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CFA Level 2 > Alternative Investments > Flashcards

Alternative Investments Flashcards

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1
Q

AFFO

A

adjusted funds from operation

AFFO = net Income +
depreciation and amort. +
(gains)/losses from sales of depreciable real estate -
non cash rent adjustment -
recurring maintenance capital expenditures -
leasing commissions

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2
Q

Theory of storage

A

Futures price = spot price + direct storage costs - convenience yield

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3
Q

Total Return

A

Price Return + Roll Return + Collateral Return

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4
Q

Price Return

A

(Current price - previous price) / previous price

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5
Q

Roll Return

A

(Near-term futures price - farther-term futures price) / near-term futures price * percent being rolled

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6
Q

Collateral Return

A

Annualized return * fraction of the year being held

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7
Q

when calendar spread is negative that market is in

A

contango

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8
Q

when calendar spread is positive that market is in

A

backwardation

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9
Q

Insurance theory of futures returns

A

producers of a commodity would prefer to accept a discount on the futures price if it meant a guaranteed price

implies markets are in backwardation

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10
Q

Hedging pressure hypothesis

A

a market in contango results when excess demand for price insurance outweighs the sellers

hedging activity of futures buyers exceeds that of sellers

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11
Q

Under theory of storage, when is convenience yield high

A

When the scarcity of resource is high

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12
Q

Three different approaches to value real estate

A

1) Cost approach
2) Income approach
3) Sales comparison approach

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13
Q

What is cost approach of valuation and when is it useful

A

1) estimate market value of the land +
2) estimate the buildings replacement cost -
3) depreciation, including function/locational/economic obsolescence

Most useful when subject property is relatively new, or for unusual properties where comparable transactions are limited

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14
Q

Valuation methods under income approach of valuation

A

1) Direct capitalization method
2) Discounted cash flow method

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15
Q

Net operating income from real estate property

A

amount of income remaining after subtracting vacancy and collection losses, as well as operating expenses such as insurance, property taxes, utilities, maintenance, and repairs from gross income

before financing costs and income taxes

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16
Q

value of real estate property using cap rate

A

NOI (1) / cap rate

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17
Q

cap rate

A

1) discount rate - growth rate
2) NOI (1) / comparable sales price)

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18
Q

gross income multiplier

A

sales price / gross income

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19
Q

all risks yield (ARY)

A

when tenants are required to pay all expenses, a cap rate is applied to rent instead of NOI

rent / comparable sales price

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20
Q

DSCR

A

debt service coverage ratio

first year NOI / debt services

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21
Q

LTV

A

loan to value ratio

loan amount / appraised valuee

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22
Q

equity dividend rate

A

first year cash flow / equity

used when debt is used to finance real estate, equity dividend rate used to measure the cash return on the amount of cash invested

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23
Q

Net asset value per share for REIT

A

market value assets - market value liabilities

market value assets are found by capitalizing NOI

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24
Q

Funds from operations

A

accounting net earnings +
depreciation charges (expenses) +
deferred tax charges (deferred tax expenses) -
gains (losses) from sale of property and debt restructuring

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25
AFFO vs. FFO as measure of economic income
AFFO is better because it considers the capital expenditures that are required to sustain the property's economic income, but FFO is more used because AFFO relies more on estimates that are considered more subjective
26
Sources of Value creation from Private equity
1) Ability to re-engineer the firm and operate it more efficiently 2) Ability to obtain debt financing on more advantageous terms 3) Superior alignment of interests between management and private equity ownership
27
Control mechanisms used by private equity
1) Compensation 2) Tag-along, drag-along clauses 3) Board reps 4) Noncompete clauses 5) Priority in claims 6) required approvals 7) earn out
28
Exit routes for private equity firms
1) IPO 2) Secondary market sales 3) Management buyout 4) Liquidation
29
PIC
paid in capital: the percent of committed or absolute amount of capital utilized by the GP to date
30
DPI
distributed to paid-in-capital: cumulative distributions paid to LPs divided by cumulative invested capital "cash on cash return"
31
RVPI
residual value to paid in capital: LP's unrealized return and the value of the LP's holdings in the fund divided by the cumulative invested capital
32
TVPI
total value to paid in capital: measures the LP's realized and unrealized return, the sum of DPI and RVPI
33
Soft commodities
Coffee, sugar, cocoa, cotton
34
Rebalancing commodities index in mean-reverting levels vs. trending levels
more important in mean-reverting levels because you can take advantage of the peaks and valleys, so you can outperform negative in trending markets
35
Production-weighting vs. Fixed weighting
Production weighting - weighs the more valuable commodities more Fixed weighting - predetermined levels of weighting
36
Heterogeneity in real estate vs. stocks & bonds
more heterogeneity in real estate
37
Correlation between appraisal based indices and other asset classes
low because the appraisal lag leads to appraised values lagging behind market upturns and downturns
38
Holding period return for for real estate
capital return and income return
39
Calendar spread
Near term futures contract - longer-term futures contract
40
Basis on contract
spot price - near term futures
41
Net lease vs gross lease
net lease - the tenant pays operating expenses gross lease - the owner pays operating expenses
42
Repeat sales index
Based on the difference in the sales price of the same property to show the change in market conditions
43
Hedonic Index
Requires only one sale, but controls for other characteristics, such as size, age, quality of construction, etc.
44
Two types of transaction-based indexes for real estate
1) Repeat sales index 2) Hedonic index
45
Performance of appraisal-index and transaction-based index
appraisal index has less volatility and so it has less correlation with other asset classes than transaction based
46
which real estate investment has the most operating and financial flexibility
REOC
47
Seven main hedge fund strategy groups
1) Equity hedge 2) Event driven 3) Fund of funds 4) multi-manager 5) relative value 6) opportunistic 7) specialist
48
equity market neutral strategy
takes opposite positions in similar or related equities that have divergent values and attempt to maintain a near net zero portfolio exposure to the market construct portfolios so that beta is equal to 0
49
stub trading
equity market-neutral strategy that capitalizes on misalignment in prices and entails buying and selling stock of a parent company and its subsidiaries, typically weighted by the percentage ownership of the parent company in the subsidiaries
50
soft vs hard catalyst event driven approach
soft - event has not yet occurred hard - event has occurred
51
Fund of fund fee structure
double layer of fees without being able to net performance on individual managers
52
Best measure of risk adjusted return with the expectation of large negative events
Sortino Ratio
53
hedge fund strategy with highest volatility
global macro
54
Two types of opportunistic hedge fund strategies
1) Global macro 2) Managed futures
55
Difference between long/short equity and equity market neutral
Long/short - buy shares that are expected to go up and short shares that are expected to go down equity market neutral - takes one position based on research and another to neutralize the position, such as a short in a competitor they are long it
56
Trendiness
directionality of markets
57
Conditional Linear Factor Model
useful for uncovering and analyzing hedge fund risk exposures
58
When would EMN equity strategy be used and why
During periods of non-trending or declining markets because EMN managers neutralize risk and typically deliver return profiles that are steadier and less volatile than those of many other hedge strategy They use a lot of leverage though
59
Convertible Bond Arbitrage strategy
Buy the convertible bond and short the stock
60
Result of short selling when using convertible bond arb strategy
short squeeze and significant losses
61
time horizon and turnover of equity market neutral portfolios
short and high turnover
62
Two types of specialist strategies
1) Volatility trading 2) Life insurance trading
63
hedge fund strategy most exposed to momentum
opportunistic strategies
64
correlation between leverage and factor exposure in long/short strategy
negative
65
Hedge fund strategy most subject to crowding out
managed futures because it is more systematically executed than other strategies
66
Risk and volatility of Soft vs. Hard catalyst event driven strategies
Soft is more volatile and more risky
67
Hedged equity vs. convertible arb, which uses more leverage
convertible arb
68
effect of including hedge funds on a portfolio's Sharpe and sortino ratios
improves both
69
Least desirable market regime for opportunistic hedge funds and global macro
mean reversion
70
Which hedge fund strategy is most exposed to concentration risk
Distressed
71
Which hedge fund style is a replacement to fixed income when yield curve is flat or fixed income returns are low
equity market/neutral
72
Which hedge fund strategy is the Sharpe ratio the most appropriate
equity long/short
73
a merger arb manager that is worried about the deal failing would do what
buy a put on the target's stock and a call on the acquirer's stock
74
Which hedge fund strategy is most correlated with the equity markets
Event-driven
75
Which equity hedge fund strategy employs the most bottom-up strategy
Dedicated Short
76
Which equity hedge fund strategy has the highest volatility of returns
dedicated short
77
Equity hedge fund strategy with lowest level of leverage
Dedicated short
78
when is equity market neutral approach least useful
when market trends up
79
Which hedge fund strategy provides the most global diversification
opportunistic
80
Which hedge fund strategy is most tax efficient
distressed
81

CFA Level 2 (11 decks)

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