Topic 7: Accessing Alts Flashcards
Define Exposure Inertia
Slower speed that common views change over time\
Define View Commonality
Views tend to cluster into common themes
Define Netting in the context of risk
Paying incentive fees for profitable funds and offsetting reductions from non-profitable funds
Name some of the benefits unique to hedge funds replication
- liquidity
- transparency
- lower fees
- flexibility
- hedging opp
- lower due d and monitoring risks
- diversification
- benchmarking
Describe efficiently inefficient markets
Markets that are efficiently inefficient are inefficient enough to compensate money managers and investors for costs and risks, but not so inefficient so as to provide numerous managers with arbitrage opportunities that are easy to exploit. These markets are neither perfectly efficient nor completely inefficient.
What is the fund bubble hypothesis?
Increased supply of investment capital results in more less-qualified managers entering the industry.
Using a factor-based replication approach to replicate hedge fund returns, how should we estimate the weights of the risky assets in the portfolio?
As BETAS in the regression equation for return
What is the capacity constraint?
Alpha is a zero-sum game such that per-capita alpha is decreased as allocation to investment capital to hedge fund increases
Describe the classic convertible arbitrage strategy
- buy convertible bond
- short sell common stock
To replicate hedge fund using factor based approach involves the following steps:
- Benchmark
- Set of factors
- Length of estimation period
- Number of factors
Steps of a factor-based replication program
- Estimate weight of risky assets in replicating portfolio (beta of regression equation)
- Estimate weight of cash
- Invest in different areas (determine out of sample returns)
What is stepwise regression?
Step-by-step iterative construction of a regression model that involves the selection of independent variables to be used in a final model.
In an underpriced call option, the implied volatility of the underlying stock is LESS/MORE than expected volatility.
In an underpriced call option, the implied volatility of the underlying stock is LESS than expected volatility.
What products give rise to alternative betas?
- currency
- volatility
- commodity
- CTA
- structured products
In a delta hedged position, if the stock in the underlying convertible bond increases in value, how can we maintain delta neutrality?
Increase the # of stocks shorted
What is a return source for traditional convertible bond arbitrage strategy?
Positive gamma
Volatility that exceeds market expectations (embedded in the convertible bond’s original price)
What does the Liew et al’s bifurcated fund analysis model evaluate?
1) mean variance of returns
2) rankings from peer group scoring method
What are the 3 challenges associated with constructing an asset weighted hedge fund portfolio?
- Declining Alpha
- AUM may fluctuate
- Style drift
Empirical evidence of hedge fund returns from 1998 to 2018
- returns generally declined
- returns not driven / fully explained by equity market returns
- returns lower than EQ returns
Alternative mutual funds restrictions
- max 15% of AUM can be invested in illiquid securities
- max 33% leverage
- Daily liquidity
Advantage of ETFs over mutual funds
- traded throughout day
- daily disclosure
- tax advantages (due to LOWER turnover and in-kind redemption)
*In Kind redemption: deliver securities increased in value in exchange for ETF shares
Equal weighted hedge funds + rebalance when returns mean reverting = performance is
good
- Individual fund strategy INDICES tended to exhibit about ___ of the TOTAL risk and about ____ of the SYSTEMATIC risk of the equity INDICES.
- Average hedge fund returns tended to exhibit about ___of the equity indices’ total risk.
- Average hedge fund returns tended to exhibit about ____the equity indices’ systematic risk.
- Individual fund strategy indices tended to exhibit about HALF of the TOTAL risk and about ONE-THIRD of the SYSTEMATIC risk of the equity indices.
- Average hedge fund returns tended to exhibit about one-third of the equity indices’ TOTAL risk.
- Average hedge fund returns tended to exhibit about one-sixth the equity indices’ SYSTEMATIC risk.
What is the risk parity approach?
Weights are selected so that each fund makes the same contribution to the portfolio’s total volatility
____ FoFs pursue opportunistic exposure to a specific market factor and are typically composed of 5-15 hedge fund
Tactical FoFs pursue opportunistic exposure to a specific market factor and are typically composed of 5-15 hedge fund
Which commodity investments are also referred to as prepaid forward contracts
ETNs. Exchange-traded commodity index-linked notes that are economically equivalent to fully collateralized forward contracts for delivery of the index value (hence the term prepaid forward contracts).
Are non-traded US REITs available to retail investors?
Yes, shares are available to retail investors who meet suitability standards.
Advantages of SWAPs to FUTURES
- A commodity index can be selected to meet their needs (when appropriate futures are unavailable).
- Long-term swaps are available (vs. long-term futures that may not be unavailable or illiquid).
- Investors maintain control of and can manage their cash and earn more than the risk-free rate (i.e., the collateral returns from futures positions).
Benefits of ETNs
- little tracking error since the issuing firm promises to pay the return on an index.
- ETNs can qualify for long-term capital gains tax treatment if they are held for long enough (generally for more than one year).
Characteristics of long-biased hedge funds in commodity futures markets?
Short lock up
High transparency