Part 1, CP 1: WHAT IS AN ALTERNATIVE INVESTMENT?

Question 1

Alternative Investments

Answer 1

Any Investment That is Not simple a Long Position in traditional Investments

Question 2

Traditional investments

Answer 2

Include public traded equities, fixed-income securities and cash

Question 3

Investment

Answer 3

• a deferred consumption
• every outlay of cash made with the prospect of receiving future benefits
• investment range: planting a tree to buying stocks to acquiring a college education

Question 4

Institutional quality investment

Answer 4

type of investment that investors include in their holdings because they are expected to deliver reasonable returns at an acceptable level of risk

Question 5

Types of alternative investments

- from an institutional point of view -

Answer 5

1. Real assets, including natural resources, commodities, real estate, infrastructure and intellectual property
2. Hedge funds, including managed futures
3. Private equity and private credit
4. Structured products including credit derivatives

Investments in PE and real assets increased over time, HFs and structured products decreased

Question 6

Real assets

- in general

Answer 6

• underlaying assets involve direct ownerships of nonfinancial assets rather than ownership through financial assets (such as securities of manufacturing or service enterprises)

Question 7

Real assets

- natural resources

Answer 7

Focus on direct ownership of real assets that have received little or no alteration by humans (such an mineral and energy rights and reserves)

Question 8

Real assets

- commodities

Answer 8

• Homogeneous goods available in large quantities, such as energy/ agricultural products, metals and building materials
• involved by future contracts

Question 9

Alternative Investments

Answer 9

Any Investment That is Not simple a Long Position in traditional Investments

Question 10

Traditional investments

Answer 10

• Include public traded equities, fixed-income securities and cash
• publicly traded

Question 11

Investment

Answer 11

• a deferred consumption
• every outlay of cash made with the prospect of receiving future benefits
• investment range: planting a tree to buying stocks to acquiring a college education

Question 12

Institutional quality investment

Answer 12

type of investment that investors include in their holdings because they are expected to deliver reasonable returns at an acceptable level of risk

Question 13

Types of alternative investments

- from an institutional point of view -

Answer 13

1. Real assets, including natural resources, commodities, real estate infrastructure and intellectual property
2. Hedge funds, including managed futures
3. Private equity and private credit
4. Structured products including credit derivatives

Investments in PE and real assets increased over time, HFs and structured products decreased

Question 14

Real assets

- in general

Answer 14

• underlaying assets involve direct ownerships of nonfinancial assets rather than ownership through financial assets (such as securities of manufacturing or service enterprises)

Question 15

Real assets

- natural resources

Answer 15

Focus on direct ownership of real assets that have received little or no alteration by humans (such an mineral and energy rights and reserves)

Question 16

Real assets

- commodities

Answer 16

• Homogeneous goods available in large quantities, such as energy/ agricultural products, metals and building materials
• involved by future contracts.
• commodity exposures can be obtained through future contracts, ETFs, physical commodities and natural resource companies

Question 17

Real assets

- operationally focused real assets

Answer 17

• include real estate, land, infrastructure and intellectual property
• performance is substantially affected by the skill and success of regular and relatively frequent managerial decision-making

Question 18

real assets

- land

Answer 18

• focuses on land and improvements that are permanently affixed
• land: comprises a variety of forms, including undeveloped land, timberland, and farmland

Question 19

real assets

- infrastructure investments

Answer 19

• Claims on the income of toll roads, regulated utilities, ports, airports, and other real assets
• traditionally held by the public sector

Question 20

real assets

- intellectual property

Answer 20

• intangible

- patents, copyrights, trademarks (music, film etc.)

Question 21

Financial asset

Answer 21

• the opposite to real assets

- a claim on cash flows, such as a share of stock or a bond

Question 22

Hedge fund

Answer 22

• a privately organised investment vehicle
• less regulated
• investment opportunities that are substantially distinct from those offered by traditional investment vehicles

Question 23

Private Equity

Answer 23

• includes both, equity and debt positions
• not public traded
• debt positions contain much risks from their cash flow uncertainty so that their short term behavior is similar to that of equity positions

Question 24

LBOs

Answer 24

• to purchase a company using a small amount of investor capital and a large amount of borrowed funds in order to take the firm private

Question 25

Mezzanine debt

Answer 25

- derives its name from its position in the capital structure of a firm - between the ceiling of senior secured debt an the floor of equity - refers to as spectrum of risky claims (i.g. convertible debt, preferred stock)

Question 26

Distressed debt

Answer 26

- debt of companies that have filed or are likely to file for bankruptcy protection - fixed income securities - future cash flows are highly risky and highly dependent of the financial success of the distressed company - PE investments intend to take longer-term ownership positions

Question 27

Structured products

Answer 27

-

Question 28

CDO | Collateralized debt obligations

Answer 28

- structured product

Question 29

diversifier

Answer 29

an investment with a primary purpose of contributing diversification benefits to its owner

Question 30

absolute return products

Answer 30

products with no or little return correlation with traditional assets

Question 31

illiquidity

Answer 31

- investment trades infrequently or with low volume - returns are difficult to observe due to lack of trading - investors demand a risk premium or a price discount

Question 32

efficiency

Answer 32

- information efficiency - the tendency of market prices to reflect all available information - high degree of competition, low costs, high speed and well informed investors

Question 33

inefficiency

Answer 33

refers to the deviation of actual prices from valuations that would be anticipated in an efficient market

Question 34

non normality

Answer 34

- important characteristic of many alts - refers to medium to longterm returns - reason: infrequently traded due to their structure

Question 35

moral hazard

Answer 35

risk that the behavior of one or more parties will change after entering into a contract

Question 36

five goals of alternative investing

Answer 36

1. Adding value through active management 2. Achieving absolute and relative returns 3. Pursue arbitrage and return enhancement 4. Reduced risk through diversification 5. Avoiding obsolescence

Question 37

active management

Answer 37

- refers to efforts of buying and selling securities in pursuit of superior combinations of risk and return

Question 38

passive investing

Answer 38

tends to focus on buying and hold securities in order to match the risk and return of target (such as a index)

Question 39

benchmark

Answer 39

performance standard of a portfolio that reflects the preferences of an investor with regards to risk and return

Question 40

absolut return standard

Answer 40

- returns are to be evaluated relative to zero, a fixed rate or relative to the riskless rater - independently of performance in equity markets, debt markets or any other - seeks attractive returns, unaffected by market directions

Question 41

relative return standard

Answer 41

- returns are to be evaluated relative to a variable benchmark - returns that moves in tandem with a particular market but consistently outperformed that market

Question 42

Pure arbitrage

Answer 42

- attempt to earn risk free profits through the simultaneous purchase and sale of identical positions trading at different prices in different markets

Question 43

arbitrage

Answer 43

- goal to earn superior returns even when risk is not eliminated (long and short positions are not identical, or are not held over the same time period) - to contain active risk and to generate relativ returns

Question 44

Four major categories of participants

Answer 44

1. buy side 2. sell side 3. outside service provider 4. regulators

Question 45

buy side

Answer 45

- institutions and entities that buy large quantities of securities for the portfolio they manage - contracts with the sell side - asset owners and asset managers