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CAIA Level I > Part 1, CP 1: WHAT IS AN ALTERNATIVE INVESTMENT? > Flashcards

Part 1, CP 1: WHAT IS AN ALTERNATIVE INVESTMENT? Flashcards

1
Q

Alternative Investments

A

Any Investment That is Not simple a Long Position in traditional Investments

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2
Q

Traditional investments

A

Include public traded equities, fixed-income securities and cash

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3
Q

Investment

A
  • a deferred consumption
  • every outlay of cash made with the prospect of receiving future benefits
  • investment range: planting a tree to buying stocks to acquiring a college education
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4
Q

Institutional quality investment

A

type of investment that investors include in their holdings because they are expected to deliver reasonable returns at an acceptable level of risk

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5
Q

Types of alternative investments

- from an institutional point of view -

A
  1. Real assets, including natural resources, commodities, real estate, infrastructure and intellectual property
  2. Hedge funds, including managed futures
  3. Private equity and private credit
  4. Structured products including credit derivatives

Investments in PE and real assets increased over time, HFs and structured products decreased

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6
Q

Real assets

- in general

A
  • underlaying assets involve direct ownerships of nonfinancial assets rather than ownership through financial assets (such as securities of manufacturing or service enterprises)
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7
Q

Real assets

- natural resources

A

Focus on direct ownership of real assets that have received little or no alteration by humans (such an mineral and energy rights and reserves)

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8
Q

Real assets

- commodities

A
  • Homogeneous goods available in large quantities, such as energy/ agricultural products, metals and building materials
  • involved by future contracts
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9
Q

Alternative Investments

A

Any Investment That is Not simple a Long Position in traditional Investments

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10
Q

Traditional investments

A
  • Include public traded equities, fixed-income securities and cash
  • publicly traded
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11
Q

Investment

A
  • a deferred consumption
  • every outlay of cash made with the prospect of receiving future benefits
  • investment range: planting a tree to buying stocks to acquiring a college education
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12
Q

Institutional quality investment

A

type of investment that investors include in their holdings because they are expected to deliver reasonable returns at an acceptable level of risk

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13
Q

Types of alternative investments

- from an institutional point of view -

A
  1. Real assets, including natural resources, commodities, real estate infrastructure and intellectual property
  2. Hedge funds, including managed futures
  3. Private equity and private credit
  4. Structured products including credit derivatives

Investments in PE and real assets increased over time, HFs and structured products decreased

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14
Q

Real assets

- in general

A
  • underlaying assets involve direct ownerships of nonfinancial assets rather than ownership through financial assets (such as securities of manufacturing or service enterprises)
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15
Q

Real assets

- natural resources

A

Focus on direct ownership of real assets that have received little or no alteration by humans (such an mineral and energy rights and reserves)

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16
Q

Real assets

- commodities

A
  • Homogeneous goods available in large quantities, such as energy/ agricultural products, metals and building materials
  • involved by future contracts.
  • commodity exposures can be obtained through future contracts, ETFs, physical commodities and natural resource companies
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17
Q

Real assets

- operationally focused real assets

A
  • include real estate, land, infrastructure and intellectual property
  • performance is substantially affected by the skill and success of regular and relatively frequent managerial decision-making
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18
Q

real assets

- land

A
  • focuses on land and improvements that are permanently affixed
  • land: comprises a variety of forms, including undeveloped land, timberland, and farmland
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19
Q

real assets

- infrastructure investments

A
  • Claims on the income of toll roads, regulated utilities, ports, airports, and other real assets
  • traditionally held by the public sector
20
Q

real assets

- intellectual property

A
  • intangible

- patents, copyrights, trademarks (music, film etc.)

21
Q

Financial asset

A
  • the opposite to real assets

- a claim on cash flows, such as a share of stock or a bond

22
Q

Hedge fund

A
  • a privately organised investment vehicle
  • less regulated
  • investment opportunities that are substantially distinct from those offered by traditional investment vehicles
23
Q

Private Equity

A
  • includes both, equity and debt positions
  • not public traded
  • debt positions contain much risks from their cash flow uncertainty so that their short term behavior is similar to that of equity positions
24
Q

LBOs

A
  • to purchase a company using a small amount of investor capital and a large amount of borrowed funds in order to take the firm private
25
Q

Mezzanine debt

A
  • derives its name from its position in the capital structure of a firm
  • between the ceiling of senior secured debt an the floor of equity
  • refers to as spectrum of risky claims (i.g. convertible debt, preferred stock)
26
Q

Distressed debt

A
  • debt of companies that have filed or are likely to file for bankruptcy protection
  • fixed income securities
  • future cash flows are highly risky and highly dependent of the financial success of the distressed company
  • PE investments intend to take longer-term ownership positions
27
Q

Structured products

A

-

28
Q

CDO

Collateralized debt obligations

A
  • structured product
29
Q

diversifier

A

an investment with a primary purpose of contributing diversification benefits to its owner

30
Q

absolute return products

A

products with no or little return correlation with traditional assets

31
Q

illiquidity

A
  • investment trades infrequently or with low volume
  • returns are difficult to observe due to lack of trading
  • investors demand a risk premium or a price discount
32
Q

efficiency

A
  • information efficiency
  • the tendency of market prices to reflect all available information
  • high degree of competition, low costs, high speed and well informed investors
33
Q

inefficiency

A

refers to the deviation of actual prices from valuations that would be anticipated in an efficient market

34
Q

non normality

A
  • important characteristic of many alts
  • refers to medium to longterm returns
  • reason: infrequently traded due to their structure
35
Q

moral hazard

A

risk that the behavior of one or more parties will change after entering into a contract

36
Q

five goals of alternative investing

A
  1. Adding value through active management
  2. Achieving absolute and relative returns
  3. Pursue arbitrage and return enhancement
  4. Reduced risk through diversification
  5. Avoiding obsolescence
37
Q

active management

A
  • refers to efforts of buying and selling securities in pursuit of superior combinations of risk and return
38
Q

passive investing

A

tends to focus on buying and hold securities in order to match the risk and return of target (such as a index)

39
Q

benchmark

A

performance standard of a portfolio that reflects the preferences of an investor with regards to risk and return

40
Q

absolut return standard

A
  • returns are to be evaluated relative to zero, a fixed rate or relative to the riskless rater
  • independently of performance in equity markets, debt markets or any other
  • seeks attractive returns, unaffected by market directions
41
Q

relative return standard

A
  • returns are to be evaluated relative to a variable benchmark
  • returns that moves in tandem with a particular market but consistently outperformed that market
42
Q

Pure arbitrage

A
  • attempt to earn risk free profits through the simultaneous purchase and sale of identical positions trading at different prices in different markets
43
Q

arbitrage

A
  • goal to earn superior returns even when risk is not eliminated (long and short positions are not identical, or are not held over the same time period)
  • to contain active risk and to generate relativ returns
44
Q

Four major categories of participants

A
  1. buy side
  2. sell side
  3. outside service provider
  4. regulators
45
Q

buy side

A
  • institutions and entities that buy large quantities of securities for the portfolio they manage
  • contracts with the sell side
  • asset owners and asset managers

CAIA Level I (2 decks)

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