Week 5: Alternative Investments Flashcards
What are the nine main risks of alternative assets?
the nine main risks of alternative assets:
1) Less clear legal structure, regulation, and transparency
2) Less liquidity
3) Different taxation
4) Less (or no) historical data for analysis
5) Valuation: May be difficult to value e.g art
6) Trends and fashions: A change in trend/fashionmay cause huge volatility in the asset prices e.g antiques
7) Lack of Income Some alternative assets lack any income payments (e.g., paintings)
8) transaction costs e.g art
9) Fraud and Forgery e.g art
what are the five main types of alternative assets?
1) Private Equity or Venture Capital
2) Hedge Funds
3) Commodities
4) Private equity
5) Cryptocurrencies
what are Private Equity (PE) funds ?
Private Equity (PE) funds Invest in private companies.
PE includes, among others, institutional investors, high-net-worth individuals (HNWI), and firms that buy stakes in private companies
Prefer relatively mature and established companies
what are Venture Capital (VC) funds?
Venture capital provides entrepreneurs with financing to establish and grow their firms. In return, the venture capitalists receive equity (ownership) of the firm.
VC Funds invests/supports young companies or startup ventures
Most venture capital funds are set up as limited partnerships.
The management company of VC starts with its own money and raises additional capital from limited partners such as pension funds.
what are hedge funds?
A Hedge fund is a pool of funds that are managed by professional fund managers using various strategies in an effort to make a positive return.
textbook definition is:
A privately organized investment vehicle that manages a concentration portfolio of public and private securities and derivative instruments on those securities, that can invest both long and short, and can apply leverage
Hedge funds are considered risky alternative investments, and they accept investments from accredited investors who have a minimum level of income or assets.
Explain the difference between hedge funds vs mutual funds?
Hedge funds are llps with minimal disclosure of stretgy and portfolio compensation while mutual funds require public disclosure of strategy and portfolio composition.
hedge funds usally have no more than 100 “sophisticated” and wealthy investors while in mutual funds there can be tens of thousands.
hedgefunds are Very flexible, funds can act opportunistically; make a wide range of investments (e.g., on derivatives, distressed firms, currency speculation, etc.)
Often use shorting, leverage, options while mutual funds Predictable, stable investment strategies, stated in prospectus.
Limited use of shorting, leverage, options
hedge funds have lock-up periods while mutal funds ar emor eliquid
hedge funds have higehr fees of 1-2% with incentive fees of profits of 20% while mutual funds have fixed fees of 0.5%
what are Directional strategies?
Directional strategies are Option strategies that require the underlying asset to move up or down to be profitable. For example, a long call option is profitable if the stock price increases.
what are Nondirectional strategies?
Exploit temporary misalignments in relative valuation across sectors
Buy one type of security and sell another
Strives to be market-neutral
what are the two types of commodities?
Commodities are either
Consumable – corn, oats, rice, wheat, etc.
Transformable – oil, gas, precious metals, etc.
Why Invest in commodities?
Reasons may include:
Protect against inflation
Commodity prices increase with general price levels.
e.g., gold is viewed as having real intrinsic value; currency is pegged with gold in the past.
Offer diversification benefits
The returns from investing in commodities are weakly or negatively correlated with those of other asset classes, such as stocks.
Crisis resilience
Value may go up during bad market times/turmoil, offering a hedge to value losses.
Global demand
Highly liquid
Businesses and investors both have demand for it.
Gold is often coined as “safe haven.”
What is a Real Estate Investment Trusts (REITs)?
A REIT is a company that own or finance income-producing real estate projects (e.g., real estate (buildings, etc.) or loans secured by real estate)
what is real estate?
Real Estate includes building lands and building, residential homes, raw land and income-producing properties.
It is a type of tangible asset
what are the four types of Real Estate Investment?
Direct ownership
Full ownership and can lease out the property to tenants and resell the property at will.
Leveraged ownership
Ownership that is subject to debt and/or a pledge (mortgage) to hand over real estate ownership rights if the loan terms are not met.
Mortgage-backed securities
Provides the investor with a stream of bond-like payments
Aggregation vehicles
like REITs: Closed-end investment companies that sell shares to the public and invest the proceeds in various real estate and real estate mortgages
What are the Real Estate Disadvantages?
Real Estate Disadvantages:
Illiquid
Hard to sell fast
Management
Have to manage the buildings
High fees
e.g., maintenance, ground rent, agency, taxes, etc.
Government Controls
Real Estate Cycles
Recovery to Expansion to Hyper Supply to Recession
Legal Complexity
what is A cryptocurrency?
A cryptocurrency is a digital/virtual currency secured by cryptography
Most of them are decentralized networks based on Blockchain Technology.
