What is an Alternative Investment? Flashcards
Define Investment
Deferred consumption.
List four major types of real assets other than land and or other types of real estate.
Natural resources, commodities, infrastructure, intellectual property.
List the three major types of alternative investments other than real assets.
Hedge funds, private equity, structured products
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.
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
Approx when did average quality corporate bonds andd international equities become commonly viewed as intsitutional-quality investments in the US?
Between 1950-1980.
Name the four return characteristics that differentiate traditional and alternative investments.
Diversification (non-correlation), Illiquidity, non-normality, inefficiency.
Name four major methods of analysis that distinguish the analysis of alternative investments from the analysis of traditional investments.
Return computation methods.
Statistical methods.
Valuation methods.
Portfolio management methods.
Describe an incomplete market.
Where there is no opportunity for market participants to implement an investment strategy according to their preferences.
Define active management.
Efforts of buying and selling securities in pursuit of superior returns.
What distinguishes the term pure arbitrage from general arbitrage.
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.
Describe real assets
Real assets are associated with investments that directly control nonfinancial assets and represent actual rights to consumption rather than indirect financial claims.
4 kinds of real assets
Real estate, timberland, infrastructure, intangible assets (intellectual property)
What is a hedge fund
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.
What are commodities
standardized goods (eg metals, agricultural products, energy products, building materials
What is Private equity
PE invstments include debt and equity securities that are not publicly traded.
4 categegories of PE investments
Venture Capital, LBO, Mezzanine debt, distressed debt
What are structured products
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.
what is a CDO
collateralized debt obligation - creates trached securities with different levels of risk and seniority that divide the returns
what is a credit derivative
Offer a payoff linked to the credit risk of an underlying asset.
What are the 5 major structures in investments
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.
What is a traditional investment
long positions in cash, bonds, stocks
characteristics of alternative investments
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
Methods of analysing alternative investments
Return computation - eg. IRR
Statistical
Valuation
Portfolio management - subject to illiquditiy, inefficient pricing, and non-normal returns.
Alterntive investing goals
Active management and generating absolute and relative returns.
what is passive management
buying and holding a mix of securities to meet risk and return objectives - or a benchmark. Benchmark returns are used to compare performance.
What is active management
An attempt to create better returns by actively buying and selling securities.
What is active risk
Active risk is the additional risk undertaken to deviate from the benchmark level of risk
what is active return
Active return is the return attributable to active management and is calculated as the difference between average portfolio returns and average benchmark returns.
What are absolute return standards
evaluate investment returns against a standard of zero or the risk free rate.
what are relative return standards
evaluate returns against a benchmark
what is arbitrage
Arbitrage is an attempt to earn absolute returns.
What are retuns enhancers
return enhancers are investments focused on increasing average returns.
what are return diversifiers
return diversifiers are investments focused on decreasing the risk of the portfolio.
What is a type I error
A type I error, also known as a false positive, is when an analyst makes the mistake of falsely rejecting a true null hypothesis.
What is a type II error
A type II error, also known as a false negative, is failing to reject the null hypothesis
when it is false.
What are the 4 steps in the Jarque-Bera test
- Select confidence interval (eg 90%, 95% etc)
- Locate corresponding critical value (eg. 5.99 for 95%)
- Compute the JB statistic (using formula 4.36 an the sample skewness and excess kurtosis).
- Compare the JB statistic to the critical value.
If the JB statistic exceeds the critical value, tje null hypothesis is rejected,
What are the steps of hypothesis testing?
- State hypothesis
- formulate analysis plan
- Analyze sample data
- interpret results
What is an alpha driver
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.
what is alpha
alpha represents superior return performance
what is beta
beta represents systemic risk
