(R50) Introduction to Alternative Investments Flashcards
Define traditional and alternative investments
Traditional: long positions in bonds, stocks, and cash Alternative: everything else
Describe characteristics of alternative investments
- Actively managed so higher fees
- Low level of regulation and transparency
- Provides more diversification
- Possibly higher returns
Define Hedge Funds and their goal
Private investment partnerships that use a variety of strategies and are highly leveraged, use long and short positions, and use derivatives. For high net worth individuals only
Goal is to generate high absolute returns
Funds of Hedge Funds
Funds that hold a portfolio of hedge funds, more commonly shortened to funds of funds
Four strategies of hedge funds
- Event-driven: profit from short-term events
- Relative-value: profit from pricing discrepencies
- Macro: top down approach to identify trends
- Equity Hedge: bottom up approach
Distressed investing
Investing in securities of companies in financial difficultly. Private equity funds that specialize in distressed investing typically buy the debt of mature companies in financial difficulty
High-water Mark
The highest value, net of fees that a fund has reached in history. It reflects the highest cumulative return used to calculate an incentive fee
Management Fee
A fee based on assets under management or committed capital, as applicable
Performance Fee
Fees paid to the general partner from the limited partner(s) based on realized net profits.
Drawdown
A reduction in net asset value, which may require liquidations
Lockup period
The minimum holding period before investors are allowed to make withdrawals of redeem shares from a fund
Notice period
The length of time (typically 30-90 days) in advance that investors may be required to notify a fund of their intent to redeem some or all of their investment
Define private equity investment
Involves investing in private companies or public companies with the intention of taking them private
Define leveraged buyout
Private equity strategy; target company’s management team converts the target to a privately held company by using heavy borrowing to finance the purchase of the target company’s outstanding shares
Mezzanine Financing
Debt or preferred share with a relationship to common equity from a feature such as attached warrants or conversion options. Mezzanine financing is subordinate to both senior and high yield debt but is senior to equity. It is referred to as “mezzanine” because of its location on the balance sheet
Define venture capital
Private equity strategy; Investments that provide “seed” or startup capital, early stage financing, or later-stage financing (including mezzanine stage financing) to companies that are in early development stages and require additional capital for expansions or preparation for an initial public offering
What are the stages of venture capital investing?
- Formative stage (early stages)
- Angel investing, seed-stage, early-stage
- Later-stage (growth/expansion phase)
- Mezzanine-stage: preparing to go public
What is a trade sale in private equity?
Type of private equity exit strategy; Its a sale of the company to a strategic buyer by auction or in private
Which alternative investments have lower correlation with traditional investments?
Hedge funds, private equity, real estate, commodities
Characteristics of Real Estate
- Potential for total returns (capital appreciation and income stream)
- Greater stability of cash flows
- Requires operational management
What are the real estate investment categories?
- Residential properties;
- Commercial real estate;
- REITs;
- Mortgage-backed securities
- Timberland and farmland.
Define commodity investments
Physical products with carrying costs (transportation, storage, precious metals); made up of commodity derivatives
Commodity swap
A swap in which the underlying is a com- modity such as oil, gold, or an agricultural product.
Management buy ins
Leveraged buyout in which the current management team is being replaced the acquiring team will be involved in managing the company
Management Buy-Out
A leveraged buyout event in which a group of investors consisting primarily of the the companies existing management purchase at least controlling interest in its outstanding shares. At the extremes, they may purchase all shares and take the company private
Define infrastructure
Real, capital-intensive, long-live assets intended for public use (typically owned, financed, or operated by gov’t). Involves private sector
Define two broad categories of infrastructure (Economic vs. Social)
- Economic: support economic activity (roads, bridges, tunnels, airports, gas, water, etc.)
- Social: support education, health care, correctional facilities
Define two broad categories of infrastructure (Brownfield vs. greenfield)
- Brownfield: investments in existing assets
- Greenfield: investments in assets that need to be constructed
What is reporting NAV (Net asset value)?
The quoted market price that is not adjusted for liquidity