CH 9 - Analyzing Non-Conventional Asset Classes and Their Structures Flashcards
Three main reasons why an investor would include alternative investments
- To incrementally increase returns more than incrementally increasing risk.
- To incrementally decrease risk more than incrementally decreasing returns.
- To increase the portfolio’s absolute return nature, making it more resistant to capital erosion in market downturns.
3 Types of Hedge Fund Risks
- First order
- Second Order
- Operational
First-order risk
Refers to the exposure to changes in the general direction of equity, fixed income, currency, and commodity markets
Second-order risks
- liquidity
- leverage
- deal break
- default
- Counterparty
- Trading
- Concentration
- Pricing model
- Trading model risks
Operational risk
relates to the hedge fund as a business entity
Reasons it is hard to evaluate Real Estate
- Uniqueness
- Interrelationships
- Immobility
- Illiquidity
- Market inefficiencies
4 types of Private equity investments
Leveraged buyout
Mezzanine Capital (high yield debt)
Venture Capital
Infrastructure
The market for hedge funds can be split into two segments:
- Funds targeted toward high-net-worth and institutional investors.
- Funds and other hedge fund-related products targeted toward broader individual investors
Four steps for hedge fund inclusion in a portfolio
- Assess the investor’s suitability in terms of risk/return
- assess percentage of the total portfolio
- Select specific hedge funds
- Monitor performance
Example of Relative value equity strategy and exposure to equity market
Equity market-neutral
low market exposure
Example of Event-driven equity strategy and exposure to equity market
Merger arbitrage.
medium market exposure
Example of Directional equity strategy and exposure to equity market
Long/short equity, global macro, emerging markets
High Market Exposure
Hedge Fund: eight key areas of due diligence
- Fund track record
- Risk characteristic
- Hedge fund managers
- Hedge fund features
- Return statistics
- Tax treatment
- Currency risk
- Operational risk
An investor can trade commodities via futures and futures options through one of two means
- Standard managed futures account
2. Commodity trading account
What is a managed futures account?
Account is managed on a discretionary basis by someone licensed in one or more Canadian provincial securities regulators as a commodity trading manager (CTM)
What is a commodity trading account?
permits individual investors to trade and manage their commodity futures portfolio themselves
Commodity-related ETFs are categorized into the following major types:
- Index ETFs
- Commodity ETFs
- Leveraged ETFs
2 types of commodity ETF’s
- Physical ownership
2. Synthetic Replication
Three operational variables that determine a
firm’s profitability.
- The quantity of commodity produced.
- The cost of production.
- The selling price of the commodity.
What is a pure play?
A commodity-producing company’s operation whose revenues are 100% dependent on the production of the raw commodity itself
types of real estate syndications
- Land banking
- Brownfield development
- Redevelopment projects
- The purchase of mature properties
- The purchase of distressed properties or mortgages in default
- Mortgage syndications
- A mortgage fund on a specific project
- Blind pools
What is Land banking?
involves the purchase of a tract of raw land outside of an urban area with the expectation that the urban area will expand because of economic growth in the region
What is a brownfield development?
The redevelopment of an abandoned or underused commercial or industrial property,
What is a Redevelopment project?
involves purchasing income-producing properties with the longer-term objective of redeveloping the properties and increasing the income they generate.
