Chapter 21 - Alternative Investments: Strategies and Performance (Done) Flashcards
What are the three main types of alternative investment strategies?
The three main types are relative value strategies (exploiting inefficiencies in pricing), event-driven strategies (profiting from corporate events like mergers), and directional strategies (betting on anticipated market movements).
What is an equity market-neutral strategy?
It’s a relative value strategy that involves creating long and short matched equity portfolios of approximately the same size to exploit inefficiencies in the equity market.
Can you provide an example of an equity market-neutral strategy?
Yes, if RBC’s stock price is usually $28 more than TD’s but this spread decreases to $22, you would buy RBC and short TD, expecting the spread to revert to the mean.
What is convertible arbitrage?
It’s a relative value strategy designed to exploit mispricing between convertible securities and the underlying stock by buying the undervalued convertible security and short selling the appropriate amount of issuer common shares.
What is credit spread arbitrage?
It’s a strategy that relies on predicting the future direction of interest rates by exploiting the spread between different types of bonds, such as corporate bonds versus government bonds.
What is yield spread arbitrage?
Managers predict the shape of the yield curve and adjust their positions in long-term and short-term bonds to profit from expected changes in interest rates.
What is merger arbitrage?
It involves taking long and short positions in companies involved in a merger or acquisition, typically going long on the company being acquired and short on the acquiring company.
What are distressed security strategies?
These strategies involve investing in the equity or debt of companies in financial distress or bankruptcy, often at deep discounts, with the potential for high returns if the company recovers.
What are directional strategies?
These strategies involve high exposure to market direction and include long and short equity strategies, global macro strategies, emerging market strategies, dedicated short bias strategies, and managed futures strategies.
What is a global macro strategy?
It involves making bets on major events affecting the entire economy, using either a top-down (discretionary) or bottom-up (systematic) analysis approach.
What is a dedicated short bias strategy?
This strategy requires that the fund’s net position must always be short, betting on a market decline. It can be very risky due to the potential for unlimited losses in short positions.
What are managed futures strategies?
These involve actively managed portfolios of futures contracts, using trend-following strategies such as time series momentum and cross-sectional momentum.
What are multi-strategy funds?
Single fund managers invest in multiple strategies within a single fund, reducing volatility, enhancing risk-adjusted returns, and reducing concentration risk.
What is a leveraged ETF strategy?
Designed to achieve returns that are multiples of the performance of the underlying index using borrowed capital, it is beneficial in rising markets but can amplify losses in falling markets.
What is the due diligence process for alternative investments?
It involves examining the structure of the investment management organization, investment management information, risk analysis, operations, fund structure, investment performance, account structure and composition, and fees.
