shares in a pool of real estate assets to investors, such as with a REIT.
How is real estate impacted by inflation?
It’s sensitive to inflation, therefore it tends to protect a portfolio from its effects.
What are the inefficiencies of real estate?
- Fragmentation, there is no central trading market.
- Limited number of buyers.
- Legal and contractual constraints affect values.
- Need for property management.
What is mortgage syndication?
When investors pool their funds together to create a single mortgage. They hold mortgages secured by properties, but generally do not have the quality of covenants that are typical with mortgages held in mortgage mutual funds (often holding second and third mortgages).
What are the 4 general categories of infrastructure assets?
- Regulated assets
- Transportation assets
- Communication assets
- Social assets
How does infrastructure credit complement a fixed income portfolio?
Can offer higher yields, longer duration, and credit diversification.
What does it mean that the loans used in infrastructure project finance are “nonrecourse”?
The only claim the creditor has is on the cash flows produced by the infrastructure asset and not the asset itself.
How are private market investments structured?
As limited partnerships, which allows investments to be marketed through an offering memorandum.
How are private investment funds structured?
Can be open-ended or closed-ended. If closed-ended, they will solicit investments over a period, then close to new investors/assets once a threshold level of assets is attained.
