Module 76.1: Alternative Investment Structures Flashcards
(20 cards)
What are alternative investments?
Investments not classified as traditional (long-only cash, publicly traded stocks, bonds). Examples include hedge funds, private equity, real estate. Often actively managed and may include illiquid securities.
List three broad categories of alternative investments.
Private capital, real assets, hedge funds.
What are the features of alternative investments compared to traditional investments?
More specialized knowledge needed, lower correlation with traditional investments, less liquidity, longer time horizons, larger investment commitments.
What is Private Equity?
Investment in equity of non-publicly traded companies, or publicly traded companies intended to be taken private. Often in mature or decline stages of their life cycle. Leveraged buyouts (LBOs) are a common type.
What is Venture Capital?
Investment in young, unproven companies in their start-up or early stages.
What is Private Debt?
Loans directly to companies, venture debt (loans to early-stage firms), or distressed debt (loans to struggling or bankrupt firms).
Give examples of Real Assets
Real estate, infrastructure, natural resources (commodities, farmland, timberland), digital assets.
What are Hedge Funds?
Investment companies typically open only to qualified investors. May use leverage, hold long and short positions, use derivatives, and invest in illiquid assets. Strategies vary widely.
Describe Fund Investing.
Investing in a pool of assets managed by a fund manager. Investors don’t control asset selection or management. Manager receives management and incentive fees.
Describe Co-Investing.
Investing in a pool of funds and directly alongside the fund manager in some assets. Reduces fees and provides learning opportunities.
Describe Direct Investing.
Investor purchases assets directly without a fund manager. Offers more control but requires more expertise and may have less diversification.
What is a Limited Partnership (in the context of alternative investments)?
Fund structure where the General Partner (GP) manages investments, and Limited Partners (LPs) are investors with limited liability and say in management.
What is a Management Fee?
Fee paid to the fund manager, regardless of investment performance. Typically 1-2% of assets under management (AUM) for hedge funds, or committed capital for private equity.
What is a Performance Fee (Incentive Fee)?
A portion of profits earned on fund investments, often paid only after a hurdle rate is met.
Explain Hard vs. Soft Hurdle Rates.
Hard Hurdle Rate: Performance fees are only paid on gains above the hurdle rate. Soft Hurdle Rate: Performance fees are paid on the entire return, even if it just meets the hurdle rate.
What is a Catch-Up Clause?
Allows the GP to receive a higher percentage of early gains until they reach a certain level of compensation, after which gains are split according to a different ratio.
What is a High-Water Mark?
Performance fees are only paid on gains that exceed the highest previous net-of-fees value. Prevents double-charging on the same gains.
Explain Deal-by-Deal (American) vs. Whole-of-Fund (European) Waterfalls.
Deal-by-Deal: Profits distributed as each investment is sold, favouring the GP.
Whole-of-Fund: LPs receive all distributions until their initial investment plus hurdle rate is returned, favouring the LPs.
What is a Clawback Provision?
Allows LPs to recover performance fees if gains on which fees were paid are subsequently reversed.
