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1
Q

Key Performance Drivers for PE Investing

A

(1) Selection of fund manager
(2) management of diversification
(3) management of capital commitments

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2
Q

Total Value to Paid in Ratio (TVPI)

A

a measure of the cumulative distribution to investors plus the total value of the unrealized investments relative to to the total capital drawn from investors.

TVPI = DPI + RVPI

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3
Q

Distribution to Paid-in Ration (DPI)

A

a measure of the cumulative distribution to investors relative to the total capital drawn from investors

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4
Q

Residual Value to Paid-in Ration (RVPI)

A

a measure of the total value of the unrealized investments relative to the total capital drawn from investors

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5
Q

CAPM Formula

A

CAPM = Rf + Beta*[E(Rm) - RF]

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6
Q

What is the most common process for selling timberland through auction?

A

a “sealed bid auction”. Each party submits a private offer price to the seller and the highest bidder wins

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7
Q

Omega Ration

A

A general measure of risk that takes into account the entire distribution.

Formula = Average Upper Partial Moment/Average Lower Partial Moment

Upper Partial Moment = max(R-T,0)

Lower Partial Moment = Max(T-R,0)

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8
Q

Portfolio Construction Using a Volatility Weighted Approach

A

Weight(x) = (1/x%)/[(1/x%)+(1/y%)+(1/z%)…]

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9
Q

Priority of Claims During a Bankruptcy

A

(1) Secured Creditors (2) Bankruptcy Admin Costs (3) Post-petition bankruptcy expenses (4) Owed Wages (5) Owed Benefit Plan Contributions (6) Unsecured Customer Deposits (7) Taxes (8) Unfunded Pension Liabilities (limit 30% BV) (9) unsecured claims (10) Preferred Stockholders (11) Common Shareholders

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10
Q

Mean Variance Asset Allocation

A

Allocates more weight to assets/funds with higher mean-variance efficiency (or better risk-return profiles)

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11
Q

Unlevered Beta

A

B(u) = B(l)/ [1+(1-CorpTax)(D/E)]

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12
Q

To qualify as a REIT, how much income (%) must a corporation generate from real estate assets?

A

75%

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13
Q

Representativeness Bias

A

participants look at past prices to form their beliefs

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14
Q

disposition effect

A

leads market participants to close profitable positions quickly and hold losing positions for a longer period

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15
Q

Fee Netting

A

involves netting the positive and negative returns of the managers in the fund

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16
Q

’40 Act fund

A

a pooled investment vehicle offered
by a registered investment company as defined in
the 1940 Investment Companies Act . A way fro hedge fund products to be delivered.

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17
Q

Over-commitment Ratio

A

Overcommitment ratio = Total Commitments/Resources available for commitments

overcommitment rations help to decrease the opportunity cost of less profitable srategies

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18
Q

TOPSCAN

A

(1) Team Building, (2) Operations, (3) Perspective, (4) Skill Building, (5) Customer Development, (6) Analysis, (7) Network

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19
Q

Crack Spread

A

hedges typically used by oil refineries. Would involve going long crude oil futures and short gasoline and heating oil

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20
Q

Commodity returns are (1)______ during contractive monetary policy regimes and (2) ______ during expansive monetary policy regimes.

A

(1) Higher, (2) Lower

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21
Q

Contango

A

when the forward curve is upward sloping. When the future price is higher than the spot price

Long only excess returns tend to be negative in a contango market.

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22
Q

Backwardation

A

when the forward curve is downward sloping. When the future price is below the spot price.

Long only excess returns tend to be positive in a backwardated market.

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23
Q

What year was the CFTC created?

A

1974

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24
Q

Defined Contribution Pension Plan

A

the employee makes a defined contribution each period. The employee bears longevity risk.

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25
Q

Relative Value Strategies are characterized as being (1) ______ Gamma. Trend-following strategies are characterized as being (2)______ gamma.

A

(1) Short, (2) Long

Gamma is used to measure the rate of change in an option’s delta as the underlying security (stock, ETF, index) moves. In a positional context, long gamma means your option position is such that if the stock rallies (or declines), your share equivalent position (also known as delta) gets you longer (or shorter).

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26
Q

Regulation Triple-X Securitization

A

an alternative risk transfer instrument used to transfer life risk

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27
Q

crush spreads

A

hedges typically used by soybean processors. a typical crush spread involves going long soybean futures and short soybean oil futures and soy meal futures

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28
Q

Fortigents 7 Step Process to Alternative Investment Strategies

A

(1) Idea Sourcing (2) Quantitative Screening (3) Risk Analysis (4) Quantitative Analysis (5) Operational and Compliance Analysis (6) Onsite Verification (7) Formal Approval

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29
Q

Unleveraged Beta Formula

A

B(u) = B(L) / 1 + (1-CorpTax)*(D/E)

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30
Q

Real Estate UnSmoothed Formula

A

R(t)True = R(t Reported) - R(t-1 Reported) * Auto/ (1 - Auto)

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31
Q

Masters Hypothesis

A

Michael Masters maintains that buying pressure from passive commodity indices creates a bubble in commodity futures prices which has caused commodity prices to increase above their fundamental values

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32
Q

Section 13(d)

A

requires an adviser who owns more than 5% of a publicly traded security to file disclosure within 10 days of the acquisition

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33
Q

What kind of strategy is a momentum strategy?

A

cross sectional, non-directional, long/short strategy

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34
Q

Normal Backwardation

A

Futures price is less than expected future spot price

F

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35
Q

David Swensen’s Endowment Model

A

the endowment model strives to generate high returns by allocating more to illiquid alternative assets and less to liquid traditional assets

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36
Q

Autocorrelation Formula

A

Autocorrelation = Covariance / (STDreportedRet *STDlaggedRet)

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37
Q

Unsmoothed Beta Formula

A

Beta(unsmoothed) = Beta(Smoothed) / (1 - Autocorrel)

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38
Q

Margin to equity ratio

A

the proportion of client assets required for margin deposits. The more aggressive the manager, the higher the margin-to-equity ratio

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39
Q

Sharpe Ratio

A

Excess return divided by standard deviation

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40
Q

Digital Call Option

A

digital call options default in bad economic states and pay off a fixed amount otherwise. Similar to a Senior CDO tranche.

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41
Q

EV (Embedded Value) Securitizations

A

goal is to monetize the present value of future earnings

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42
Q

CAT Bonds

A

Used for risk transfer. Bond sponsor receives a payment that is conditional on the insured event.

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43
Q

CPPI (Constant Proportion Portfolio Insurance) Strategy

A

(convex strategy) a trading strategy that allows an investor to maintain an exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk.

Stock = 2 * (Asset - Floor)

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44
Q

Constant Mix Strategy (rebalancing of investments)

A

(concave strategy) brings a portfolio that has deviated from the target asset allocation back into line. Exploits reversals.

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45
Q

OBPI

A

(Option Based Portfolio Insurance)

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46
Q

In a commodity substitution spread, the relative performance of the commodities is typically expressed as which of the following?

A

national log of the ratio of commodity prices.

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47
Q

Hedonic Price Estimators

A

use a regression based methodology to synthetically develop a continuous price series by controlling for the unique characteristics of each transaction that comes to market

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48
Q

Capacity Constraint Hypothesis

A

per capita alpha is reduced as investment capital increases

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49
Q

fund bubble hypothesis

A

assumes that investment bubbles result in less skilled managers entering the industry and diluting hedge fund returns

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50
Q

increased allocation to active funds

A

increased allocations to hedge funds adversely affect their performance and increase their betas

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51
Q

Hurst Ratio

A

a measure of persistence

  • Mean reverting returns = 0 - 0.5
  • random returns = .5
  • persistent returns = .5 - 1
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52
Q

D-statistic

A

measures downside risk. Measured between 0 and 1.

No downside risk D = 0.

No positive returns D = 1

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53
Q

Panageas and Westerfield Theoretical Model

A

managers who are compensated with an incentive fee and have a high watermark will keep a constant proportion in the risky asset (ie they will not adjust allocations)

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54
Q

The Dealer Rule

A

the dealer rule imposes additional taxes on capital gains of REITS when the holding period is short. This keeps REITS from being able to take advantage of short term price inefficiencies

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55
Q

Traditional IRR

A

the discount rate that results in a zero NPV

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56
Q

Interim IRR (IIRR)

A

the discount rate that results in a zero NPV (except or the last cash flow). The IIRR uses the NAV as the last cash flow

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57
Q

Price of Real Estate using Decay Factor

A

Price(true) = P(t-1) + (1/DecayFactor) * (P(t) - P(t-1)

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58
Q

Successful high frequency trading strategies typically have ____ capacity and _____ sharpe ratios

A

Low and High

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59
Q

Standard Deviation (formula)

A

SQRT(Variance)

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60
Q

Idiosyncratic Risk

A

Idiosyncratic risk has little or no correlation with market risk, and can therefore be substantially mitigated or eliminated from a portfolio by using adequate diversification.

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61
Q

40 Act Fund Regulations

A

(1) 5% of the fund can be invested in one issuers securities (2) daily pricing and liquiddity (3) 15% can be illiquid (4) 1.33x max leverage

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62
Q

Autocorrelation of Smoothed Retuns (formila)

A

Autocorrelation = 1 - (SmoothedCorrel/UnsmoothedCorrel)

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63
Q

Blend Approach

A

A combination of the value approach and growth approach. Used by fundamental equity hedge fund managers

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64
Q

winsorizing

A

a step used by quantiative equity hedge fund managers to remove outliers

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65
Q

Exchange Rate Mechanism Crisis of 92-93 (ERM)

A
  • UK faced currency depreciation
  • Bank of England attempted to defend its currency during quantum funds attack on the pound
  • germany faced currency appreciation
  • currencies of participating countries were bound within narrow predetermined bands
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66
Q

Economic Value Approach (private equity valuation)

A

Used for private equity fund valuation. used to overcome the issues associated with net asset value approach.

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67
Q

Bottom up model (private equity valuation)

A

used by determining exit scenarios using manager track record data

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68
Q

top down model (private equity valuation)

A

uses historical performance of a best comparable peer group

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69
Q

What is the standard approach to estimating private equity fund betas?

A

the standard way of estimating PE fund betas is based on quoted comparable. Betas obtained using this approach are regression based

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70
Q

What commodity index has the largest energy allocation

A

S&P Goldman Sachs Commodity Index

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71
Q

Mount Lucas Management Index (MLMI)

A

a passive benchmark that uses long and short futures positions and follows a trend following strategy

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72
Q

Insurance Linked Securities (ILS) Payment Triggers

A

(1) Indemnity based - based on actual losses (2) modelled loss (3) industry loss index - determined in the uSA by the Property Claim Services (PCS) (4) Parametric Index - based on physical characteristics of a loss event.

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73
Q

Front Month Equivalents (FME)

A

FMEs take a portfolio of forward contracts and convert it into an equivalent exposure in terms of a near term futures contract

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74
Q

Concave Strategy

A

a strategy where you buy as stocks fall and sell as they go up.

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75
Q

Convex Strategy

A

a strategy where you sell as stocks fall and buy as they go up.

76
Q

Leveraged Beta Formula

A

B(U) = B(L) / 1 + (1 - Tax) * (D / E)

77
Q

European inflation is ______ correlated with energy returns and Asian inflation is ________ correlated with energy returns

A

(1) Positive, (2) Negative

78
Q

Positive Kurtosis

A

Fat tails

79
Q

Positively Skewed

A

more weight in the right tail. Average negative returns.

80
Q

Exponential Smoothing Model (Formula)

A

Exponentially Smoothed Volatility = SQRT( (1 - SmoothingFactor) * volatility^2 + SmoothingFactor * (LatestRet - AvgRet)^2 )

81
Q

3 Stages of PE Fund Manager Life Cycle

A

(1) Entry and Establish
(2) Build and Harvest
(3) Decline or Exit

82
Q

Hedging Pressure Hypothesis

A

commodities in which hedgers are net short have positive excess returns and commodities in which hedgers are net long and negative excess return.

83
Q

VAR Formula

A

VAR = (Confidence level factor * Volatility ) + Return

84
Q

What is the difference between trend following and momentum strategies?

A

trend following - market timing with one asset at a time. A time series strategy. hedge against tail risk.

Momentum strategy - typically a long/short strategy, cross sectional strategy

85
Q

World stocks and bonds are ______ correlated with inflation

A

negatively

86
Q

Z-Scoring

A

subtracting the average P/E ration from each firms P/E ration and dividing the result by the standard deviation of P/E ratios. This results in values that have a mean of zero and a standard deviation of one.

87
Q

Payment Triggers Ranked by hedging effectiveness (highest to lowest)

A

(1) Indemnity
(2) modeled loss
(3) industry loss
(4) Parametric

88
Q

Payment triggers ranked by transparency (highest to lowest)

A

(4) Indemnity
(3) modeled loss
(2) industry loss
(1) Parametric

89
Q

Explain the algorithm for risk budgeting created by DeSouza and Golkcan

A

capital is allocated to each fund based on its standard deviation. The base principal is that each risk class has equal amount of capital at risk. Returns and correlations are not brought into this method at all.

90
Q

Clare and Motson’s findings on moneyness

A

managers adjust their risk levels based on both relative returns and moneyness. For at the money incentive options, they increase risk significantly, at in/out of the money options, they reduce risky behavior.

Managers make larger risk adjustments based on poor relative returns.

91
Q

Brownfield vs. greenfield infrastructure assets

A

brownfield is a seasoned already set up asset wheras greenfield is something new.

92
Q

Fama french carhart model

A

Fama French = 3 factors - excess returns, size, value

Carhart - adds momentum

93
Q

RSI

A

-a counter-trend following strategy. used to determine when a security is overbought or oversold.RSI can be used as a relative value indicator.

94
Q

Moneyness of an incentive call option (formula)

A

Moneyness = NAV / HighWater

95
Q

What are Tier 1, 2 and 3 assets

A

Tier 1 - short term FI
Tier 2- risky liquid assets (stocks)
Tier 3 - risky illiquid assets

96
Q

Ilmanen’s sources of return

A

(1) Value, (2) carry, (3) trendfollowing and momentum, (4) volatility, (5) liquidity

97
Q

Geometric return formula

A

Rg = Ra - VARport/2

98
Q

Covenants in capital markets are similar to _______ loan covenants

A

negative

99
Q

Capital Market Theory Model

A

Assumes all investors have the same horizon. Assumes only the mean and variance are important.

100
Q

What did Erb and Harvey find?

A

diversification return is high when correlations are low and asset variances are high

101
Q

Hurricane Katrina caused spark spreads to _____ and crack spreads to _____.

A

(1) Widen (2) widen

Spark spreads are the correlation between natural gas and power.

102
Q

What is the basis of a futures position

A

the difference between the futures price and current spot price.

103
Q

trend following CTAs behave most like _______ that increase their _____ positions in up markets

A

(1) in the money straddles

(2) long

104
Q

Conditions favorable to a convertible strategy

A

high game, low conversion premium, high stock volatility and enough stock to be shorted.

105
Q

Convertible Delta Formula

A

Change in price / change in parity

106
Q

Interest Rate Parity Formula

A

F/S = (1 + Dom / 1 + Foreign)

107
Q

Requirements of Hedge Funds in Hong Kong

A

1 - starting capital of $5mm
2 - liquidity of $3mm
3 - officer with 3 years experience
4 - be authorizaed by the SFC before offering shares to the public

108
Q

Section 363 Sale

A

distressed companies can sell assets free of liens of liabilities without regard to creditor objections.

109
Q

40 Act fund requirements

A

(1) redemptions in 7 days (2) 15% of assets in illiquid securities (3) no performance fees (4)max 5% one issuer, 10% issuers voting securities, 25% given industry (5) at most 10% of income generated from non-securities (6) leverage limited to 33%.

110
Q

S&P Case Schiller Home Price Index

A

residential property index based on repeated sales

111
Q

How does inflation correlate with:

  • stocks
  • bonds
  • Real Estate
  • Energy
  • Commodities
A
  • stocks - negative
  • bonds - negative
  • Real Estate - negative
  • Energy - positive
  • Commodities - positive
112
Q

Parity

A

The total market value of the shares into which a convertible bond can be converted. (often quoted as a %)

113
Q

How do interest rates correlate with:

  • stocks
  • bonds
  • Real Estate
  • Energy
  • Commodities
A
  • stocks - positive
  • bonds - positive
  • Real Estate - positive
  • Energy - negative
  • Commodities - negative
114
Q

Surplus Risk

A

the tracking error of the assets relative to the present value of the liabilities

115
Q

Straddle

A

long positions in both a call and put on the same asset. The trader will profit with large asset moves in either direction. The delta of the position grows as it moves in the same directions.

116
Q

Explain Diff CTA investment options

A

1) CTA Fund - similar to a hedge fund.
2) Multi CTA Fund - similar to FoF
3) Managed Account - investor gets complete control and transparency. heavy oversight and costs of entrance.
4) Platform - operates like a multi-fund except investors can choose their own leverage and invest in the funds f their choice that the platform carries.

117
Q

Beta

A

(Volatility(portfolio) * Correlation) / Volatility(market)

118
Q

Standard Portfolio Analysis of Risk (SPAN)

A

used to determine margin requirements for futures contracts. SPAN takes into account benefits of diversification by determining overall portfolio risk by calculating the maximum loss of a portfolio.

119
Q

Variance of portfolio (formula)

A

Variance = Variance(fx) + Variance (re) + 2*cov

120
Q

Overcommitment Ratio

A

Total Commitments / Resources available for commitments

121
Q

Information Ratio

A

Port Return - Index Return / Tracking Error

Tracking Error = difference between return of portfolio and return of index.

122
Q

Purchasing Power Parity

A

the change in the exchange rate between two currencies should reflect the difference in the countries exchange rates.

123
Q

Carry Trade

A

Borrowing in a low interest currency and lending in a high interest currency

124
Q

Diversification Return

A

the difference between a portfolios geometric average return and the weighted geometric average of the returns associated with the portfolio

125
Q

Geometric Return

A

SQRT( (1+r1)(1+r2)…..)

126
Q

40 Act Trust Structure

A

Series Trust - setup is outsourced

Stand alone trust - product sponsor creates the trust

127
Q

Convertible Bond Conversion Premium

A

Conversion Premium = (Convertible Price - Parity) / Parity

128
Q

How to find the stock price at a node of the binomial tree

A

U = exp(vol * sqrt(T) )

129
Q

Define UCITS

A

Undertakings for Collective Investment in Transferable Securities

Objectives - establish a regulatory framework and provide investors protection by a single regulator across the EU

10% Trash Ration is an exemption that permits UCITS funds to hold 10% in non-eligible assets

Var may not exceed 20% of the NAV of the fund

130
Q

UCITS III

A

led to the construction of Newcits funds (UCITS funds that invest in alternative investment strategies

131
Q

Sophisticated vs. Non Sophisticated UCITS funds

A

Non-Sophisticated - long only, only stocks and bonds, can use derivatives for hedging, leverage limit is 200% of the funds NAV

Sophisticated - can use derivatives for investment, must use VAR to establish leverage levels, leverage limits are 99% monthly relative VAR cannot exceed twice the reference portfolios VAR or 99% of monthly absolute VAR cannot exceed 20% of the funds NAV

132
Q

Economic Characteristics of Infrastructure

A
  • high barriers to entry
  • economies of scale
  • inelastic demand for services
  • low operating costs and high operating margins
  • long duration
133
Q

Describe the 2 step process financial institutions use to create securities that achieve a given credit rating

A

1- pooling - involves assembling a portfolio containing a large set of credit sensitive assets
2- tranching - involves dividing the claims on cash flows generated by the collateral into several classes/trances

134
Q

Overcollateralization

A

the maximum loss to the collateral pool before impairment of the senior bonds

135
Q

Depreciation Tax Shield

A

Depreciation Tax Shield = Depreciation * Tax Rate

136
Q

Bad Leaver vs. Good Leaver Clause

A

Bad Leaver - for cause removal of GP. Needs a simple majority. Hard to prove

Good Leaver - allows the LPs to cease funding with a qualified majority

137
Q

Insurance Perspective of Commodity Futures Returns

A

under normal backwardation hedgers are assumed to sell short commodity futures to cover their long positions. They therefore offer an insurance premium to investors in long only commodity futures. (ie a risk premium)

138
Q

Hedge Pressure Hypothesis (for commodity futures returns)

A

hedgers can be long or short. Therefore risk premiums can be positive or negative depending on the net position of the hedger

139
Q

Diversification Return

A

Diversification Return = Port Geometric Return - Weighted Avg Geometric Returns

140
Q

Discuss evidence surrounding persistence of performance in private equity funds. Also indicate a consequence of this?

A
  • Evidence indicates top quartile PE funds that performed well in the past will continue to perform well in the future.
  • A consequence is that top quartile funds tend to be oversubscribed. Therfore new investors face a barrier to entry to access top tier funds.
141
Q

Bailey Criteria

A

An ideal benchmark should have the following characteristics

(1)unambiguous(2)investable (3)measurable(4)specified in advance(5)appropriate

142
Q

For each convertible bond, how much stock do you short?

A

delta * conversaion ratio

143
Q

How can a hedge fund investment add value?

A

Strategic allocation, tactical allocation and manager selection.

144
Q

Alpha Decay Formula

A

P(t True) = P(t-1 Reported) + [(1/AlphaDecay)*(P(t Reported) - P(t-1 Reported))]

145
Q

Define Weak form, semistron form and strong form

A

Weak - past prices cannot be used to predict future prices
Semistrong - past prices as well as currently available public info cannot be used to generate returns
strong form - private info cannot be used to create profitable strategies

works bottom up.

146
Q

Approach to risk management for PE funds

A

(1) risk measurement
(2) risk control
(3) risk mitigation

147
Q

What constitutes a tender offer?

A

1- a limited time offer to purchase a large % of a companies debt securities at a premium
2- active solicitation of holders of public securities
3- firm terms
4- purch contingent on acquisition of securities
5- pressure for security holders to sell stock

148
Q

De Souza and Gokcan - pre screening model identifies what as being associated with surving hedge funds

A

better performance, higher aum, old, high watermarks, longer lockups, required redemption periods

149
Q

Which alternative strategies are most adoptable to mutual funds

A

Long short equity, long short credit and managed futures

150
Q

Steps of unsmoothing a return series that contains first order autocorrelation.

A

1- specify the form of autocorrelation
2- estimate the parameter of the assumed autocorrelation process
3- use the estimated autocorrelation coefficient to generate the unsmoothed return series

151
Q

In film higher budgets lead to (1) _______ revenues and (2) ______profitability

A

(1) Higher (2) lower

152
Q

The fischer effect states that….

A

nominal interest rates incorporate real interest rates and a premium for anticipated inflation

153
Q

Roll Return Formula

A

Excess Return - Spot Return = Roll Return

154
Q

Formula for up and down multipliers in a binomial model

A

U = exp ( vol *SQRT(T) )

D = 1/U

155
Q

Formula for up probability in a binomial model

A

Prob = (Exp(Rf) - D) / (U - D)

156
Q

Describe the types of FoFs

A
  • Balanced - an FoF that invests in a large number of hedge fund managers (30-40)
  • Concentrated- a FoF that invests in a few strategies
  • Single strategy
  • multi-strategy
157
Q

Spot to future commodity price formula

A

Future - Spot = Spot * (Funding + Storage - Convenience)* (T - t)

158
Q

Rational Expectations Model

A

The price of an asset for delivery in the future must be the same as the markets current spot price in the future

159
Q

Pension Benefit Obligation (PBO) change in yields formula

A

PBO = -1 * change in yields * duration

160
Q

Intergenerational Equity Formula

A

intergenerational equity can be expressed by a 50% probability of maintaining the inflation adjusted value of the endowment in perpetuity

161
Q

Describe the 3 primary sources that cause returns to go to extremes during tail risk events

A

1- increased risk to individual stocks due to higher fundamanetal and flow related risk at the company level.
2- high levels of short term corellation caused by deleveraging and derisking across large groups of securities
3- higher price for providing liquidity

162
Q

Modified Delta

A
  • used for discrete-time hedging. Modified delta provides a measure for the average change in the convertible price for a given change in the stock price
163
Q

Exchange Traded Note (ETN)

A
  • Exchange trades commodity index linked notes that are economically equivalent to fully collateralized forward contracts.
  • Advantage - taxes - becasue they are an index they can qualify for long term capital gains

Disadvantage - credit risk (risk of issuing bank defaulting)

164
Q

Total Return of one commodity futures contract vs. a portfolio of commodity futures contracts

A

Total Return of a cash collateralized commodity futures contract = cash return + excess return (excess return = spot + roll)

Total Ret Portfolio = cash ret + weighted avg exces ret + diversification ret

165
Q

Theoretical Frameworks that explain commodity returns

A
  • CAPM
  • Insurance perspective (normal backwardation
  • hedging pressure hypothesis
  • thoery of storage
166
Q

Affects of Smoothing on Real Estate

A
  • reduced volatility
  • lower correlations
  • lower betas
  • Consequences -inflated sharpe ratios, overallocation to real estate, inflated diversification potential, inaccurate hedge ratios
167
Q

What is the argument from Jensen and Meckling and Myers on why financiers include covenants in their contracts with entrepreneurs?

A

to reduce agency costs

168
Q

Hurt Money

A

Money the GP is required to commit to a fund

169
Q

Explain the tenors for estimates, forecasts and scenarios

A
  • estimates - short term
  • forecasts - medium term (1-2 years)
  • scenario analysis is used for future long term projections
170
Q

Maximum Drawdown

A

[(Nav(small) / Nav(big)) - 1] *100

171
Q

The _____ measure gives the true return of the portfolio.

A

pooled

the pooled measure gives the true return of the portfolio. It combines the individual funds cash flows and residual values together as if they came from a single fund

172
Q

According to Gorton and Rouwenhorst how to commodities and equities perform through expansions and recessions

A
  • Commodities and equities perform similarly through expansions and recessions
  • commodity futures perform well in early stages of recession
    commoditiy futures tend to perform poorly in later stages of a recession
  • commodity futures outperform stocks in later stages of an expansion
173
Q

Define Commodity Beta

A

Commodity beta is the return associated with holding the active futures contract until its roll date and then rolling to the next active futures contract

  • IE Roll return
174
Q

Drawback of payoff distribution approach

A

it assumes that the return on the clone portfolio is the same as the return on the hedge fund if they have the same probability distribution.

Investors are not indifferent between two portfolios even if they have the same distriubtion

175
Q

to reduce equity allocations after a 10% price increase what would you do?

A

Sell equity index call options 10% above the market

176
Q

To buy equities after a 10% price decrease what would you do?

A

sell equity index put options with a strike price 10% below the current market

177
Q

The most important components of IRR or PE are?

A

past present and future cash flows

178
Q

What was Indersts conclsion regarding infrastructure as an asset class?

A

No emprical evidence or financial theory supports classifying infrastructure as a distinct asset class.

179
Q

Master Limited Partnerships are most similar to?

A

MLPS are most similar to REITs. They avoid corporate taxation by distributing income to their investors

180
Q

Factor Based Approach to hedge fund replication

A
  • the most logical way to address hedge fund replication
  • it assumes that the return on the clone portfolio is equivalent to the return on the hedge fund if there values agree with probability one
181
Q

Investable hedge fund indices ______ perform non-investable indices

A

Under

  • it is easier to replicate investible hedge fund indices because they have more transparent disclosure about component hedge funds
182
Q

Which private equity investment typically yields the lowest returns

A

mezzanine funds

183
Q

What part of a commodities return provides diversification benefit

A

Spot return

184
Q

Spot Return Formula

A

Spot Return = [Spot Index(t)/Spot Index (t-1) ] - 1

185
Q

Define Principal Guaranteed Notes

A

Cash and Call Strategy - principal guaranteed notes consist of 2 parts, an investment in a 0 coupon band and a call option linked to a commodity return

186
Q

Define Capital at risk

A

the ratio of total loss if positions hit the stop loss price to net asset value and it can be part of a stop loss rule

187
Q

According to Preqin, what do most investors allocate to infrastructure?

A

most investors have target allocations of 1-10% but actual allocations are generally lower

CAIA Level 2 (2 decks)

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