Chapter Eight Flashcards
What are the commodities?
Where raw or primary products are traded - energy, previous metals, base metals, agricultural or soft commodities
Are interest rates considered to have a significant influence on commodity prices?
No, although they may have an affect on individual producers, it is not likely
Do commodity prices have volatile values?
Yes
What is the correlation of commodity futures with equity and bond markets?
Negative correlation
What do commodities provide a good hedge against?
Natural disasters
What can coffee be classified as?
Softs
What are downsides of investing in alternatives?
High transaction costs and low liquidity
What is a benefit of investing in alternatives?
Low correlation with other asset classes, providing diversification benefits
What is ETC?
ETC is an indirect form of commodity investment, rather than collectibles
Do commodities deteriorate over time?
Softs may deteriorate over time
What does a REIT provide?
An indirect exposure to the property market
What do exchange traded contracts usually track?
The price of a single commodity or a group of commodities comprising an index, by using futures contracts or at times the actual physical commodity held in storage
Why would you not hold hards in a portfolio?
If you want income generation
Why might you hold hards in a portfolio?
If you want to:
1. Hedge against inflation
2. Hedge against natural disasters
3. Portfolio diversification
What are the requirements of a company to qualify as a REIT?
- UK resident closed-ended company
- Pay out at least 90% of its net taxable profits to investors
- No one investor owning more than 10% of the share of the REIT
Does a company have to obtain a listing on the LSE main market?
It must obtain a listing though this does not have to be on the main market, it may be on AIM or any recognised overseas market
What are the characteristics of property?
- Higher transaction costs
- Indivisible compared to other
- Illiquid
Is property homogeneous?
No, it is heterogeneous as it comes in all different shapes and sizes
What are the typical characteristics of commercial property?
- Medium to long term leases
- Tenant repairing
- Mainly income returns
How often are rent reviews for commercial property?
Every five years
What is the main class of property investors?
Pension and life companies
What do residential property investros primarily seek?
Capital returns
Is the supply of property elastic or inelastic?
Inelastic
What property fees are paid by a buyer?
Legal fees and stamp duty land tax
Who pays the estate agent fees?
The seller
What are direct property investments?
- Freehold
- Life interest
- Leasehold
What is not a direct property investment?
REIT
Are REITs open or closed ended funds?
They are closed ended
How much profit must REITs payout?
At least 90%
Do REITs require a listing?
Yrs
Where must the majority of profits come from for REITs?
They must receive at least 75% of profits from property letting business
Is ETC a method of indirect property investment?
No, ETC = exchange traded contract in commodities, not a property investment
What are common characteristics of property investment?
- Government intervention
- High management costs
- Inelastic supply
What are the major exchanges for energy derivatives?
The New York Mercantile Exchange (NYMEX), part of CME Group, and ICE Futures Europe in London
Which futures contracts are traded on ICE Futures Europe?
Brent Crude Oil futures
Which contracts are traded on NYMEX?
Light Sweet Crude Oil
What are the two property derivatives?
IPD Index swaps, Property Income Certificates, and MSCI IPD property futures contracts that are traded on Eurex
What does a property derivative provide?
It gives investors a return that reflects the performance of the direct property market and are aimed at insitutional investors and high net worth individuals
Which indices are constructed to measure commodity price movements?
- Refinitiv/Core Commodity CRB Index
- S&P Dow Jones Commodity Index (DJCI)
- Bloomberg Commodity Index (BCOM)
- Rogers International Commodity Index (RICI)
What are types of real assets?
Real estate, infrastructure, and natural resources
What are features of real assets?
They are typically less liquid than traditional finance assets such as equities and bonds and offer diversification possibilites since they have a low correlation with equities and bonds
Why are real assets often considered a good hedge against inflation?
As they often represent investments in firms with strong pricing power and facing inelastic demand
Is cash a real asset?
No
Where a hedge funds generally located?
Offshore
Why would an investor choose a short/long hedge fund?
To have a market-neutral exposure
How do cryptocurrencies operate?
Via decentralised networks whereby investors deal directly with each other rather than operating within a centralised exchange
What is blockchain?
It is an example of a distributed ledger technology (DLT) that uses a consensus algorithm to confirm the validity of a transaction
What is a ‘fiat’ currency?
A currency backed by the government and can be in the form of physical money or represented electronically
