Brainscape's Knowledge GenomeTM

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


See full index

Alternative Investments > Study Session 13 - Alternative Investments Portfolio Mgmt > Flashcards

Study Session 13 - Alternative Investments Portfolio Mgmt Flashcards

1
Q

Common Features of Alt Investments

A

illiquid (associated with a return premium as compensation)
diversifying potential relative to a portfolio of stocks/bonds
high due diligence costs
performance appraisal is difficult

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How to select an active manager for AI?

A

1) Assess market opportunity offered
2) Assess the investment process
3) Assess the organization
4) Assess the people
5) Assess the terms and structure of the investment
6) Assess the service providers
7) Review Document
8) Write-up

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Issues for Private Wealth clients

A

1) taxes
2) suitability
3) communication
4) decision risk
5) concentrated positions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are examples of indirect real estate investments?

A

REITS, CREFs, SMAs, infrastructure funds, and companies that develop and manage real estate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are REITS?

A

Real estate investment trusts which are publicly traded equity shares in a portfolio of real estate;

Liquid
permits smaller investors RE exposure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are CREFs?

A

commingled real estate funds which are pooled investments in real estate that are professionally managed and privately held – more flexible than REITs
They can be open-end or or closed-end
Restricted to wealthy investors and institutions
Access to RE experts
Usually leveraged and have higher return objectives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Advantages of real estate investment?

A 
low correlation with stocks and bonds
low volatility of return
often inflation hedge
tax advantages
potential to leverage return
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Disadvantages of real estate investment?

A 
high information and transaction costs
political risk related to taxes
high operating exp
high commissions
special geographical risks 
inability to subdivide direct investments
large idiosyncratic risk component
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Private equity: 2 subcategories

A

1) Venture Capital

2) Buyout funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are Traditional Alternative Investments?

A

primarily provide exposure to risk factors not easily accessible by stock/bond:

1) real estate
2) (long-only) commodities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are Modern Alternative Investments?

A

provide exposure to specialized investment strategies run by outside manager (added value heavily depended on skills of manager):

1) HFs
2) managed futures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are Alternative Investments that combine the feature of modern and traditional?

A

1) Private Equity funds

2) distressed securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is decision risk?

A

risk of changing strategies at the point of max loss

risk is increased by strategies that by nature have 1) frequent small positive returns but likely to have large losses
2) frequent big swings in returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Size of real estate market?

A

1/3 to 1/2 of world’s wealth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the benchmark for direct real estate investment?

A

NCREIF Property index

value weighted, quarterly benchmark - sample of commercial pptys
property appraisal based
not investable index

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the problem with NCREIF Index?

A

due to infrequency of appraisals, values exhibit remarkable inertia - index tends to underestimate volatility of underlying values and SMOOTHing bias

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is NAREIT?

A

principal benchmark for REITs

real-time, monthly computed, market-cap weighted index of all REITS traded on exchange

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

How do you unsmooth NCREIF?

A

By using transaction based data

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Which real estate benchmark is leveraged?

A

NCREIF represents nonleveraged investment only

REITS are often has >50% in debt so levered exposure to real estate, thus higher standard deviation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the performance of real estate investments?

A

REITs have high return= 12.71% and high s=12.74%

Appraisal-based RE have low return=6.14% and low s=3.37%
if smoothed, s doubles

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is a “hedged” REIT return series?

A

remove overall equity market return part

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is RE role in portfolio?

A

Asset allocation increasing

Diversifier in portfolio, diversification within RE itself, and investment globally

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What are two segments of buyout funds?

A

Middle-market and mega-cap

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Middle-market buyout funds

A

funds concentrated on spin-offs from large parents

- can’t efficiently get capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Mega-cap buyout funds

A

funds concentrated on taking publicly traded firms private

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

How do buyout funds add value?

A

1) restructure company’s ops/mgmt
2) buying companies for less than intrinsic value
3) creating value by leverage/restructure existing debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What are exit strategies for buyout funds?

A

1) selling companies thru private placements
2) IPOs
3) div recapitalizations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Dividend Recapitalizations

A

Under direction of buyout fund, company issues large debt and pays large special dividend to buyout fund and other equity investors - changes company’s leverage but not owners (still retains control)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Commodity Investment Properties

A

direct or indirect investments
liquid
low correlation with stocks/bonds and business-cycle sensitivity
positive correlation w/ inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Hedge funds classifications

A 
equity market neutral
convertible/FI/merger arbitrage
distressed securities
hedged equity
global macro
emerging markets
FOFs
31
Q

Managed Futures holdings

A

trade only derivatives markets (vs. HFs trades spot/futures) - more macro view

32
Q

Managed Futures accounts

A

private commodity pools
CTA managed accts
publicly traded commodity futures funds - available to small investors

33
Q

Managed Futures trading strategies

A

Systematic Trading strats – follows rules
includes Trend-following and Contrarian strats

Discretionary Trading strats – depend on mgmt judgement

may invest in all financial markets, current mkt only or mix of derivatives and underlying commodities

34
Q

How does managed futures’ std deviation compare to stock and bonds?

A

generally between stock and bonds
correlation to equities is low and often negative
correlation to bonds is higher but below 0.50

35
Q

What is the risk/return of buyout funds?

A

less risk then VC funds - good diversification

36
Q

What is risk/return of Infrastructure funds?

A

low risk/return - good diversification

37
Q

What is risk/return of distressed securities?

A

depends on skill-based strategies - can earn higher returns due to legal complications and due to others not being able to invest in them

relatively high avg return but large negative skew - can’t compare and Sharpe ratios are misleading

38
Q

What is distressed securities?

A

may be part of he

39
Q

Issuers of Venture Capital

A

companies seeking capital

40
Q

Formative-stage companies

A

new or young firms

41
Q

Expansion-stage companies

A

need funds to expand revenues or prep for IPO

42
Q

Investors/Suppliers of VC investing

A

venture capitalists - speclists
Corporate venturing - large firms that invest in VC oppty
angel investors - expert individuals who are first to invest (non-founders or relatives)

43
Q

Stages of private companies

A

Early stage - seed money
Start-up funds - begin product development/marketing
First-stage funding - begins manufacturing/sales
Expansion stage - young companies with established products looking to grow or launch IPO
Second-stage financing – supports add’l major expansion of production/sales
Third-stage financing - “”
Mezzanine/Bridge Financing – prep for IPO (may be include debt and equity capital)
EXIT stage - IPO, merger or acquisition (may be VC fund specializing in such activity)

44
Q

VC vs Buyout funds

A 
Buyout funds have...
higher leverage
earlier and steadier cash flows
less error in return measurement (since mostly cash)
less frequent losses
less upside potential
45
Q

Direct VC investment in Convertible Preferred Stock

A

pref shareholders must be paid a specified amount ahead of common shareholders

typically - investors in later rounds of financing receive pref stock with claim that is senior that previously issued pref stock

seniority is included to entice subsequent investors

46
Q

Typical structure of private equity fund

A 
limited partnerships (sponsor = general partner)
LLCs (sponsor = managing director)
47
Q

Private equity strategy issues

A

1) low liquidity
2) diversification through a of positions
3) diversification strategy
4) plans for meeting capital calls - investor needs to be be prepared to meet the commited funds calls

48
Q

Indirect vs. Direct commodity investment

A

direct - more exposure but has carrying costs, increase # of investable indices so makes it avail to smaller investors

indirect - more convenient but may be very little exposure especially if company is hedging risk itself

49
Q

What are components of the return in commodity futures?

A

total return = spot return +collateral return + roll return

50
Q

What is collateral return?

A

periodic risk-free return

51
Q

Roll Yield/return

A

change of futures contract price for the time period minus change in spot price of the commodity for the period

52
Q

Bacwardation

A

downward-sloping term structure of futures prices (price gets lower into the future)

positive roll return = future price increases to converge with spot price

53
Q

Contango

A

upward-sloping term structure of futures prices

negative roll return

54
Q

Why is commodity a good unexpected inflation hedge?

A

storability and demand relative to economic activity

55
Q

5 segments to HF strategies

A

1) RV
2) event-driven
3) hedged equity
4) global asset allocators
5) shorting

56
Q

High Water Marks

A

avoid incentive fee double-dipping

57
Q

Lock-up Period

A

limit withdrawals by requiring minimum investment period and pre-set exit windows

58
Q

HF performance conventions

A

Funds do better when…
have longer lock-up periods then short
youger funds vs. older
smaller funds vs. bigger

59
Q

Downside Deviation

A

measures dispersion of returns below specified threshold return - usually either zero or risk-free rate of return

if threshold = recent avg return then downside deviation is called semivariance

purpose is to focus only on negative returns and not on high positive returns (i.e. so it doesn’t look like they are more risky for having large high returns and a few avg positive ones)

60
Q

Sharpe Ratio formula

A

(return - risk free rate)/ std

61
Q

Sharpe Ratio limitations

A 
time dependency
assumes normality
assumes liquidity
assumes uncorrelated returns
stand-alone measure
62
Q

Managed futures benefits

A

significant diversification potential (impoved Sharpe ratios)
positive correlation to equities/bonds in up markets
negative correlations during falling markets

private funds add value vs. publicly traded funds do poorly

63
Q

CTA correlations

A

risk - CTAS often show negative correlations w/ equities and correlations between CTAs range from 1 to modestly positive

64
Q

whats a good indicator of future risk-adjusted performance of CTAs?

A

beta – relates performance of individual CTA to fund of CTAS

65
Q

Major types of Distressed Securities investing

A

1) long-only value investing
2) distressed debt arb
3) private equity

66
Q

“fallen angel”

A

issue of debt fallen from investment grade to below-investment grade

67
Q

High-yielding investing

A

buying publicly traded, below-investment grade debt

68
Q

Orphan equities investing

A

buying firm equity of companies emerging from reorg

69
Q

Distressed debt arb

A

buying firm’s distressed debt while shorting company’s equity

70
Q

How is private equity “active” approach?

A

investor buys positions in distressed company and gets some measure of control

71
Q

Vulture Funds

A

specialize in buying undervalued distressed securities

72
Q

Distressed securities investing concerns

A

Event Risk
Market Liquidity risk
Market risk
J-factor risk

73
Q

Type of commodities not good to hedge against unexpected inflation

A

nonstorable commodities (i.e. agricultural like corn, livestock, etc.) - negatively affected by unexpected increases to inflation

Alternative Investments (2 decks)

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