week 9 - CCF and PE

Question 1

if there are more and more speculators in the market…

Answer 1

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

Question 2

Financialisation of commodity market:

Answer 2

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

Question 3

Why are CCFs not appropriate for every investor?

Answer 3

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

Question 4

be careful with investing in CCFs

Answer 4

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

Question 5

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

Answer 5

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

Question 6

PE

industry language

Answer 6

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

Question 7

•Considerable debate on whether PE outperforms versus market benchmarks after fees:

Different methods:

Answer 7

• 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

Question 8

•Considerable debate on whether PE outperforms versus market benchmarks after fees:

LBO performance:

Answer 8

–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.

Question 9

•Considerable debate on whether PE outperforms versus market benchmarks after fees:

VC

Answer 9

Appear to have performed poorly on average

Question 10

Is PE just another form of equity?

Some strong linkages:

Answer 10

1. Exposure to economy and corporate profitability
2. Exit prices are linked to equity market valuations

Question 11

Is PE just another form of equity?

But also some key differences:

liquid, cost

Answer 11

1. Illiquid, long-term investment
2. Higher costs: management & other fees, cost of transacting

Question 12

Is PE just another form of equity?

But also some key differences:

corporate governance

Answer 12

is a huge problem. Legal battles. Capitalist and founder. End up in dispute

Question 13

Is PE just another form of equity?

But also some key differences:

Answer 13

1. 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.

Question 14

PE differences from equity

funding sources

Answer 14

The funding is from private sources

Question 15

PE differences from equity

leverage

Answer 15

Higher risk with LBO. Very high leverage is used. Above two times from debt to equity

Venture invest in start up over 90%

Question 16

Commodities

appears

believed

Answer 16

–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

Question 17

Collateralized commodity futures (CCFs)

how long to hold for?

Answer 17

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

Question 18

why futures price is important

Answer 18

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

Question 19

some investors are very good at

Answer 19

forecasting commodity prices so they can extract exotic beta or alph from inevesting in commodites but not every investor.

Question 20

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

Answer 20

Australian equity negatively correlated with commodities

Question 21

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

Answer 21

After 2005–2019, correlation between australian equity and commodites have been positive.

Question 22

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

Answer 22

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

Question 23

US investors who hold balanced portfolio 70% growth, 30% defensive. Including CCF in total portfolio will

Answer 23

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.