week 9 - CCF and PE Flashcards
if there are more and more speculators in the market…
even though supply exceeds demand of oil, the oil producers do not need to offer large discount anymore or risk premium
smaller difference between futures contract and future expected spot price of oil.
risk premium negative after GFC
Financialisation of commodity market:
lots of speculators in the market and the producers and users of commodities do not need to offer a large or even any risk premium to have counterparts of the futures contract
ER those holding futures contract is going to erode in recent years
Why are CCFs not appropriate for every investor?
some investors e.g. institutional investors may have the expertise to forecast commodity prices. may generate excess return from investing in CCFs
but this is beyond the ordinary investor
be careful with investing in CCFs
depending on the clearing house
collateral could be as low as 10% of futures contract. could be up to 50-60%. huge amount of capital commitment
unexpected changes in futures prices, if you make a loss in your account, have to make up the loss
if an australian investor wants to take additional risk to invest in commodities.
e.g. holding total 70/30 still invest in gold commodity index
most likely impact on total portfolio in the next few years
increased total portfolio risk.
if i am good at forecating commodity price, i may have higher total portfolio returns
if increase total portfolio risk is acceptable, may be good source of excess return for some investors
PE
industry language
IRR is internal rate of return. How PE managers evaluate the ER from investment of the private companies. IRR assume you hold this invetment for very long term indefnitely.
J curve : return you expect for PE. Initially very low return then when value of firms is recognised by the market, can realise the gain
•Considerable debate on whether PE outperforms versus market benchmarks after fees:
Different methods:
- Measured by IRR. Practitioner and academics are critical of IRR because it is not the realised return. Only estimatmation of investment holding until exit to the company
•Considerable debate on whether PE outperforms versus market benchmarks after fees:
LBO performance:
–Seems to depend on database and method used to measure excess returns. But overall, LBO funds seemed to have added value in US, even after fees.
•Considerable debate on whether PE outperforms versus market benchmarks after fees:
VC
Appear to have performed poorly on average
Is PE just another form of equity?
Some strong linkages:
- Exposure to economy and corporate profitability
- Exit prices are linked to equity market valuations
Is PE just another form of equity?
But also some key differences:
liquid, cost
- Illiquid, long-term investment
- Higher costs: management & other fees, cost of transacting
Is PE just another form of equity?
But also some key differences:
corporate governance
is a huge problem. Legal battles. Capitalist and founder. End up in dispute
Is PE just another form of equity?
But also some key differences:
- Aims to add value to business (refresh asset portfolio and operations, incentivise management, lower cost of capital)
- PE no vote over board decisions
- Make substantial changes to business
- PE firm applies target, they are going to fire existing management team and bring in their own manaers and own managers on the board.
PE differences from equity
funding sources
The funding is from private sources
PE differences from equity
leverage
Higher risk with LBO. Very high leverage is used. Above two times from debt to equity
Venture invest in start up over 90%
Commodities
appears
believed
–Appears like an attractive diversifier, given CCFs return of equity-like levels, but low correlation with equities & FI
–Believed to provide an inflation hedge, eg. gold
Collateralized commodity futures (CCFs)
how long to hold for?
They roll over it before maturity to maintain desired exposure.
automatically rolled over to new contracts when they are close to maturity. Always have exposure to goldman sacs commodity interest that is a group of commodity futures contract, the constant exposure to this commodity market
why futures price is important
it forms Part of excess return that commodity investors receive.
commodity investors are actually commodity speculators.
What they expect to receive, by speculating commodities in commodity market, is the risk premium or compensation for bearing the counterparty risk in the commodity futures market.
Because of financialisation of commodity future market, there has been significant downard pressure on risk premium. Sometimes it is negative –> don’t expect large excess return
some investors are very good at
forecasting commodity prices so they can extract exotic beta or alph from inevesting in commodites but not every investor.
30% australia nequity and 30% world equity hedged A dollar and another 20% in listed and unslisted rpoerty A dollar. Another 30% in Australian FI, world FI A dollar.
Is commodity a good addition to total portfolio?
Fundamental risk analysis
until 2005
Australian equity negatively correlated with commodities
30% australia nequity and 30% world equity hedged A dollar and another 20% in listed and unslisted rpoerty A dollar. Another 30% in Australian FI, world FI A dollar.
Is commodity a good addition to total portfolio?
Fundamental risk analysis
after 2005
After 2005–2019, correlation between australian equity and commodites have been positive.
30% australia nequity and 30% world equity hedged A dollar and another 20% in listed and unslisted rpoerty A dollar. Another 30% in Australian FI, world FI A dollar.
Is commodity a good addition to total portfolio?
Fundamental risk analysis
Fudnamental risk = australian economy.
With my existing portfolio 90% total porffolio return variation driving australian stock market movement —-> Leading indicator of australian economy and australia is mostly a commodity economy .
Australian currency is a commodity currency. With my total portfolio I have substantial concentrated risk exposure to the economy
THEN, introducing commodity into my portfolio, it is going to increase my exposure to commodity or australia economic risk
US investors who hold balanced portfolio 70% growth, 30% defensive. Including CCF in total portfolio will
improve risk and return trade off of total portfolio b/c of negative correlation of commodties with equity.
without sacrificing too much total portfolio return.
