Intro to Alts Flashcards
(60 cards)
1
Q
Real assets
A
- Investments that directly control non-financial assets
- Represent actual rights to consumption.
- Includes intangible assets such as copyrights, patents, royalties, and trademarks.
2
Q
Venture capital
A
- Equity used to finance startup companies
- Typically includes small companies with unproven operating history.
3
Q
Growth equity
A
- Capital used as the company looks to expand, consider an exit/IPO.
- Typically lower risk compared to venture capital, but the company’s growth plans must still be met to achieve profitability.
4
Q
Leveraged buyouts (LBOs) / Take privates
A
- Taking a public company private through purchasing the outstanding shares.
- Typically involves a small amount of equity and a larger amount of debt financing. The firm assets are used as collateral for the debt.
- Aim is to increase the target firm’s operating efficiency, utilize tax advantages from debt financing, enhance profitability, and profit from taking the company public again.
5
Q
Management Buy-Ins
(a form of LBOs)
A
A new management team from outside the company takes over
6
Q
Management Buyouts
(a form of LBOs)
A
The existing management team remains in place and takes the company private.
7
Q
Direct lending
A
- Loans made to borrowers outside the banking system (originated by PE, PC and HFs instead)
- Loans are typically issued at par with coupons being the main source of return.
8
Q
Distressed debt
A
- The purchase of debt issued by companies that are likely to or have already filed for bankruptcy protection.
- Distressed debt investments behave like equity due to large cash flow uncertainty and dependence on the issuer’s long-term financial success.
- Investors generally convert their position to equity in order to profit from the firm’s emergence from bankruptcy.
9
Q
Structured products
A
- Segment the cash flows of traditional investments / link the product’s returns to one or more market values in order to achieve certain risk, return, tax, or other objectives (e.g. CDOs, CLOs)
10
Q
Non-financial assets
A
An asset that derives its value from its physical traits.
11
Q
Financial assets
A
A liquid asset that gets its value from a contractual right or ownership claim (e.g. stock, bonds, cash)
12
Q
Lumpy Assets
A
- Assets that are difficult to liquidate/redeem in parts
13
Q
Typical causes of non-normal distribution of strategy returns
A
- Trading structure / illiquidity
- Securities structure that have non-liner relationship with underlying asset / leverage
14
Q
Four types of risk/return methods in Alts
A
- Return computation methods (e.g. IRR)
- Statistical methods (e.g. downside risk measured for skewed distributions)
- Valuation methods
- Portfolio management methods (
15
Q
A moral hazard
A
Risk that the actions of one or more parties will change after the transaction is completed (e.g. GPs whose compensation structure leads to them taking on excessive risk)
15
Q
Incomplete markets
A
Markets where limited investment opportunities fail to satisfy the exact investment options that participants seek
16
Q
Pure arbitrage
A
Combines long and short positions in identical but differently priced securities to earn a risk-free return
17
Q
Arbitrage
A
Attempt to earn absolute returns (long and short positions may not always be identical or held for the same time horizon)
18
Q
Buy-side market participants
A
Asset managers that focus on acquiring appropriate securities for their investment portfolios (e.g. plan sponsors, FOs, foundations, endowments etc.)
19
Q
Plan Sponsors
A
An organization that funds a health care or retirement plan for qualified members (e.g. corporation, govt. entity, non-profit organisation)
20
Q
Foundation
A
- A not-for-profit fund established for charitable purposes to support specific types of activities.
- Objective is to fund its charitable activities on a continuing basis without decreasing the real (i.e., inflation-adjusted) value of the portfolio assets.
21
Q
Endowment
A
- A not-for-profit fund that is dedicated to providing financial support in perpetuity for a specific purpose and must maintain its principal on an inflation-adjusted basis.
22
Q
Mutual funds and ‘40 Act funds
A
Mutual funds that comply with the U.S. Investment Company Act of 1940 (i.e., the ‘40 Act).
23
Q
Master limited partnerships (MLPs)
A
This structure is essentially the same as a private limited partnership but offers the advantage of being publicly traded, resulting in a substantial liquidity advantage
24
Sell-side market participants
Refers to those that act as agents for their investors when they trade securities (e.g. dealer banks, retail brokers etc)
25
Large dealer banks (e.g. GS, Barclays etc)
- In the primary market, large dealer banks serve as intermediaries between issuers and investors, act as underwriters, and provide liquidity.
- In the secondary market, they trade with each other, trade with broker-dealers, and serve to intermediate and facilitate trades.
- Engage in proprietary trading (i.e., trade for their own account, known as the house account), off-balance sheet financing, and OTC derivatives trading.
- Offer account management services to buy-side institutions and may serve as prime brokers
26
Prime brokers
- Executes trades on behalf of an alternative investment manager, lends securities to sell short, provides research data, account statements and provides financing for leverage
27
Depositories and custodians
- Companies that hold client assets and provide information services, trade clearance, and trade settlement for investment securities.
- The Depository Trust Company (DTC) is the primary global central securities depository.
28
Universal banking
Institutions that allow both commercial banking and investment banking
29
A limited liability company (LLC)
- a legal entity that offers its members a similar level of protection to that offered by a corporation, with two unique differences:
1) protection is not absolute, as certain events like fraud may expose investors to greater losses than just their investment
2) distributions do not have to be pro rata and can be made irrespective of actual ownership percentages.
30
A master trust
A legal structure used to invest the assets of onshore and offshore investors of differing tax jurisdictions
31
Feeder funds
The legal structure that provides access to the master trust, with each fund designed to accommodate the tax profile of its respective investors
32
Four documents are standard to the limited partnership structure
- PPM (investment opportunity)
- Partnership Agreement / LPA (LP and GP relationship)
- Subscription Agreement
- Management Company Operating Agreement (LLC (PE firm) and GP (manager) relationship)
33
Adverse selection
Decisions made by one party (GP or LP) cause less desirable parties to be drawn to the transaction
34
Holdup problems
- When an LP and GP fail to cooperate out of fear that doing so may provide a bargaining advantage to the other party, thereby reducing each party's own potential profits.
35
Limited liability
Limits losses of noncontrolling (passive) owners to a fixed amount (e.g. investors in listed companies, LLC structures, LPs, SPVs/SPEs
36
Limited Partnership Agreement
- Details LP and GP relationship. Contains investor protection + economic clauses
- LP Advisory Committee (LPAC) - monitors GP activity. Decisions struck by simple (50%) and qualified (75%) majorities.
37
Open-ended fund
Can continuously take subs/reds over its life
38
Closed-ended fund
raises fixed amount of capital
(they may also issue new units/shares if they want to raise more capital. Investors typically buy and sell existing shares in the fund to each other as opposed to purchasing new units).
39
Hurt Money
GP personal investment / skin in the game
40
Perverse incentives
- Excessive risk-taking when the hurdle is set too high
- Taking performance fees after very short time periods.
41
Clawback
Returning performance fees to LPs following subsequent poor performance
42
Key person provision
LPs suspend contributions / terminate fund if key manager leaves
43
Termination clauses (between LP and GP)
- For-cause removal ('bad leaver' clause) - simple majority (50%)
- Without-cause ('good leaver' clause) - qualified majority (75%)
44
Primary / Secondary / Third / Fourth (private) markets
Primary: IPOs / new issues
Secondary: Stock exchanges
Third: Regional/OTC markets where you can trade stocks listed on the secondary market (e.g. NASDAQ Intermarket)
Fourth: Alternative trading systems, ECN
45
Short selling gain/loss calculation
Total gain/loss =
(Capital gain on trade + Rebate) - (Dividends paid to lender + Commission)
Rebate = Collateral Posted * rebate %
46
short squeeze
a rush to cover short positions in a heavily shorted security, causing a spike in the share price
47
'bought in'
A short position is 'bought in' when the stock lender recalls their stock from the borrower (HF)
48
Special stock
A stock that is heavily borrowed and shorted. May have a negative rebate (stock fees > interest on collateral)
49
Interval funds
A semi-liquid vehicle, where the manager provides liquidity by periodically repurchasing shares from investors
50
'promote' fees
Performance fee charged on co-invest deals (ie share on profits)
50
Bridging
GP makes an investment in the main fund and at the same time agrees to sell the investment to co-investors at a later date (as an exit strategy)
50
Lock-step provision
a term in a co-invest deal where the terms of the GP-LP relationship are the same as those in the main fund.
51
Interim IRR vs Since-Inception IRR
Interim IRR: Conducted midway through an investment's life. Uses appraisal value as proxy for final cash flow
Since-inception (normal) IRR: Time interval starts as initial cash flow
52
Main causes of J-curve effect with PE funds
- Accounting conservatism
- Fees and expenses charged immediately
53
Forward Contract
Agreement to transact in the future at a price agreed today.
- Zero value at initiation
- Returns based on principal value (notional)
54
Auto (serial) correlation and Durbin-Watson statistic
Autocorrelation: relationship between current data and previous data (to provide an insight of future possible returns)
DW stat: used to test for autocorrelation (between 0-4)
>3: negative autocorrelation
2: no evidence of autocorrelation
<1: positive autocorrelation
55
Homoskedasticity
where the variance is constant across different periods
56
Mesokurtosis
Kurtosis = 3 (normal distribution)
57
Carry Trade
Long high-yielding assets, short low-yielding assets
