What is an Alternative Investment?

Question 1

Define Investment

Answer 1

Deferred consumption.

Question 2

List four major types of real assets other than land and or other types of real estate.

Answer 2

Natural resources, commodities, infrastructure, intellectual property.

Question 3

List the three major types of alternative investments other than real assets.

Answer 3

Hedge funds, private equity, structured products

Question 4

Name the assets that are often characterised as traditional by some and alternatives by others for each of the following categories; hedge funds, private equity, real assets.

Answer 4

Hedge funds: liquid alternative mutual funds
Private equity: closed-end funds with illiquid holdings
Real assets: Public real estate and public equities of corporations with performance dominated by stable positions in real assets

Question 5

Approx when did average quality corporate bonds andd international equities become commonly viewed as intsitutional-quality investments in the US?

Answer 5

Between 1950-1980.

Question 6

Name the four return characteristics that differentiate traditional and alternative investments.

Answer 6

Diversification (non-correlation), Illiquidity, non-normality, inefficiency.

Question 7

Name four major methods of analysis that distinguish the analysis of alternative investments from the analysis of traditional investments.

Answer 7

Return computation methods.
Statistical methods.
Valuation methods.
Portfolio management methods.

Question 8

Describe an incomplete market.

Answer 8

Where there is no opportunity for market participants to implement an investment strategy according to their preferences.

Question 9

Define active management.

Answer 9

Efforts of buying and selling securities in pursuit of superior returns.

Question 10

What distinguishes the term pure arbitrage from general arbitrage.

Answer 10

Pure arbitrage is risk-free and simultaneous. General arbitrage still has risk because the assets are not identical ornot held over the same time period.

Question 11

Describe real assets

Answer 11

Real assets are associated with investments that directly control nonfinancial assets and represent actual rights to consumption rather than indirect financial claims.

Question 12

4 kinds of real assets

Answer 12

Real estate, timberland, infrastructure, intangible assets (intellectual property)

Question 13

What is a hedge fund

Answer 13

private investment vehicles that capitalize on investment opportubities available as a result of minimal regulatory restrictions.. Through derivatives, leverage, short positions, and other strategies, hedge funds are able to earn returns unavailable to traditional investments. Can be further differentiated by the strategies pursued by funds.

Question 14

What are commodities

Answer 14

standardized goods (eg metals, agricultural products, energy products, building materials

Question 15

What is Private equity

Answer 15

PE invstments include debt and equity securities that are not publicly traded.

Question 16

4 categegories of PE investments

Answer 16

Venture Capital, LBO, Mezzanine debt, distressed debt

Question 17

What are structured products

Answer 17

structured products segment the cash flows of traditional invstments or link the product’s returns to one or more market values in order to achieve certain risk, return, tax, or other objectives. Alternative structured products include CDOs and credit derivatives.

Question 18

what is a CDO

Answer 18

collateralized debt obligation - creates trached securities with different levels of risk and seniority that divide the returns

Question 19

what is a credit derivative

Answer 19

Offer a payoff linked to the credit risk of an underlying asset.

Question 20

What are the 5 major structures in investments

Answer 20

STRIC
Regulatory structures - gvmt regulation and taxation.
Securities structures - methods of cash flow securitization
Trading structures - trading strategies, eg highly active or passive
Compensation structures - arrangements around fees
Institutional structures - eg public or private listing, trading market activity, and investor composition.

Question 21

What is a traditional investment

Answer 21

long positions in cash, bonds, stocks

Question 22

characteristics of alternative investments

Answer 22

DIIN

Diversification - diversifiers (absolute return products) have little to no correlation with traditional assets.

Illiquidity - alternative asssets often illiquid - low volume or infrequent trading. Lumpy assets can only be traded in certain quanities.

Inefficiency - prices are different than those expected in an efficient market.

Non-normality - - normal distribution is a symmetrical bell shaped ccurve

Question 23

Methods of analysing alternative investments

Answer 23

Return computation - eg. IRR

Statistical

Valuation

Portfolio management - subject to illiquditiy, inefficient pricing, and non-normal returns.

Question 24

Alterntive investing goals

Answer 24

Active management and generating absolute and relative returns.

Question 25

what is passive management

Answer 25

buying and holding a mix of securities to meet risk and return objectives - or a benchmark. Benchmark returns are used to compare performance.

Question 26

What is active management

Answer 26

An attempt to create better returns by actively buying and selling securities.

Question 27

What is active risk

Answer 27

Active risk is the additional risk undertaken to deviate from the benchmark level of risk

Question 28

what is active return

Answer 28

Active return is the return attributable to active management and is calculated as the difference between average portfolio returns and average benchmark returns.

Question 29

What are absolute return standards

Answer 29

evaluate investment returns against a standard of zero or the risk free rate.

Question 30

what are relative return standards

Answer 30

evaluate returns against a benchmark

Question 31

what is arbitrage

Answer 31

Arbitrage is an attempt to earn absolute returns.

Question 32

What are retuns enhancers

Answer 32

return enhancers are investments focused on increasing average returns.

Question 33

what are return diversifiers

Answer 33

return diversifiers are investments focused on decreasing the risk of the portfolio.

Question 34

What is a type I error

Answer 34

A type I error, also known as a false positive, is when an analyst makes the mistake of falsely rejecting a true null hypothesis.

Question 35

What is a type II error

Answer 35

A type II error, also known as a false negative, is failing to reject the null hypothesis
when it is false.

Question 36

What are the 4 steps in the Jarque-Bera test

Answer 36

1. Select confidence interval (eg 90%, 95% etc)
2. Locate corresponding critical value (eg. 5.99 for 95%)
3. Compute the JB statistic (using formula 4.36 an the sample skewness and excess kurtosis).
4. Compare the JB statistic to the critical value.

If the JB statistic exceeds the critical value, tje null hypothesis is rejected,

Question 37

What are the steps of hypothesis testing?

Answer 37

1. State hypothesis
2. formulate analysis plan
3. Analyze sample data
4. interpret results

Question 38

What is an alpha driver

Answer 38

An alpha return driver is a driver that seeks exposure to active return factors. In most cases, alpha drivers are not seeking to add return that are related to a benchmark / index. They seek return through active investment strategies.

Alternative investments are in most cases alpha drivers. The reason for this is that they seek returns through active and complex strategies and in most cases, they have low levels of positive correlation with traditional assets.

Question 39

what is alpha

Answer 39

alpha represents superior return performance

Question 40

what is beta

Answer 40

beta represents systemic risk