unit 12 Flashcards
1
Q
hedge fund structure
A
- generally org as LP with no more than 100 investors (keeps fund from needing to register with the SEC)
- little transparency
- instead of prospectus use private placement memo with limited info
- not investment company under investment company act of 1940
- PMs typically invest along with other investors
2
Q
hedge funds
A
- pooled investments that are professional managed but have more investment flexibility than mutual funds and are unregulated by US securities law
- aggressively managed
- use advanced investment strategies suitable for sophisticated investors
- main objective is generating high returns
- speculative
- accredited investors with min annual income and net worth and considerable investment knowledge
- institutional investors
- 2/20 fees
3
Q
hedge fund strategies
A
- highly levered
- short positions
- derivative products
- FX speculation
- commodity speculation
- fronter or emerging markets
4
Q
hedge fund lock up provisions
A
- illiquid
- require investors to invest for a min amt of time
5
Q
funds of hedge funds
A
- can target and diversify among several hedge funds
- non accredited investors can access
- Lower initial investment
- cannot trade in secondary market, so liquidity risk
6
Q
blank check hedge fund
A
- special purpose acquisition vehicle (SPAC)
- companies without business operations that raise money through IPOs in order to have their shares publicly traded for the sole purpose of seek out a business or combination of businesses
- do not ID business intent
7
Q
blind pool hedge fund
A
- raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be
- might target a sector or industry
8
Q
asset backed securities (ABS)
A
- value and income payments are derived from or back by a specific poll of underlying assets
- pools assets which makes them easier to sell (securitization) - allows risk to be diversified
9
Q
collateralized mortgage obligations (CMO)
A
- pool large # of mortgages, typically on single family homes
- issued by private sector financing corp
- often backed by Ginnie Mae, Fannie Mae and Freddie Mac pass through securities
- typically highly rated
10
Q
collateralized debt obligations (CDO)
A
- don’t specialize in any particular type of debt
- mostly consist of nonmortgage loans or bonds (auto loans, leases, credit card debt, company’s receivables, derivative products)
- can be sold to investors in the secondary market
11
Q
amortizing and nonamortizing CDOs
A
- amortizing loan is when regular payments are paid against the principal, this results in an investor’s return consisting of principal and interest (mortgages)
- non amortizing CDO is one back by debt obligations without a fixed end end (credit cards)
12
Q
characteristics of CMOs
A
- clients must complete suitability form
- pool a large # of mortgages
- structured into maturity classes called tranches
- CMO pays principal and interest from mortgage pool monthly, but repays principal to only one tranche at a time
- short term tranche must receive their entire principal before the next tranche begins to receive principal payments
- principal payments are made $1000 increments to randomly selected bonds within a tranche
- changes in interest rate adducts rate of mortgage prepayments and this affects flow of interest payment and principal repayment to the CMO investor
13
Q
classes of CMOs
A
- principal only (PO)
- interest only (IO)
- planned amortization class
- targeted amortization class
14
Q
principal only (PO) CMOs
A
- sells at a discount from par
- difference between the discount price and the principal value is the investor’s return
- MV tends to be volatile
- affected by fluctuations in prepayment rate
- value of PO rises when interest rates drop and prepayments accelerate; value falls when interest rates raise and prepayments decline
15
Q
interest only (IO) CMOs
A
- seems at a discount
- cash flows decline over time
- value of IO increase when interest rates rise and decline when interest rates fall bc the # of interest payments change as prepayment rate change
- can be used to hedge a portfolio against interest rate risk
- when prepayments are high, the owner of an IO might get few interest payments than anticipated
16
Q
planned amortization class CMOs (PACs)
A
- targeted maturity dates
- retired first and offer protection from prepayment risk and extension risk (change that principal payments will be slower than anticipated)
17
Q
targeted amortization lass CMOs (TACs)
A
- transfers prepayment risk only to a companion tranche and does not offer protection from extension risk
- get slightly higher interest rate than PACs
18
Q
Zero tranche CMO (Z tranche)
A
- gets no payment until all preceding CMO tranches are retied
- most volatile of CMO tranches
- would not be suitable for investor needing funds in a specified amt of time
19
Q
CMO risks
A
- considered relatively safe
- affected by interest rate movements and mortgage repayments
- rate of principal repayment varies
- if interest rates fall and homeowners refinancing increases, principal is received sooner than anticipated (prepayment risk)
- if interest rates fall and refinancing declines, CMO investor may have to hold investment longer than anticipated (extension risk)
20
Q
returns on CMOs
A
- yield more than treasury securities
- normally pay investors interest and principal monthly
- repayments are paid in $1000 increments to investors in one tranche before any principal is repaid to the next tranche
21
Q
CMO taxation
A
- subject to federal, state and local taxes
22
Q
CMO liquidity
A
- active secondary market for CMOs
- trading is done OTC
- market for more complex CMOs is limited or nonexistent
- certain tranches might be riskier than others
23
Q
CMO suitability
A
- some types of CMOs (PAC companion tranches) may be unsuitable for small or unsophisticated investors due to complexity and risks
- customer must sign suitability statement before buying a CMO
- not comparable with other investment vehicles
24
Q
securitization
A
process of pooling assets into a single financial instrument for this purpose is known as securitization
25
Q
A
