Alternative Investments Flashcards

Question

Describe Managed Futures (CTA) strategies.

Answer 1

Managed Futures (CTA): Typically systematic, trend-following strategies using futures/forwards across asset classes. Often use time-series or cross-sectional momentum signals.

Answer 2

FoF: Invests in multiple underlying hedge funds. Offers diversification, manager selection expertise. Issues: Double layer of fees, potential netting risk. Multi-Strategy: Single fund allocates capital internally across various hedge fund strategies. Advantages: potentially lower fees, easier capital reallocation, centralized risk management. Disadvantages: operational risk concentration

Answer 3

Risk profiles contain equity-oriented risk. Dedicated managers look for possible short selling targets among companies that are overvalued, are experiencing declining revenues and/or earnings, or that have internal management conflicts, weak corporate governance, or even potential accounting frauds

Answer 4

Event-driven HF strategies focus on corporate events such as governance events, mergers and acquisitions, bankruptcy, and other key events for corporations

Answer 5

Relative value strategy, focusing onrelative valuation between two or more securities. Often exposed to credit and liquidity risks because valuation differences seek to benefit are often due to differences in credit quality and/or liquidity across different securities. Classic convertible bond arbitrage strategy to buy undervalued convertible and take short in overvalued underlying

Answer 6

Opportunistic hedge funds that take a top-down approach, focus on a multi-asset opportunity set, and include global macro strategies, global macro managers use both fundamental and technical analysis to value markets as well as discretionary and systematic modes of implementation

Answer 7

FFO - non-cash rent - recurring maintenance type Capex and leasing commissions

Answer 8

Try to buy cheap volatility and sell more expensive netting out time decay, extracting value from active gamma trading adjustments. Equity volatility is 80% negatively correlated with equity returns

Answer 9

Long volatility positioning exhibits positive convexity, which can be useful for hedging terms. Natural convexity of volatility instruments typically means that outsized gains may be earned at times with very little up-front risk.

Answer 10

Can force the market into backwardation

Answer 11

Surrender value offered to individual relatively low Ongoing premium payment low Probability covered individual is likely to die in specified period Key inputs are cash flows (upfront lump-sum payment, ongoing premiums) and time to death

Answer 12

(Return on HFi)t = αi+ βi,1(Factor 1)t + βi,2(Factor 2)t + … + βi,K(Factor K)t+ Dtβi,1(Factor 1)t + Dtβi,2(Factor 2)t + … + Dtβi,K(Factor K)t+ (error)I, Shows incremental exposure during for example a time of crisis

Answer 13

Equity Risk (SP500): Monthly total return on S&P 500 Interest Rate Risk (BOND): Monthly total return on Bloomberg Barclays Corporate AA Intermediate Bond Currency Risk (USD): Monthly return on US Dollar Index Commodity Risk (CMDTY): Monthly total return on Goldman Sachs Commodity Index (GSCI) Credit Risk (CREDIT): Difference between monthly seasoned Baa and Aaa corporate bond yields provided by Moody's Volatility Risk (VIX): First difference of end of month value for VIX

Answer 14

Four-step stepwise regression, where independent variables with high correlation, each omitted independently then the adjusted R^2 is compared

Answer 15

NOI is a measure of an income-producing property's return before financing costs or income taxes. It is calculated as Effective Gross Income - Operating Expenses - Property Maintenance Allowance.

Answer 16

NOI typically rises during the expansion phase due to increasing occupancy rates and the ability of property owners to raise lease rates.

Answer 17

REITs are typically structured as tax-efficient conduits that must distribute most (e.g. 90%-100%) of their taxable income to shareholders to avoid corporate income tax. REOCs are ordinary taxable corporations with more flexibility in reinvesting income.

Answer 18

FFO is Net Income + Depreciation + Amortization - Net Gains from Sale of Real Property. It aims to approximate continuing operating performance.

Answer 19

AFFO adjusts FFO by subtracting non-cash (straight-line) rent and recurring maintenance-type capital expenditures and leasing costs. It is considered a more accurate measure of a REIT's sustainable dividend-paying capacity.

Answer 20

NAVPS is the market value of a REIT's assets minus the market value of its liabilities divided by the number of shares outstanding. For real estate assets it often involves capitalizing the next-12-month cash NOI by an appropriate market cap rate.

Answer 21

Liquidity - REIT shares can be bought and sold easily on major exchanges.

Answer 22

Lack of retained earnings. Because REITs must pay out most of their income as dividends they often need to access capital markets (issue new equity or debt) to fund growth.

Answer 23

Appraisal-based indexes rely on professional estimates of property values which can lag market changes. Transaction-based indexes use actual sale prices often employing statistical techniques like repeat sales or hedonic models to control for property differences.

Answer 24

Appraisal lag is the tendency for appraised values to lag actual market changes. This tends to smooth the index reduce reported volatility and lower its correlation with other asset classes.

Answer 25

Income Approach Cost Approach Sales Comparison Approach.

Answer 26

Property Value = Expected NOI / Capitalization Rate. The Capitalization Rate = Required Rate of Return (r) - Constant Growth Rate (g).

Answer 27

It considers the cost of reproducing or replicating an asset (buying land and constructing a new comparable property) less deductions for depreciation and other factors reducing value.

Answer 28

An investor should not pay more for a property than what similar or comparable properties have recently transacted for after adjusting for differences in features location and market conditions.

Answer 29

Equity Event-Driven Relative Value Opportunistic Specialist and Multi-Manager.

Answer 30

To buy equities expected to rise in value (long positions) and sell short equities expected to fall in value (short positions) aiming to generate alpha primarily through stock selection.

Answer 31

EMN strategies take opposite long and short positions in similar equities to neutralize market risk aiming for a portfolio beta of approximately zero. They often use leverage to achieve meaningful returns from security selection.

Answer 32

They take positions in corporate securities to profit from events like mergers acquisitions bankruptcies restructurings or other corporate actions.

Answer 33

The manager buys the target company's stock and sells short the acquiring company's stock in the offer ratio hoping to earn the spread upon successful deal completion.

Answer 34

Deal risk - the risk that the announced merger or acquisition will fail to close.

Answer 35

They invest in securities of firms that are in or near bankruptcy or under financial stress often trading at a significant discount to their potential workout value.

Answer 36

A partially-in-the-money claim (e.g. a specific class of debt) whose holders are expected to end up owning the equity of the reorganized company after bankruptcy.

Answer 37

To exploit pricing inefficiencies by taking long and short positions across a range of debt securities based on variations in duration credit quality liquidity or optionality.

Answer 38

Buy an undervalued convertible bond and take a delta-neutral short position in the underlying common stock aiming to profit from the convertible's cheap implied volatility or mispricing.

Answer 39

They take a top-down approach focusing on global relationships across various asset classes (equities bonds currencies commodities) often using derivatives to express views on macroeconomic trends and central bank policies.

Answer 40

They typically use systematic trend-following models to trade futures contracts across a wide range of asset classes including commodities currencies equities and fixed income.

Answer 41

They often exhibit low or negative correlation with traditional assets like stocks and bonds and can provide positive skewness especially during periods of market stress.

Answer 42

To profit from changes in or mispricings of the volatility of an underlying asset often using options variance swaps or volatility swaps.

Answer 43

It involves purchasing existing life insurance policies from original policyholders (or via brokers) at a discount to the death benefit and continuing to pay the premiums with the expectation of receiving the full death benefit when the insured passes away.

Answer 44

Fund-of-Funds (FoFs) and Multi-Strategy Funds.

Answer 45

A double layer of fees (fees at the FoF level and at the underlying hedge fund level) and potential netting risk where investors pay incentive fees on winning underlying funds even if the overall FoF performance is flat or negative.

Answer 46

It combines multiple hedge fund strategies managed by different internal teams under a single fund structure allowing for potentially quicker capital reallocation between strategies.

Answer 47

By regressing hedge fund returns against various systematic risk factors (e.g. equity market credit spread currency volatility) to identify the fund's sensitivities (betas) to these factors especially under different market conditions (e.g. normal vs. crisis).

Answer 48

It often decreases total portfolio standard deviation and can improve risk-adjusted returns (e.g. Sharpe ratio Sortino ratio) due to diversification benefits.

Alternative Investments Flashcards

(72 cards)