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FINA 411: Portfolio Management > Class 2: Alternative Investments > Flashcards

Class 2: Alternative Investments Flashcards

1
Q

three most popular alternative investments

A

RE (most popular)

Private equity (future)

Infrastructure (future)

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2
Q

alternative investments benefits

A

can make more money

low correlation to other tradition investments

–> better diversification

rewards usually outright the risks

–> better chance to find undervalued assets

—-> nearly impossible to do in the stock market

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3
Q

disadvantages of alternatives

A

lack of information and transparency

not very liquid

higher fees

no policing when putting it first in the market unlike stocks (less regulated)

different tax treatments

high due diligence costs

after buying, it is very difficult to judge how its worth (hard to give it appraisal)

–> hard to check performance at year end

use of derivatives

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4
Q

due diligence costs

A

doing research before making an investment

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5
Q

how to buy RE

A

direct (ownership of actual properties)

indirect (REITs)

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6
Q

pros of RE

A

more money has been made in RE than in any other industry

can use high leverage

–> magnifies returns when things go well

–> magnifies losses when things go wrong

direct control unlike stocks and bonds

Houses are not taxed in Canada

tax-deductible expenses (CCA shit)

diversification of total portfolio

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7
Q

what are shopping centers doing to remodify themselves since covid

A

they focus more on entertainment and vag on fashion

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8
Q

how can we diversify with RE

A

geographic

location

property type

seller has information advantage

requires hands on property management

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9
Q

cons of investing in RE

A

not very liquid

high unit cost and not divisible

high cost to acquire and to analyse

commissions are high

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10
Q

what does an asset need to be considered liquid

A
  1. can sell quickly

2. have to be able to sell at full value

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11
Q

true or false

is real estate a full time job

A

ye

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12
Q

how to value Real Estate

A
  1. comparable sales
  2. cost approach
  3. income approach
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13
Q

cost approach

A

a real estate valuation method that estimates the price a buyer should pay for a piece of property is equal the cost to build an equivalent piece of property

replacement cost to rebuild

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14
Q

comparable sales

A

recent sales of similar properties

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15
Q

income approach

A

a) Multiplier
b) net operating income / cap rate
c) NPV of cash flows

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16
Q

Multiplier income approach

disadvantage of this

A

gross income · multiplier = property value

we do not consider the condition or age of the property

–> influences the net income

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17
Q

why should we not use income taxes in RE?

A

because we use it in property valuation

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18
Q

how to find net operating income of real estate

A

potential rental income + other income = total potential income

  • vacancy losses and other things that lowers rent = total operating income
  • operating expenses

= net operating income

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19
Q

advantages of REITs

A

pay dividends

easy to buy

less of an initial investment

information is transparent

not a full time job

not taxed

-

20
Q

what do REITs do to not taxed?

A

they have to pay out between to 90 and 95% of their earnings as dividends

21
Q

how to valuate REITs

A
  1. Net Asset Value
  2. Price-to-funds from operation (P/FFO)

–> most common multiple method

  1. Price-to-adjusted FFO (P/AFFO)

4.

22
Q

Net Asset Value to value REITs

A

NAV = (market value of assets - market value of liabilities) / (number of REIT shares outstanding)

23
Q

FFO adjustments

why would REITs do this?

A

net earnings
+ depreciation expenses
+ deferred tax charges
- Gains (losses) from sales of property and debt restructuring

= FFO

FFO/shares outstanding * office multiple = price of share

depreciation is not a real cash flow

we should neutralize capital losses or take out any capital gains cause its a rate thing

24
Q

Adjusted FFO (AFFO)

A

FFO

  • Noncash (straight-line) rent adjustment
  • recurring maintenance-type Capex and leasing commissions

= AFFO

AFFO/shares outstanding * office multiple = price of share

25
Q

tenant inducements

A

the shit you do to incite tenants to reach

26
Q

which method is more accurate to value REITs

A

discounted cash flow

–> nearly impossible to do

–> extremely time consuming

this is why we would choose net asset value method instead

27
Q

Private Equity fund physiology

A

general partner has all liability

–> doesn’t care cause he has no money but has expertise so he don’t care

–> gets management fees and carried interest

limited parterre has limited liability

–> has the money but no expertise so he don’t care

private equity are gyuuu

28
Q

carried interest

A

a bonus in the form of shares that the general partner receives if he does well

29
Q

venture capital life

A
  1. formative stage
  2. later stage
  3. mezzanine stage
30
Q
  1. formative stage of venture capital life
A

angel investing stage

seed stage

early stage

31
Q

angel investing stage of the formative stage of venture capital life

A

business plans and market potential

32
Q

seed stage of the formative stage of venture capital life

A

product development

market research

33
Q

early stage of the formative stage of venture capital life

A

begin production and sales

34
Q
  1. later stage of venture capital life
A

company expansion

35
Q
  1. mezzanine stage of venture capital life
A

IPOs and shit

36
Q

clawback

A

allow investors to reclaim fees paid earlier if the fund does not later return the initial investment and if a minimum return requires managers to have excessive fees

37
Q

direct investment in commodities

A

cash purchase of commodities

long position in derivatives

38
Q

indirect investment in commodities

A

investment in companies whose principal business is associated with commodities

mutual funds and ETFs

39
Q

returns in commodities

A

lower returns and highermrisk than S&P 500 and bonds

wide variety in return characteristics with commodity type

low correlation with stocks, bonds, and RE

–> why people invest in it

40
Q

how do commodities provide diversification

A

provides an inflation hedge against unexcited inflation with positive collation to inflation

41
Q

contango

A

future prices > spot prices

42
Q

backwardation

A

future prices < spot prices

43
Q

insurance theory

A

longs rewarded for providing protection to producers

–> backwardation is something common and normal

44
Q

stage theory

A

future prices relate to spot prices through storage costs and convenience yield

45
Q

convenience yield

A

the monetary benefit from holding a physical commodity versus being a long holder of (theres more)

FINA 411: Portfolio Management (13 decks)

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