Reading 2.1: What is an Alternative Investment? Flashcards
absolute return standard
An absolute return standard means that returns are to be evaluated relative to zero, a fixed rate, or relative to the riskless rate, and therefore independently of performance in equity markets, debt markets, or any other markets.
active management
Active management refers to efforts of buying and selling securities in pursuit of superior combinations of risk and return.
absolute return products
Absolute return products are investment products viewed as having little or no return correlation with traditional assets, and have investment performance that is often analyzed on an absolute basis rather than relative to the performance of traditional investments.
active return
Active return is the difference between the return of a portfolio and its benchmark that is due to active management.
active risk
Active risk is that risk that causes a portfolio’s return to deviate from the return of a benchmark due to active management.
alternative investments
Alternativeinvestments are sometimes viewed as including any investment that is not simply a long position in traditional investments.
benchmark
A benchmark is a performance standard for a portfolio that reflects the preferences of an investor with regard to risk and return.
benchmark return
A benchmark return is the return of the benchmark index or benchmark portfolio.
commodities
Commodities are homogeneous goods available in large quantities, such as energy products, agricultural products, metals, and building materials.
compensation structure
Compensation structure refers to the ways that organizational issues, especially compensation schemes, influence particular investments.
distressed debt
Distressed debt refers to the debt of companies that have filed or are likely to file in the near future for bankruptcy protection.
diversifier
A diversifier is an investment with a primary purpose of contributing diversification benefits to its owner.
efficiency
Efficiency refers to the tendency of market prices to reflect all available information.
farmland
Farmland consists of land cultivated for row crops (e.g., vegetables and grains) and permanent crops (e.g., orchards and vineyards).
financial asset
A financial asset is not a real asset; it is a claim on cash flows, such as a share of stock or a bond.
hedge fund
A hedge fund is a privately organized investment vehicle that uses its less regulated nature to generate investment opportunities that are substantially distinct from those offered by traditional investment vehicles, which are subject to regulations such as those restricting their use of derivatives and leverage.
illiquidity
Illiquidity means that the investment trades infrequently or with low volume (i.e., thinly).
incomplete markets
Incomplete markets refer to markets with insufficient distinct investment opportunities.
inefficiency
Inefficiency refers to the deviation of actual prices from valuations that would be anticipated in an efficient market.
information asymmetries
Information asymmetries refer to the extent to which market participants possess different data and knowledge.
infrastructure investments
Infrastructure investments are claims on the income of toll roads, regulated utilities, ports, airports, and other real assets that are traditionally held and controlled by the public sector (i.e., various levels of government).
innovation
Innovation is the application of creativity.
institutional factors
Institutional factors refer to the financial markets (and their policies, such as restrictions on short selling, leverage, and trading) and financial institutions related to a particular investment, such as whether the investment is publicly traded.
institutional-quality investment
An institutional-quality investment is the type of investment that financial institutions such as pension funds or endowments might include in their holdings because they are expected to deliver reasonable returns at an acceptable level of risk.
investment
An investment is a deferred consumption. Any net outlay of cash made with the prospect of receiving future benefits might be considered an investment.
land
Land comprises a variety of forms, including undeveloped land, timberland, and farmland.
lumpy assets
Lumpy assets are assets that can be bought and sold only in specific quantities, such as a large real estate project.
mezzanine debt
Mezzanine debt derives its name from its position in the capital structure of a firm: between the ceilings of senior secured debt and the floor of equity.
moral hazard
Moral hazard is risk that the behavior of one or more parties will change after entering into a contract.
operationally focused real assets
Operationally focused real assets include real estate, land, infrastructure, and intellectual property.
passive investing
Passive investing tends to focus on buying and holding securities in an effort to match the risk and return of a target, such as a highly diversified index.
private equity
The term private equity is used in the CAIA curriculum to include both equity and debt positions that, among other things, are not publicly traded.
pure arbitrage
Pure arbitrage is the attempt to earn risk-free profits through the simultaneous purchase and sale of identical positions trading at different prices in different markets.
real assets
Real assets are investments in which the underlying assets involve direct ownership of nonfinancial assets rather than ownership through financial assets, such as the securities of manufacturing or service enterprises.
real estate
Real estate focuses on land and improvements that are permanently affixed, like buildings.
regulatory factors
Regulatory factors in the context of investing refer to the role of government, including both regulation and taxation, in influencing the nature of an investment.
relative return standard
A relative return standard means that returns are to be evaluated relative to a benchmark.
return diversifier
If the primary objective of including the product is the reduction in the portfolio’s risk that it is believed to offer through its lack of correlation with the portfolio’s other assets, then that product is often referred to as a return diversifier.
return enhancer
If the primary objective of including an investment product in a portfolio is the superior average returns that it is believed to offer, then that product is often referred to as a return enhancer.
structured products
Structured products are instruments created to exhibit particular return, risk, taxation, or other attributes.
structuring
Structuring refers to the partitioning of claims to cash flows through leverage and securitization.
timberland
Timberland includes both the land and the timber of forests of tree species typically used in the forest products industry.
trading strategies
Trading strategies refer to the role of an investment vehicle’s investment managers in developing and implementing trading strategies that alter the nature of an investment.
traditional investments
Traditional investments include publicly traded equities, fixed-income securities, and cash.
Alternative Investments by Inclusion
[1] Hedge funds (+ managed futures)
[2] Private Equity/Debt
[3] Structured Products (+ credit derivatives)
[4] Real Assets (natural resources, commodities, real estate, infrastructure and intellectual property)
