Module 50.2: Hedge Funds, Commodities, and Infrastructure Flashcards
What are “prime brokers” for hedge funds?
provide a variety of services such as custodial services, administrative services, money lending, securities lending for short sales, and trading.
For Hedgefunds, what is “absolute basis” or “relative basis”?
absolute - 10% of total
relative - 5% above a specific benchmark return
Are hedgefund investments less liquid than traditional investments? what is the lockup period / notice period?
yes, lock up - period of time after initial investment that funds can not be withdrawn
notice period - give 30 to 90 days advance notice
What are the four main strategies of hedge funds?
1) event-driven strategies - based on acquisition or restructuring that provides value opportunities
2) relative value strategies - profiting over perceived value discrepancies
3) macro strategies - based on global economic trends
4) equity hedge fund strategies - publicly traded derivatives with equities as underlying.
What are the four subclasses of event-driven hedge fund strategies?
1) merger arbitrage - buy the shares of a firm being acquired and sell short the firm making the acquisition
2) distressed / restructuring - but undervalued firm securities during restructuring
3) activist shareholder - buy sufficient shares to influence a company
4) special situations - buy securities when firm is selling assets, or distributing capital, or repurchasing securities
What are the 5 subclasses of relative value strategies for hedge funds?
1) convertible arbitrage fixed income - exploit price differences between convert bond prices and common stock
2) asset backed fixed income - exploit pricing differences between MBS or ABS
3) general fixed income - exploit pricing differences between fixed income securities
4) volatility - exploit pricing differences driven by percieved expectations in volatility
5) multi-strategy - exploit pricing differences from all the above
What are the 5 sub classes of equity hedge fund strategies?
1) market neutral - use technical or fundamental analysis to find undervalued securities
2) fundamental growth - find high-growth companies using fundamental analysis
3) fundamental value - buy equity shares that are undervalued
4) quantitative directional - buy securities believed to be undervalued and sold when overvalued driven by technical
5) short bias - employ short positions in over valued equities
What is the difference between accounting NAV and trading NAV?
Trading NAV - adjusted values of illiquid values by an illiquidity discount
What are the five main ways an investor can get exposure to commodities?
1) ETFs
2) equities that are directly linked to the commodity
3) managed futures funds
4) individual managed accounts
5) specialized funds in specific commodity sectors
What are two benefits of investing in commodities?
1) low correlation with equities
2) can hedge against inflation as commodities typically increase by inflation.
why are commodity prices volatile?
short run supply is inelastic, long lead time to alter production
What is the futures price of a commodity?
futures price = spot price (1 + risk free rate) + storage costs - convenience yield
convenience yield = value of having the physical commodity for use over the period of the futures contract.
What is contango and backwardation for commodities prices?
contango - futures prices will be higher than spot prices, when there is little or no convenience yield
backwardation - futures prices will be less than spit prices, when the convenience yield is high
What are three sources of returns for commodities futures?
roll yield - yield due to a difference between spot and futures price, or the difference between two future prices at different expiration dates. positive for marked in backwardation, negative for market in contango
collateral yield - interest earned on collateral required to enter a futures contract
change in spot prices - the total price return is a combo of the change in spot prices and the convergence of futures prices to spot prices over the term of the contract,
What are brownfield and greenfield investments for infrastructure?
brownfield - assets that are already construction. typically have stable cash flows and high yields, little growth.
greenfield - new construction. have more uncertainty, lower yields, but offers more growth potential than brownfield.