LM 2: Alternative Investment Performance & Returns Flashcards
Describe the 3 stages of an investment cycle for alternative assets?
- Capital Commitment (investors commit capital)
- Capital Deployment (managers begin to buy assets with committed capital)
- Capital Distribution (returns from the assets bought by manager get distributed to investors)
Describe the outflows and inflows of cash in the 3 different life cycle stages of alternative asset classes.
- Capital Commitment (large outflows and small inflows)
- Capital Deployment (larger outflows to buy assets and increased inflows as you buy assets)
- Capital Distribution (Larger inflows and small outflows as assets begin cash flowing)
What is the J curve for private equity & real estate?
J curve of return and time.
it starts below at 0 the goes down below 0 when capital commitment is called & slowly increases as inflows start to exceed outflows & profits are realized & positions sold
What is the multiple of invested capital (MOIC) & formula?
is a metric used to describe the value or performance of an investment relative to its initial cost
MOIC = (realized value of investment + unrealized value of investment) / total amount of investment
What is a prime broker?
Bundle of services provided to hedge funds (a bank for hedge funds in which they deposit cash as collateral)
What is funds rate of return formula using borrowed funds?
rL = (r (Vc + Vb) - rb(Vb))/ Vc
rL= leveraged return
r= fund rate of return
Vc = funds own capital
Vb = borrowed funds
rb = cost of borrowed funds
What are the 3 levels assets can be classified into categories for valuation purposes, and describe them?
Level 1: assets valued on public exchange.
Level 2: assets valued based on quotes from brokers
Level 3: assets valued using internal models (mark to model instead of market prices)
What are redemption fees?
fee charged to discourage redemptions and offset some transaction costs
What are notice periods?
period before investment redemption can be made to give manager heads up
What are lockup periods?
minimum period investors are required to keep their money in hedge fund
What are liquidity gates?
limit or restrict redemptions for a period
What are 3 common custom fee arrangements apart from 2/20?
- Fee based on liquidity terms, asset size, and investment horizon (larger amounts, longer lockup periods)
- Founder shares (lower fees to early participants)
- Either/or fees (arrangement of either higher performance fee or management fee)
What are 3 common ratio approaches to performance appraisal?
- sharpe ratio
- sortino ratio
- calmar ratio
What is sharpe ratio and formula for a portfolio?
portfolios return in excess of risk free rate
sharpe ratio = portfolio return - risk free rate / portfolio return standard deviation
What is sortino ratio and formula?
portfolios return in excess of risk free rate however tries to eliminate upside and downside volatility
sortino ratio = portfolio return - risk free rate / portfolio return downside deviation (SD of downside)
What is calmar ratio and formula?
focuses on worst case scenario
calmar ratio = average annual compound return (period) / maximum drawdown (period)
What is maximum drawdown and formula?
maximum observed loss from a peak to a trough before new peak is reached
MDD = Peak - trough
What is MAR ratio and formula?
same thing as calmar ratio except it focuses on since inception instead of period
MAR ratio = average annual compound return (since inception) / maximum drawdown (since inception)
What is cap rate and formula?
the annual gross expected return of an investment
cap rate = annual rent earned / purchase price of priperty
What is capital loss ratio used by private equity managers formula?
capital loss ratio = % loss of all investments valued below cost / total invested capital divided
What is the difference between survivorship bias & back fill bias for alternative investments?
Survivorship bias: hedge funds no longer in business not included in indexes
Backfill bias: when funds are only added to an index after an initial period of success (can choose when to and when not to… in good years report in bad years don’t.)
When using the calmer ratio, how low long of returns do you usually use?
Usually use 3 years of performance
