Alternative Investments

Question 1

Define:

Cost of carry

aka carry

Answer 1

Net costs associated with carrying, storing, or holding, an asset or position.

Question 2

Define:

Clearinghouse

Answer 2

An intermediary which acts as middleman between contracting parties, typically in the futures market.

Provide credit gaurantee to buyer and seller of futures contract.

Question 3

Define:

Committed capital

Answer 3

Money which limited partners have made a commitment to provide to the private equity fund.

Question 4

Define:

Commodity swap

Answer 4

A swap in which the underlying is a commodity.

Question 5

Define:

Convenience yield

Answer 5

A non-monetary advantage of holding an asset.

Question 6

Define:

Counterparty risk

Answer 6

Risk that the other party to a contract or transaction may default on the contractual obligation.

Question 7

Define:

Funds of hedge funds

aka fund of funds

Answer 7

Investment vehicle that pools money from multiple investors and invests that money in a diversified portfolio of other investment funds (mutual funds, hedge funds) rather than in individual securities or assets.

Question 8

Define:

Hedge funds

Answer 8

Private investment fund that pools money from multiple investors and employs a range of investment strategies (including leverage and derivatives) with the goal of generating returns that are uncorrelated with traditional asset classes.

Question 9

Define:

High-water marks

Answer 9

The highest value, net of fees, that the fund has previously reached. This mechanism is used to determine the performance fees that hedge fund managers charge to their clients, and discourages them from collecting performance fees on profits that simply recover previous losses.

Question 10

Define:

Limited partners

LPs

Answer 10

Partners with limited liability. They play a passive role (not directly involved in managing the fund).

Question 11

Define:

General partner

GP

Answer 11

The partner that does directly manage the business/fund (theoretically bears unlimited liability).

Question 12

Define:

Management buyout

MBO

Answer 12

A leveraged buyout with existing management purchasing controlling interest of its outstanding shares (May purchase all shares and take company private).

uses leverage (debt)

Question 13

Define:

Management fee

Answer 13

A fee charged for investment management services, based on assets under management or committed capital.

Question 14

Define:

Private equity securities

Answer 14

Securities not listed on public exchanges (no active secondary market). Issued to institutional investors via non-public offerings (ex. private placements).

Question 15

Define:

Venture capital

VC

Answer 15

Investments that provide “seed” or start-up capital, early-stage financing, or later-stage financing (including mezzanine-stage financing) to young companies in early development stages/requiring additional capital for expansion.

Question 16

Define:

Backwardation

Answer 16

In futures markets: spot price > futures price. Forward curve is downward sloping

Convenience yield is high with backwardation, can think “better to already hold the item today” (rather than having to pay such a high spot price).

Question 17

Define:

Calmar Ratio

Answer 17

Avg annual return (compounded) / max drawdown risk (for the period)

Often calculated using prior three years performance.

Question 18

Define:

Cap rate

Answer 18

Annual rent collected (net of vacancies) / price paid for property

or NOI/V

Key metric in Real Estate

Question 19

Define:

Catch up clause

Answer 19

Clause allowing GP to receive 100% of distributions after hurdle rate is achieved, until total performance fee is received, after which regular distributions resume.

Question 20

Define:

Contango

Answer 20

In futures market: spot price < futures price.
Forward curve is upward sloping.

Convenience yield is low

Question 21

Define:

Hard commodities

Answer 21

Natural resources which are consumed/used in industry and therefore are traded with physical delivery common upon settlement.

Metals and minerals, Energy, lumber

Question 22

Define:

Limited partnership

Answer 22

Partnership with a general partner (unlimited liability) who is responsible for managing the business/fund, and other partners who are limited partners with limited liability.

Question 23

Define:

Limited partnership agreement

LPAs

Answer 23

Legal document outlining the partnership and framework for operations of a limited partnership.

Question 24

Define:

MAR ratio

Answer 24

Avg annual compounded return / max drawdown risk (over full history of investment).

as opposed to calmar ratio

Question 25

Define:

Partnership agreement

Answer 25

legal document outlining the partnership (outlines how much each partner owns, their share of profits, and duties).

Question 26

Define:

Public-private partnership

PPP

Answer 26

Agreement between public and private sector to finance, build, and operate infrastructure.

Question 27

Define:

Real estate investment trusts

REITs

Answer 27

Tax advantaged entities which owns and operates income producing real estate properties. Provide investors an indirect means on investing in RE and gaining exposure to cashflows generated by RE.

Can also be involved in RE development.

Question 28

Define:

Side letters

Answer 28

Side agreement between LPs and GP (outside of the LPA).

Question 29

Define:

Soft commodities

Answer 29

Agricultutal products which tend to be perishable. They are traded and often involve physical delivery upon settlement.

ex. grains, livestock, coffee, sugar

As opposed to hard commodities

Question 30

Define:

Title search

Answer 30

Done to ensure that the seller actually owns the property without liens or claims against the asset.

Part of Real Estate due dilligence.