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Flashcards in S13 Deck (40):
1

common characteristics of alternative investments

low liquidity

diversification

due dilligence costs

difficult performance evaluation

2

investment manager review steps

assess the market opportunity (ineffciencies exploited)
assess the investment process
assess the organization
assess the people
assess the terms and structure of the investment
assess the service providers
review documents
write up

3

issues of alternative investments to be considered while checking suitability

taxes
suitability
communucation
decision risk
cncentrated positions

4

buyout funds add value thru

restructuring
buying cheap companies
adding leverage or restructuring existing debt

5

real estate - investment and features

residences, commercial real estate, land /
large idiosyncratic risk, good diversification

6

private equity - investment and features

preferred shares, venture capital, buyout funds
/
startup and middle market private companies have more risk and lower return than investments in established companies via buyout funds

7

buyout funds - investment and features

well established private firms or corporate spinoffs
/
less risk than venture, good diversificaiton

8

infrastructure funds - investment and features

public infrastructure
/
low risk, low return, good diversification

9

commodities - investment and features

agricultural products, metals, oil
/
low correlation with stocks bonds, positive correleation with inflation

10

managed futures - investment and features

trade mainly on derivatives market, private commodity pools, publicly traded commodity futures funds
//
risk is between that of equityues and bonds, negative and low correlation with equities and low to moderate correlation with bonds

11

disressed securities - investment and features

may be part of hedge fund class or private equity class, investments can be equity and debt
/
depends on skills based strategies, can earn higher returns due to legal complications and the fact that some investors cannot invest in them

12

benchmark for direct real estate invesmtnets

NCREIF - published quarterly

13

benchmark for indirect real estate investments

NAREIT - is live from all reits traded on NYSE/AMEX

14

issues in benchmark selection for hedge funds

relevance of past data
popularity bias
survivorship bias
stale price bias
backfill or inclusion bias

15

best benefit from real estate

risk diversifier

16

best benefit from private equity

return enhancement

17

best benefit from commodities

diversification

18

advantages of real estate investing

many expenses are tax deductible
ability to use more leverage
direct control of the properites
ability to diversify geographically
lower volatility of returns vs equities

19

disadvantages of real estate

lack of divizibility
high information costs
high commissions
high operating and mainenance costs
special geographical risks (neighbourhood deterioration)
political risks (changing tax code)

20

private equity stages

- early stage - seed money - begin prototype work
- start up - funds - beginning product development and marketing / AND / first stage funding to begin manufacturing and sales
- expansion stage - expansion of production and sales

21

buyout funds (vs venture funds) are

higher level of leverage
earlier and steadier CF
less error in measurement of returns
less frequent losses
less upside potential

22

3 components of total return of commodity futures

TOTAL return = SPOT return + COLLATERAL return + ROLL Return

23

roll return =

= change in futures price - spot return
(note collateral return is omitted)

24

inflation hedge feature of commodity futures is driven by

storability
demand relative to economic activity

25

downside deviation =

SqRoot
(Sum
(min
(return - threshold, 0)^2)) /
(n-1))

26

concerns of distressed securities investing

event risk
market liquidity risk
market risk
J factor

27

direct real estate investing vs indirect - adv/dadv

Disadvantages: Direct has higher information costs, higher commissions and higher political risk.
Advantage: Allows more leverage.

28

SWAP rate =

(forward1/(1+r1)^1 + (forward2/(1+r2)^2 + ...
--------------------------------------------------------
1/(1+r1)^1 + 1/(1+r2)^2 + ....

29

when futures storage cost is given in $ in calculation of futures price do not forget to

determine FV of monthly costs using interest rate

30

when analyzing risk ratios do not forget to consider

normal distribution ?
length of the period?
stale price bias?

31

systematic trading strategies

rule based and frequently trend following

32

fallen angels

fixed income securities downgraded from their initial investment grade

33

kurtosis and skewness needed to limit the downside risk ?

low kurtosis and positive skewness

34

hedge fund consistency and cyclicality better measured by

rolling returns (not sharpe or sortino)

35

cash and carry arbitrage

long commodity + short forward

36

if you buy and then lease physical = you earn/lose

earn LEASE rate but spend RFR

37

if you hold a physical = you earn/lose

earn CONVENIENCE,
spend STORAGE,
spend RFR
(miss LEASE)

38

strip hedge is

buying separate futures for each of recurring need in commodity

problem: the longer termed futures costly due to wider spread

39

stack hedge is

hedging all future needs in commodity by buying just nearest futures

good: higher liquidity/lower costs

40

cash and carry table :

summing up separatelly all T0 cash flows, and T1 cash flows and then using LN(CFt1/CFt0) to determine the rate