Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA Level 3 - Alternative Investments > SS13 - Alternative Investments > Flashcards

SS13 - Alternative Investments Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

What are the six basic groups of alternatives?

A
  1. real estate
  2. private equity
  3. commodities
  4. hedge funds
  5. managed futures
  6. distressed securities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the four common features of alternatives?

A
  1. low liquidity
  2. diversification
  3. due diligence costs
  4. difficult performance evaluation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What issues arise for private wealth clients in relation to alternative investments?

A
  1. taxes
  2. suitability
    • usually refers to lock-up periods or emotional feelings
  3. communication
    • discussing complex strategies with the client is not easy
  4. decision risk
    • risk emotionally abandoning strategy at the point of maximum loss
  5. concentrated positions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the two main classifications of real estate?

A
  1. Direct
    • ownership of residences, commerical real estate, agricultural land
  2. Indirect
    • there is a well-defined middle group that manages properties
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the main types of indirect real estate investments?

A
  • companies that develop and manage RE
  • REITs
    • publically traded equity shares in a portfolio
    • equity REITs own property
    • mortgage REITs hold mortgages
  • CREFs
    • pooled investments in real estate
    • more flexibility than REITs
  • Infrastructure funds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the advantages and disadvantages of real estate?

A

Advantages

  • low corr. with stocks and bonds
  • low return volatility
  • usually inflation hedge
  • may provide tax advantages
  • source of potential to leverage return

Disadvantages

  • high info and t-costs
  • political risk re: tax law changes
  • high op expenses
  • inability to subdivide direct investments
  • large idiosyncratic risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is private equity and what are its major subcategories?

A

PE is an ownership interest in a non-publically-traded private company.

Subcategories:

  • venture capital
  • buyout funds
    • middle-market buyout funds
    • mega-cap buyout funds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How do buyout funds add value?

A
  • restructuring company operations and management
  • buying companies for less than intrinsic value
  • creating value by adding leverage or restructuring existing debt of the company
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the major private equity exit strategies?

A
  • selling companies through private placements
  • IPOs
  • dividend recapitalizations
    • company issues substantial debt and pays a large special dividend to the buyout fund and other equity investors
  • recapitalization
    • increases company leverage buy does not change owner
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the advantages and disadvantages of commodity investments?

A

Advantages

  • liquid
  • low correlation with stocks and bonds
  • business-cycle sensitivity
  • positive correlation with inflation

Disadvantages

  • none listed. margin?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the major hedge fund classifications?

A
  • equity market neutral
  • convertible arbitrage
  • fixed-income arbitrage
  • distressed securities
  • merger arbitrage
  • hedged equity
  • global macro
  • emerging markets
  • fund of funds (FOFs)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the similarities and differences between managed futures and hedge funds?

A

Similiarities

  • use same LP structure
  • 2 and 20
  • considered skill based and not an asset class

Differences

  • type of assets traded
    • MF trades only in derivates markets
    • HF trades in spot and futures markets
  • usually take positions based on indices where HFs usually are more focues on individual assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the major vehicles for investments in managed futures?

A
  • private commodity pools
  • managed futures programs as SMAs (CTA managed accounts)
  • publicly traded commodity fugures funds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the trading strategies adn classifications for managed futures?

A
  • systematic trading strategies
    • follow rules
    • may be short, med, or long-term
  • discretionary trading strategies
    • depend on judgement of manager
    • could be based on economic or other criteria
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the major real-estate benchmarks?

A
  • NCREIF for direct investments
    • value-weighted of commercially owned properties
    • valuation obtained periodically so vol is downward biased.
  • NAREIT for indirect investments
    • cap-weighted of all REITs traded on AMEX or NYSE
    • is a “live” index
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What problem does the infrequent trading of real estate cause for real estate indices?

A

Infrequent trading results in an understatement of volatility.

Unsmoothing:

  • std dev increases
  • Sharpe ratio decreases
17
Q

What problems does the leverage of alternative investments cause of real-estate indices?

A

When leverage effect is removed:

  • returns lower
  • Sharpe ratios lower

But still has low correlation with other assets.

18
Q

What are two methods of weighting commodity indices?

A

Note that because of zero-sum nature of futures, you cannot use a market-cap weighting method.

  1. basing weights on world production of underlying commodities
  2. basing weights on perceived relative importance of underlying commodity
19
Q

What are the myriad of ways a hedge fund index can be constructed?

A
  • selection criteria can vary
    • methods: AUM, length of track record, restrictions on new investments
  • style classification
  • weighting schemes
    • equal or AUM weighted?
  • rebalancing rules
    • must be defined for equal-weight. can be monthly or annually
  • investability
20
Q

What are the major issues associated with hedge fund indices?

A
  • relevance of past data
  • popularity bias
    • funds that attract capital will have disproportionate effect on index
  • survivorship bias
    • indices may drop hedge funds with poor track records or that fail. bias is estimated to be 1.5-3%/year
  • stale price bias
  • backfill/inclusion bias
    • arises from filling in missing past data
21
Q

What are the risk/return characteristics of each alternative?

A
  • Private equity
    • less a diversifier and more a long-term return enhancer
  • Commodities
    • diversification to stocks and bonds
    • inflation hedge (except for ags)
  • Hedge Funds
    • generated higher absolute and risk-adjusted return than stocks and bonds
  • Managed Futures
    • similar to hedge funds
  • Distressed Securities
    • high average return
    • large negative skew (so sharpe can be misleading)
22
Q

What are the major differences between venture capital funds and buyout funds?

A

buyout funds usually have:

  • higher level of leverage
  • earlier, steadier cash flows
  • less error in measurement of returns (because more are from actual cash flows)
  • less frequent losses
  • less upside potential
23
Q

What is a good use of convertible preferred stock?

A

Convertible preferred stock is a good vehicle for a direct venture capital investment.

24
Q

What issues must be addressed in formulating a private equity investment strategy?

A
  • low liquidity
  • diversification through a number of positions
    • five to ten investments needed for diversification
  • diversification strategy
    • knowing the unique aspects of proposed PE investment and how it relates to the larger portfolio
  • plans for meeting capital calls
    • committed funds are called as needed. investor needs to be prepared to meet calls
25
Q

What are the major differences between direct and indirect investments in commodities?

A

Direct

  • purchase of actual commodities
  • provides more exposure, but higher carrying costs

Indirect

  • purchase of indirect claims
  • usually more convenient
26
Q

What are the three components of return for commodity futures?

A
  1. spot return
  2. collateral return
  3. roll yield
    • backwardation
      • lower and lower futures prices
      • positive roll yield as futures prices increase to converge with spot
    • contango
      • higher and higher futures prices
      • negative roll yield
27
Q

What are the two major factors that determine whether a commodity is a good inflation hedge?

A
  • storability
    • non-perishables are positively related to unexpected changes in inflation
  • demand relative to economic activity
    • if commodity has constant demand are worse hedges (ags tend to fall into this group)
28
Q

What is a convertible arbitrage hedge fund?

A

Convertible arb funds seek to exploit mispricings in the price of convertible bonds, convertible stock, or warrants.

Long undervalued convertible bonds

Short the stock

Conertible provides “call option” on the stock

29
Q

What is a fixed-income arbitrage hedge fund?

A

Takes long and short positions in fixed-income instruments based upon expected changes in the yield curve and/or credit spreads.

30
Q

What are the major features of FOFs?

A
  • 10-30 funds in attempt to provide diversification
  • extra layer of fees
  • more liquidity for investor, but more cash drag
  • can suffer from style drift
  • returns more highly correlated with equity than individual hedge funds
31
Q

What is an example of a distressed debt strategy?

A

Long company’s distressed debt

Short company’s equity

If firm deteriorates, equity should fall more than bonds in value

If firm improves, returns to bond holders should be greater than to equity holders due to priority of interest over dividends

32
Q

What are the main concerns of distressed debt investing?

A
  • event risk
  • market liquidity risk
  • market risk
  • J-factor risk (rulings of judges/courts)

CFA Level 3 - Alternative Investments (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions