S13 Flashcards
common characteristics of alternative investments
low liquidity
diversification
due dilligence costs
difficult performance evaluation
investment manager review steps
assess the market opportunity (ineffciencies exploited) assess the investment process assess the organization assess the people assess the terms and structure of the investment assess the service providers review documents write up
issues of alternative investments to be considered while checking suitability
taxes suitability communucation decision risk cncentrated positions
buyout funds add value thru
restructuring
buying cheap companies
adding leverage or restructuring existing debt
real estate - investment and features
residences, commercial real estate, land /
large idiosyncratic risk, good diversification
private equity - investment and features
preferred shares, venture capital, buyout funds
/
startup and middle market private companies have more risk and lower return than investments in established companies via buyout funds
buyout funds - investment and features
well established private firms or corporate spinoffs
/
less risk than venture, good diversificaiton
infrastructure funds - investment and features
public infrastructure
/
low risk, low return, good diversification
commodities - investment and features
agricultural products, metals, oil
/
low correlation with stocks bonds, positive correleation with inflation
managed futures - investment and features
trade mainly on derivatives market, private commodity pools, publicly traded commodity futures funds
//
risk is between that of equityues and bonds, negative and low correlation with equities and low to moderate correlation with bonds
disressed securities - investment and features
may be part of hedge fund class or private equity class, investments can be equity and debt / depends on skills based strategies, can earn higher returns due to legal complications and the fact that some investors cannot invest in them
benchmark for direct real estate invesmtnets
NCREIF - published quarterly
benchmark for indirect real estate investments
NAREIT - is live from all reits traded on NYSE/AMEX
issues in benchmark selection for hedge funds
relevance of past data popularity bias survivorship bias stale price bias backfill or inclusion bias
best benefit from real estate
risk diversifier
best benefit from private equity
return enhancement
best benefit from commodities
diversification
advantages of real estate investing
many expenses are tax deductible ability to use more leverage direct control of the properites ability to diversify geographically lower volatility of returns vs equities
disadvantages of real estate
lack of divizibility high information costs high commissions high operating and mainenance costs special geographical risks (neighbourhood deterioration) political risks (changing tax code)
private equity stages
- early stage - seed money - begin prototype work
- start up - funds - beginning product development and marketing / AND / first stage funding to begin manufacturing and sales
- expansion stage - expansion of production and sales
buyout funds (vs venture funds) are
higher level of leverage earlier and steadier CF less error in measurement of returns less frequent losses less upside potential
3 components of total return of commodity futures
TOTAL return = SPOT return + COLLATERAL return + ROLL Return
roll return =
= change in futures price - spot return
note collateral return is omitted
inflation hedge feature of commodity futures is driven by
storability
demand relative to economic activity
downside deviation =
SqRoot
(Sum
(min
(return - threshold, 0)^2)) /
(n-1))concerns of distressed securities investing
event risk
market liquidity risk
market risk
J factor
direct real estate investing vs indirect - adv/dadv
Disadvantages: Direct has higher information costs, higher commissions and higher political risk.
Advantage: Allows more leverage.
SWAP rate =
1/(1+r1)^1 + 1/(1+r2)^2 + ….
when futures storage cost is given in $ in calculation of futures price do not forget to
determine FV of monthly costs using interest rate
when analyzing risk ratios do not forget to consider
normal distribution ?
length of the period?
stale price bias?
systematic trading strategies
rule based and frequently trend following
fallen angels
fixed income securities downgraded from their initial investment grade
kurtosis and skewness needed to limit the downside risk ?
low kurtosis and positive skewness
hedge fund consistency and cyclicality better measured by
rolling returns (not sharpe or sortino)
cash and carry arbitrage
long commodity + short forward
if you buy and then lease physical = you earn/lose
earn LEASE rate but spend RFR
if you hold a physical = you earn/lose
earn CONVENIENCE,
spend STORAGE,
spend RFR
(miss LEASE)
strip hedge is
buying separate futures for each of recurring need in commodity
problem: the longer termed futures costly due to wider spread
stack hedge is
hedging all future needs in commodity by buying just nearest futures
good: higher liquidity/lower costs
cash and carry table :
summing up separatelly all T0 cash flows, and T1 cash flows and then using LN(CFt1/CFt0) to determine the rate
