14. Alternative investments & private markets Flashcards
(74 cards)
1
Q
Name 3 common types of alternative investments.
A
- Commodities e.g. gold
- Financial derivatives
- Real estate
2
Q
Name 2 providers of absolute return investment strategies.
A
- Hedge funds
- Private equity
3
Q
Why do people invest in alternative asset classes & investment products?
A
Because they show little correlation to conventional asset classes so act as useful risk diversifiers.
4
Q
What is a con to investing in alternative asset classes & investment products?
A
Reduced liquidity, as PE & hedge funds may have a lock-in period for up to 5 years, & real estate is very illiquid.
5
Q
What are commodity markets?
A
Where raw or primary products are traded.
6
Q
What is the difference between hard & soft commodities?
A
- Hard: mined or extracted
- Soft: agriculture or livestock
7
Q
Name 3 ways to invest in commodities.
A
- Purchase stock in commodities corporations
- Purchase funds or ETFs that focus on commodities
- Purchase them physically (though storage costs)
- Buy futures contract
8
Q
Pros & cons of investing in commodities via futures contracts.
A
- allows leverage & selling short
- only minimal margin needed
- volatile
- leverage magnifies losses
9
Q
Why might a manufacturing company use commodity futures?
A
To hedge risk by locking in price of some inputs for future delivery.
10
Q
What is the term commodity trading adviser (CTA) used to represent?
A
A particular type of investing in futures via collective investment vehicle, e.g. hedge fund.
11
Q
What is a contango and what will it result in?
A
- if futures curve slopes upwards, i.e. each subsequent month’s futures price is progressively higher
- a negative roll yield
12
Q
What is a backwardation and what will it result in?
A
- if futures curve is downward sloping
- a positive roll yield where fund will sell relatively higher priced contracts snd buy lower priced ones.
13
Q
What are the major exchanges for energy derivatives? [2]
A
- NY Mercantile Exchange (NYMEX)
- ICE Futures Europe in London
14
Q
When are OTC or ‘off-exchange’ energy derivatives popular?
A
If clients want to hedge or trade energy where there is as yet no ETC (exchange traded contracts)
15
Q
Precious metals inc. gold, silver & platinum are often considered volatile why? [2]
A
- driven by variety of S & D factors
- and geopolitical issues
16
Q
Name 3 features to consider when investing in a physical metal.
A
- cost of storage & insurance
- absence of yield
- potential for quality issues
17
Q
Commodities are organised into 4 groups based on liquidity. What are they?
A
- Group 1: petroleum products
- Group 2: 7 highly liquid commodities
- Group 3: 4 liquid commodities
- Group 4: 5 commodities
18
Q
Name 2 things commodities can be used to hedge against.
A
- Inflation
- Event risk
19
Q
The negative correlation between commodities futures and stocks & bonds tends to ___ the ___ the horizon.
A
- increase
- longer
20
Q
Why were cryptocurrencies originally developed?
A
To provide an alternative mode of payment for online transactions which is fully secure due to encryption techniques.
21
Q
Fiat currency is backed by the govt and can be physical money or electronic, whereas crypto is?
A
digitally encrypted, decentralised currency not controlled or regulated by govt or centralised authority.
22
Q
Supply of fiat currencies is theoretically ___ which is not the case for cryptos.
A
unlimited
23
Q
Storage & trf costs are ___ compared to traditional banking services.
A
low
24
Q
Cryptos cannot be ___ or ___ because they only exist as a digital currency.
A
forged or falsified
25
What is blockchain? aka distributed ledger technology (DLT)
Effectively a digital ledger of transactions that is duplicated across the entire network of computer systems on the blockchain.
Records of transactions are unchangeable.
26
What is the most important feature of blockchain technology?
It makes it possible to automate transactions, providing for close to real-time settlement, while maintaining strong controls against fraud.
27
Name 3 examples of blockchain usage.
1. secure sharing of medical records & sensitive information
2. AML tracking of movements
3. supply chain & logistics monitoring
4. real estate & similar asset ownership & transacting
28
How are the number of Bitcoins in circulation controlled to £21m limit (19m in 2022)?
Increasingly time-consuming task to create each successive Bitcoin.
29
What is ethereum?
A decentralaised software platform that enables smart contracts & decentralised applications to be built & run without any downtime, fraud or control from a 3rd party.
30
What is Ripple?
A global payments network whereby users can bypass banks & make loans & open credit lines with each other.
31
Direct property investment usually takes place in which 3 sectors?
1. Retail
2. Office
3. Industrial
32
Name 3 reasons why someone might invest in property.
1. Less volatile that stocks & bonds
2. Risk diversifier as low correlation with stocks & bonds
3. Considered to provide a high-income return
4. Provides a hedge against inflation
33
What is autocorrelation which is unique to property as an asset class?
Future returns are related to current returns.
34
Infrequent valuations & of property assets & general lack of liquidity has effect of what?
Smoothing returns which results in volatility (risk) being very under-estimated.
35
What is the de-smoothing formula for:
True return =
(Valuation return - k x Valuation return - 1) / (1-k)
where k is a de-smoothing coefficient taking a value between 0 and 1, which represents the weighting in current valuations of new mkt evidence.
36
Name 3 differences between commercial & residential property.
1. R: shorter leases, C: longer term contracts (often >10yrs)
2. C: tenants usually liable for repairs, R: landlord usually
3. R: returns more capital weighted, C: more income weighted
4. C: usually costs more than R property
5. C: considered more stable cash flow, less volatile
37
What do MSCI Indices measure?
Total returns for all directly held real estate assets exc. effects of debt, fund mgt fees, taxation & cash on property portfolios.
38
What does the MSCI UK Monthly Property Index measure?
Unlevered total returns of directly held property investments from one valuation to next.
39
What are the 3 versions of the MSCI UK Monthly Property Index?
An index that includes:
1. completed & lettable properties
2. non-operating properties (e.g. those under development or refurb)
3. all properties
40
What are the 3 methods for valuing a particular property?
1. **Cost approach**: replacement cost of asset
2. **Sales comparison approach**: mkt value estimated against benchmark e.g. similar properties
3. **Income approach**: involves discounting a perpetual income from owning the investment.
41
What is hedonic price variation?
Key features of property identified, e.g. location, no. of rooms, characteristics & transaction prices from sample of properties observed & statistics (regression analysis) used to estimate value of characteristics & property.
42
Mkt cap rate =
Benchmark NOI /
Benchmark transaction price
43
For an investor to consider an investment worthwhile, expected ___ should be ___, or ___ should > investor's ___
- NPV
- positive
- IRR
- RRR
44
Following the 2015 Paris Agreement on curbing global warming and managing ESG & climate-related risks, there will be growing requirements internationally for what?
- mandatory disclosure
- benchmarking
- public dissemination of carbon production data
- increasing societal expectation that companies & investment funds take into account ESG issues
- growing pressure to allocate investments to sustainable businesses
45
UK authorised property unit trusts can invest up to XXX% directly in property, and up to XXX% in unregulated collective investment schemes.
- 100%
- 20%
46
Unauthorised property unit trusts are available for?
Tax-exempt investors, e.g. pension funds & charities.
47
What are REITs?
Companies that own & operate income-producing property, which can be commercial or residential.
48
What tax do REIT's not have to pay?
Corporation tax
49
To qualify as a REIT:
- location / type of co.
- property letting biz (tax exempt)
- net taxable profits
- min no. of properties owned by REIT
- investor share ownership
- BRT
- UK-based, closed-end co.
- must be 75% of overall biz
- at least 90% must be distributed to investors
- 3 properties, no single property over 40% of TAs
- not more than 10% of all shares without losing certain tax benefits
- must withhold BRT on dist of profits
50
What are real assets?
Examples?
Tangible assets that have intrinsic value due to their physical properties e.g. precious metals, commodities
51
Real assets often have low correlation to conventional financial assets so offers what 3 benefits?
- More stable
- inflation hedging
- diversification
- capital appreciation
52
Name 2 drawbacks of real assets compared to financial assets.
- Less liquid
- higher transaction fees
- higher carrying / storage costs
53
Hedge funds aka target funds, often use investment & risk-mgt skills to seek ___ returns regardless of ___.
- positive returns
- mkt direction
54
A hedge fund is an ___ structured as a ___ or ___ and is managed by an investment manager who is ___ and ___ separate from the fund & assets.
- investment vehicle
- corporation or partnership
- legally
- financially
55
How do hedge fund managers compare to conventional asset managers in terms of mgt style.
Generally more active & use tools such as leverage, derivatives & short-selling.
56
How do hedge fund targets compare to conventional fund ones?
Hedge fund targets are absolute return with aim of achieving this, regardless of mkt conditions, whereas conventional funds tend to target returns relative to a benchmark or index.
57
A key feature of hedge funds is that they almost always have a fee structure that includes what?
A mgt fee & a performance fee.
Mgt fee often 1-2%
Performance fee up to 20% of upside
58
What is a 'hurdle rate'?
Target that must be reached before a hedge fund earns a performance fee.
59
What is a high-water mark in reference to hedge funds?
Performance fees only accrue after previous pre-defined high points, therefore good returns after bad years may not count.
60
What are relative value (mkt neutral) funds?
Ones that attempt to produce return series that have no or low correlation with traditional mkts such as equity.
Usually arbitrage strategies.
61
What are event-driven funds?
Ones that seek to make profitable investments by investing in a timely manner after securities affected by particular events.
62
What are fund of hedge funds?
Benefits? [2]
- Term used for a fund that invests in a number of hedge funds
- diversification
- & access to expertise.
63
What is a disadvantage of investing in fund of hedge funds?
2 layers of costs payable
64
What is a key feature of infrastructure investing?
Gearing.
65
In general, investment in private assets is often considered to be ___ & offers ___ returns than in listed assets.
- less volatile
- higher returns
66
PE funds are structured as ___, where investors are ___ who ___ with the investment managers.
- partnerships
- limited partners
- co-invest
67
Typically PE investments are made over 1st 5 or so years (known as?), and will be realised over the subsequent 5 years (known as?)
- investing period
- harvesting period
68
What is 'carried interest'?
Refers to investment returns generated often in excess of hurdle rate.
69
What are 3 main financing stages in a company's life cycle in PE investing?
1. **VC**: made in young co.s with little rev (entrepreneurial phase)
2. **Growth capital**: equity investment, often minority in nature, in rel mature co.s
3. **Buy-out inv's**: investors taking stake in co., mature well established companies with strong mkt positions.
70
What are the 3 main types of PE investments?
1. **Primary investments**: newly constructed, closed-end PE partnerships
2. **Secondary investments**: existing limited partner PE equity interests available on secondary mkt
3. **Co-investments**: direct investments by a limited partner in a co. alongside a PE fund
71
What is the liquidity premium?
Compensation for PE investors for the LT nature of their investments.
72
What are 2 measures used to assess PE firms?
1. Investment multiples
2. IRR
73
What are the 2 most popular investment multiples?
1. **Total value to paid in (TVPI)**: fund's total value as multiple of its cost base
2. **Distributed to paid-in (DPI)**: cumulative dist's / capital called
74
If Distributed to pad-in (DPI) > 1?
Investor has made money net of fees & carry.
