Intro to Alts

Question 1

The five main categories of Alts

Answer 1

• HF
• private capital: PE and PD
• natural resources
• real estate
• infrastructure

Question 2

Why consider alts?

Answer 2

• portfolio diversification
• low correlation with traditional asset classes
• enhanced returns
• income through higher yields

Question 3

Due diligence for fund investing should assess whether:

Answer 3

• the manager can effectively pursue the proposed investment strategy
• the appropriate org structure and policies for managing investments, ops, risk, and compliance are in place
• the fund terms appear reasonable

Question 4

Due diligence for direct investments should assess:

Answer 4

• the quality of the management team
• the quality of its customers
• the competitive landscape
• revenue generation
• key risks, etc
• often supplemented with analysis prepared by external consultants

Question 5

Due diligence for co-investing

Answer 5

• investors often depend heavily on the due diligence conducted by the fund manager

Question 6

Hurdle rate is

Answer 6

• aka the preferred rate

- the performance fee is paid only if the returns exceed

Question 7

Hard hurdle rate

Answer 7

• the GP earns fees on annual returns in excess of the hurdle rate

Question 8

Soft hurdle rate

Answer 8

• the GP earns fees on the entire annual gross return as long as the set hurdle is exceeded

Question 9

Funds of funds vs. HF

Answer 9

FOF offers:

• more accessible to smaller investors
• better redemption terms
• due diligence expertise
• more diversification

FOF charge an additional management fee and incentive fee on top of the fees charged by the underlying HFs.
- double layer of fees

Question 10

Commodities are

Answer 10

• are physical products that can be standardized on quality, location, and delivery for investment purposes
• commodity investments generally take place through derivative instruments due to high storage and transportation costs

Question 11

Commodity indexes use

Answer 11

• use the price of the futures contracts rather than the prices of the underlying physical commodities

Question 12

Contango is

Answer 12

• the future price > spot price
• markets tend to be in contango when there is little or no convenience yield

THE COMMODITY CURVE IS UPWARD SLOPING

Question 13

Convenience yield is

Answer 13

• the value associated with holding the physical asset

Question 14

Backwardation is

Answer 14

• Future price < spot price
• markets tend to be in backwardation when the convenience yield is high

THE COMMODITY CURVE IS DOWNWARD SLOPING

Question 15

Timberland and farmland produce commodities are globally traded, thus

Answer 15

• they are impacted by global factors

Question 16

The main advantage of a REIT

Answer 16

• REIT structure avoids double corporate taxation

Question 17

Appraisal based index:

Answer 17

• measure RE returns using appraisals, not actual transactions
• backward-looking index
• subject to biases of the appraisers
• smooth out volatility

Question 18

Repeat sales index:

Answer 18

• an index based on actual transactions

- suffers from sample selection bias since the same property is unlikely to come up for repeat sales every year

Question 19

Traditional risk and return measures are not appropriate for alt investments bc:

Answer 19

• alts exhibit asymmetric risk and return profile
• high kurtosis (leptokurtic)
• negative skewness

Question 20

CAP rate

Answer 20

• used in RE investments

= annual rent collection / original purchase price of the property