Module 50.2: Hedge Funds, Commodities, and Infrastructure Flashcards

1
Q

What are “prime brokers” for hedge funds?

A

provide a variety of services such as custodial services, administrative services, money lending, securities lending for short sales, and trading.

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2
Q

For Hedgefunds, what is “absolute basis” or “relative basis”?

A

absolute - 10% of total

relative - 5% above a specific benchmark return

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3
Q

Are hedgefund investments less liquid than traditional investments? what is the lockup period / notice period?

A

yes, lock up - period of time after initial investment that funds can not be withdrawn

notice period - give 30 to 90 days advance notice

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4
Q

What are the four main strategies of hedge funds?

A

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.

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5
Q

What are the four subclasses of event-driven hedge fund strategies?

A

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

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6
Q

What are the 5 subclasses of relative value strategies for hedge funds?

A

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

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7
Q

What are the 5 sub classes of equity hedge fund strategies?

A

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

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8
Q

What is the difference between accounting NAV and trading NAV?

A

Trading NAV - adjusted values of illiquid values by an illiquidity discount

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9
Q

What are the five main ways an investor can get exposure to commodities?

A

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

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10
Q

What are two benefits of investing in commodities?

A

1) low correlation with equities

2) can hedge against inflation as commodities typically increase by inflation.

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11
Q

why are commodity prices volatile?

A

short run supply is inelastic, long lead time to alter production

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12
Q

What is the futures price of a commodity?

A

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.

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13
Q

What is contango and backwardation for commodities prices?

A

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

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14
Q

What are three sources of returns for commodities futures?

A

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,

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15
Q

What are brownfield and greenfield investments for infrastructure?

A

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.

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16
Q

Are infrastructure investments liquid?

A

no, typically have long life and require a lot of capital, however there are liquid investments backed by infrastructure assets such as ETFs, mutual funds, PE funds, or MLPs.

17
Q

What is the primary reason for investors to include alternative investments in their portfolios?

A

uncorrelated returns to traditional investments, reduce risk.

18
Q

What is the Sharpe ratio?

A

excess return per unit of returns standard deviation

19
Q

What is the highwater mark?

A

the incentive fee is not paid on gains that just offset prior losses.

20
Q

Why would standard deviation be a misleading measure of risk (2 reasons)?

A

1) returns distributions are not approximately normal, they tend to be leptokuric and negatively skewed.
2) for alternative assets that use a valuation model, the returns will be smoothed so standard deviation will be understated.

21
Q

What are four types of risks that using derivatives introduces?

A

1) operational
2) financial
3) counterparty
4) liquidity

22
Q

What are the six categories of due diligence to perform on alternative investments?

A

1) Organization
2) portfolio management
3) operations and controls
4) risk management
5) legal review
6) fund terms