unit 12 Flashcards

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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
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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
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3
Q

hedge fund strategies

A
  • highly levered
  • short positions
  • derivative products
  • FX speculation
  • commodity speculation
  • fronter or emerging markets
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4
Q

hedge fund lock up provisions

A
  • illiquid
  • require investors to invest for a min amt of time
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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
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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
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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
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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
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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
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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
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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)
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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
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13
Q

classes of CMOs

A
  • principal only (PO)
  • interest only (IO)
  • planned amortization class
  • targeted amortization class
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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
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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
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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