T8 Managing an Alternative Asset Portfolio Flashcards
What are the main characteristics of alternative assets?
- generally more expensive than traditional assets,
- relatively illiquid (hence must offer illiquid premium to compensate investors for locking away money for LT) and require long investment horizon.
Name major hedge fund strategies.
- Relative value (convertible arbitrage, fixed income arbitrrage, equity market neutral)
- event driven (merger arbitrage, distressed securities)
- equity hedge (long/short equity, short sellers)
- opportunistic/macro (equity & fixed income indices, currencies & commodities)
(in order of increasing market risk)
When investing in PE (private equity), the life cycle of a business being assessed is of importance, describe the phases of life cycle of a business.
phase 1: start-up phase characterised by venture capital and involves high risk/high capital
phase 2: expansion phase characterised by expansion capital and involves low risk/high capital
phase 3: mature phase characterised by LBO (leveraged buyouts) and involves low risk/low capital
Name the main types of alternative asset.
- hedge funds - which usually set objectives relative to cash ror or in an absolute context as opposed to a benchmark
- PE (private equity) - equities that are nonlisted/non-mkt traded
- infrastructure - which can be further divided into two types i.e. economic infrastructure (transport links, transport nodes, utilities, telecom) and social infrastructure (schools and educational facilities, hospitals and other health facilities, public housing, law and order facilities such as prisons)
- commodities incl. commodity derivatives
- timberland
- agricultural assets.
What are the main features of infrastructure investment?
economic infra -> focus on inanimate objects (e.g. railway, airports, shipping ports, water production and distribution, telecom); social infra -> people centric (e.g. public housing, schools) . whichever way, it incurs high inital cap costs, have long lives and should be managed on a LT basis
- extended payback over the asset’s life.
- transitional - as in they become more like conventional asset types as cash flows stablise over time and management seeks to expand the asset out of the single-purpose niche. so they can become like inflation-linked bond or a complete business.
- illiquid and involve patient capital - hence if initial risk assessment is incorrect, it’d be difficult to correct later.
- infra R distorted by tax - 1. high gearing ratio -> income tax losses for a sig part of the early stages of operation 2. cap intensive -> easily affected by changing depre rules 3. no/low divs
How can investors invest in infrastructure?
investors can be equity or debt participant. 3 way to invest in infra:
-
direct equity investment (only avail for lrg institutional investors and superfunds)
pro: no management fee; access to unlisted equity;
con: must have resources and expertise to assess inv; inv not avail in small parcels and very illiquid -
listed equity investment (small investor friendly) e.g. Transurban (pf of toll roads), AGL (gas distributor and inv coy), MAP group (pf of airports), Envestra (gas distribution) all listed on ASX.
pros: liquidity, avail in sml parcels
cons: investors still have to make informed inv decisions; R subject to fear and greed of mkt participants/ may deviate sig away from fair val from time to time. - direct investments in senior and subordinated debt (lrg institutional/superfunds can invest directly) in senior i.e. nominal or CPI bonds, bank debt (usually syndicated among a number of banks) or subordinated debt where investors get to have exposure to subordinated debt without directly investing in project. Rs based on floating ror plus a margin and added val from capital gains on investments due to decreses in risks in the underlying prj.
Name the 3 main groups of commodities
- Energy (crude oil, heating oil, natural gas, gasoline)
- Agriculture (corn, soybeans, wheat, rice, cocoa, coffee, cotton, sugar, meats)
- Metals (gold, silver, platinum, copper)
What makes commodity different from other asset classes?
physical nature, storage costs, seasonal variations
generally negatively correlated with other asset classes hence provide diversification benefits (unless ofc events such as the 2008 GFC hits which makes all asset classes turn positively correlated)
commodity is also a very volatile asset class so managers usually diversify within commodities or use specialist managers in commodities.
Who are the participants in the commodity mkt?
How to invest in commodity?
can buy shares in coys that produce commodities or (more typically) via derivatves like commodity futures but overall in established exchanges, the % of deliveries is very sml compared with total vol traded and open positions. Note that for fund managers, easier to jsut invest in futures to gain a leveraged exposure to the underlying commodity price e.g. CRB index futures, DJ-AIG index futures -> exposure to diversified pf of commodities that reflect the broader prevailing economic conditions
Name the 3 groups into which agricultural futures can be divided?
- grains (corn, soybean, wheat, soybean meal, soybean oil, oats and rice)
- softs (sugar, coffee, cocoa, orange juice, potatoes, cotton, raw silk, flax, dairy products)
- meats (live cattle, live hogs, frozen pork bellies, feeder cattle, pig and piglets)
What are the sources of Rs on commodity investment?
- price return - a func of how spot price of the underlying comm changes vs the K price. impacted by basis risk i.e. diff b/w local cash price of a commodity and price of the relevant futures contract
- collateral yld - you post collateral to cover part or all of credit risk, which generates interest income, hence influence the price of the derivative
- roll yld (when you decide to hold the position for longer, you have to understake a transaction where you close out the expiring position and open a new one, the g/l from this transaction is a roll yld)
How are commodity futures valued?
- futures price = spot price + cost of carry
- cost of carry = interest cost at rf rate (aka opportunity cost) + storage costs - income - convenience benefit
