CHAPTER 13: Alternative Managed Products Flashcards
Principal-Protected Notes (PPN)
Is a debt instrument.
Maturity date upon which the issuer agrees to pay the investors the principal.
Provide interest payments at maturity or as regular payments.
Who issues PPN’s usually?
Issued by chartered banks, but not covered by CDIC
Costs to PPN’s (disadvantages)
commissions, management fees, early-redemption fees (usually runs from 2-5years), structuring costs and guarantee fees (this is their major disadvantage to investors)
PPN’s advantages
- investors get access to markets they ordinarily do not enter
- PPN’s can return a higher yield than other investments
- are risk-free for the principal
PPN’s underlying assets
Common Stocks Mutual Funds Stock Indexes Commodities Hedge Funds
PPN’s Risks
liquidity
performance
credit
currency
4 Things to consider before investing in PPN’s
1) Creditworthiness of the issuer
2) understand the calculation method used to arrive at the final variable return
3) risk factors behind the underlying asset
4) protection of the principal should be worth paying for
Hedge Funds
Lightly regulated pools of capital run with greater flexibility in using investment strategies not available to managers of regular mutual funds.
Who does hedge funds target
High-net-worth and institutional investors
What do they issue to inform potential clients about the fund?
They offer memorandums stating the objectives, risks, terms of investment involved with the private placement.
What is a private placement?
sale of securities directly to institutional buyers.
ex. of institutional buyers Banks Pension Funds Insurance companies Mutual fund companies
3 Hedge Fund Strategies
1) Relative Value
Exploiting inefficiencies or differences in related investment pricing
2) Event-driven
seek profits in mergers, acquisitions, stock splits, stock buybacks
3) Directional
anticipated movements in market prices
3 differences to mutual funds and hedge funds
Hedge funds
- can use derivatives in any way
- may have liquidity restrictions
- Sold by offering memorandums to sophisticated investors
Mutual Funds
- Usually liquid
- Use derivatives in a limited way
- Sold by prospectus to general public
Hedge fund risks
- Light regulatory oversigh
- Market risk
- Liquidity constraints
- Investment strategy risk
Commodity pools
are Managed futures funds, structured and sold as mutual funds.
- trade derivative products, commodities, financial assets, and currencies
- use leveraging and short-selling
- additional licensing requirements to sell them
- Fees can be from 15%-20%
3 Commodity Pools Advantages
1) absolute returns
2) diversification
3) potential to attract top management talent
4 Commodity Pool Risks
1) currency
2) leverage
3) trading
4) liquidity
Commodity Pool Fees
Performance fees
15%- 20%
Management fees
about 2% of customer assets
What to consider before investing in Commodity Pools
Trading history that covers an entire business cycle
Closed-end Funds
Managed pool of securities traded on a stock exchange.
- invest in most of the same types of assets as mutual funds, such as stocks and bonds
- fixed number of shares
Where are closed-end funds traded?
Secondary market
Traded at a discount or premium
2 Other names for Closed-end funds
Closed-end discretionary fund
Interval funds
2 Advantages to closed-end funds
boost returns by using
1) short-selling
2) leveraging
4 Closed-end fund Risks
1) trading
2) liquidity
3) leverage
4) unpredictable cash flow
