Other Alternatives Flashcards
What are the 3 different types of Asset Classes?
1) Fiancial Assets (have a contractual claim on real or intangible assets)
- Bonds
- Stocks
- Cash
- Derivatives (ETFs, MBS, Commodity futures)
2) Real Assets (tangible: they have a physical presence)
- precious metals
- commodities (oil,corn, etc.)
- real estate
- machinery, buildings
Real Assets are great for diversifed portfolios because of their low corelation with financial assets, such as stocks and bonds
3) Intangible Assets
- Trademarks
- Goodwill
- Patents
Why has Alternative Investments grown significantly?
Alternative investments have grown significantly, reaching ~$13 trillion, as investors seek higher returns and diversification.
- Key drivers include prolonged low bond yields, negative global sovereign yields (interests rates issued by gov. worldwide), and inflation concerns post-pandemic.
- Alternatives offer benefits like uncorrelated returns, risk diversification, and higher income potential
- There has been a increasingly obvious trend of institutional investors looking or altenratives to diversify sources of income and return
Define Private Equity/Private Debt Investing
Private equity: is an alternativeinvestmentclass and consists of capital that is not listed on a public exchange.
- Private equityis composed of funds andinvestorsthat directlyinvestinprivatecompanies, or that engage in buyouts of public companies, resulting in the delisting of publicequity.
- The investment can take the form of equity (common share ownership) or debt (purchasing bonds or providing financing to private companies) or both.
List the 3 different catergories of Private Equity/Private Debt
- Venture Capital: which is investing in start-up companies. This type of investing can be further subdivided into seed, early stage and later stage investing. (Seed investing is the most risky as it has the most failures)
- Buyout: is when a takeover happens of a publicly-traded firm and is then taken private
- Special Situations: or “Special sits” in capital markets often involve private debt investing, focusing on distressed company bonds with missed payments or downgraded ratings. Investors in this space, called “vulture funds,” target struggling firms for potential high returns. (charge high yield for bonds)
What are some more key things/general process about Private Equity - Buyouts?
- The purchase (of a public firm, turned private) typically has a small equity investment (from 5% to 20%) and a large amount of debt.
- The debt will usually include a mix of bank loans, notes and bonds.
- Essentially, a private equity firm seeks companies that are underperforming.
- The private equity owners will probably have several board seats and take an active role in the company.
- Undertake initiatives to increase cash flows (cost-cutting, changing product mix, etc.), in order to pay down the debt load and increase shareholder value.
what is the “J-curve” effect?
Returns on Pirvate Equity Funds:
- J-curve is a trendline that shows an initial loss immediately followed by a dramatic gain, when a buyout happens
- Initial years of new private equity commitment usually produce negative returns
- Overtime, Average annual returns tend to be quite high
what are some major differneces between Hedge Funds and Private Equity Firms?
- the HF investor is often not actively involved in the operations of the underlying firm, but the HF investor is still looking for “alpha”.
- Private equity investors are often very involved in board decisions and the operations of the firm.
private equity has the “?” return but also “?” risk. However the risk is not as “?” as common stocks.
highest, high, high
What are the 4 catergories of Real Asset Funds?
1) Commodities/Precious Metals
2) Real Estate
3) Infrastructure
4) Real Return Bonds
What are some pros and cons of Real Asset Funds?
Pros:
- Diversification: Reduces portfolio volatility and enhances the efficient frontier by adding non-traditional asset classes.
- Income Generation: Offers income and capital growth
- Inflation Protection: Defends against inflation shocks, with assets like commodities and real estate often performing well during inflationary periods.
Cons:
- Lower Liquidity: Many real assets lack a formal market or exchange, making them harder to trade.
- Large Capital/Time Commitment: Requires significant capital, often tied up for 20-30 years or more.
- Only for High Net-worth Investors/Institutions
Real Asset Funds, Commodities/Precious Metals: what are the 4-subcatergories of trading commodities? also what is base metals vs precious metals
- Energy (including crude oil, heating oil, natural gas and gasoline)
- Metals (including gold, silver, platinum and copper)
- Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle)
- Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)
Commodities: agricultural products such as corn, wheat, coffee oil, natural gas, water
Base metals: industrial commodities, such materials as copper, lead also include , steel, iron, nickel, aluminum, zinc and even uranium.
Precious metals: Used for jewelry, accessories and a store of wealth. Gold, silver, platinum, palladium
How do you invest ? Phsycial delivery, futures, pooled funds, ETFs
Real Assets Funds, Real Estate Funds: Define Real Estate Limited Partnerships (RELP) & Real estate investment trust(REIT), and what are two other ways to invest in real estate?
Real Estate Limited Partnerships (RELP): similar to a real estate investment group formed to purchase and hold a portfolio of properties, or sometimes just one property
- experiencedproperty manageris thegeneral partner.
- Outside investors are brought in aslimited partners.
Real estate investment trust(REIT): is a company that owns, operates, or finances income-producing real estate. It’s like a mutual fund. Bought on major stock exchanges.
Two other ways to invest in real estate.
1. They can purchase it directly
2. they can enter into a pooled investment fund
- These Pooled investment funds typically involve an active management strategy ranging from leasing of properties to development or extensive redevelopment.
- Investments are typically made via private equity real estate fund, which pools capital from investors.
Real Asset Funds, Infrastructure Funds: What is it?
Infrastructure Funds: Invest in essential public assets, such as toll roads, airports and rail facilities.
predictable returns due to low levels of competition and high barriers to entry.
- Managed by specialist fund managers,
Include: toll roads, airports, broadcasting towers, etc.
Real Asset Funds, Real Return Bonds: what is it?
+ what are pros and cons
AReal Return Bond(RRB): issued by the Government of Canada and/or certain provincial governments pay a rate of return that is adjusted forinflation.
Pros:
- a known real rate of return
- returns are highly correlated with inflation
- low correlation with otherasset classes
Cons:
- Lower liquidity
- Have very long maturities – good for pensions but not good for small investors if they have to sell before maturity and if rates have risen quickly.
- Today’s interest rates are so low that the returns are not sufficient for many pension funds
what are the pros and Cons of Bitcoin?
Pros of Bitcoin:
1. Public Distributed Ledger: Transparent, immutable transaction history prevents fraud.
2. Hash Encryption: Secure transactions using private/public keys and digital signatures.
3. Proof of Work: Miners verify transactions, ensuring security and decentralization.
4. Mining Rewards: Incentivizes participation in maintaining the blockchain.
Cons of Bitcoin:
1. Energy-Intensive: Mining consumes significant electricity, raising environmental concerns.
2. Volatility: Price fluctuates widely, increasing risk.
3. Lack of Regulation: No protection for fraud, hacks, or lost private keys.
