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Alternative Investments > Study Session 13 - Alternative Investments Portfolio Mgmt > Flashcards

Study Session 13 - Alternative Investments Portfolio Mgmt Flashcards

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1
Q

Common Features of Alt Investments

A

illiquid (associated with a return premium as compensation)
diversifying potential relative to a portfolio of stocks/bonds
high due diligence costs
performance appraisal is difficult

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2
Q

How to select an active manager for AI?

A

1) Assess market opportunity offered
2) Assess the investment process
3) Assess the organization
4) Assess the people
5) Assess the terms and structure of the investment
6) Assess the service providers
7) Review Document
8) Write-up

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3
Q

Issues for Private Wealth clients

A

1) taxes
2) suitability
3) communication
4) decision risk
5) concentrated positions

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4
Q

What are examples of indirect real estate investments?

A

REITS, CREFs, SMAs, infrastructure funds, and companies that develop and manage real estate

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5
Q

What are REITS?

A

Real estate investment trusts which are publicly traded equity shares in a portfolio of real estate;

Liquid
permits smaller investors RE exposure

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6
Q

What are CREFs?

A

commingled real estate funds which are pooled investments in real estate that are professionally managed and privately held – more flexible than REITs
They can be open-end or or closed-end
Restricted to wealthy investors and institutions
Access to RE experts
Usually leveraged and have higher return objectives

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7
Q

Advantages of real estate investment?

A 
low correlation with stocks and bonds
low volatility of return
often inflation hedge
tax advantages
potential to leverage return
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8
Q

Disadvantages of real estate investment?

A 
high information and transaction costs
political risk related to taxes
high operating exp
high commissions
special geographical risks 
inability to subdivide direct investments
large idiosyncratic risk component
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9
Q

Private equity: 2 subcategories

A

1) Venture Capital

2) Buyout funds

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10
Q

What are Traditional Alternative Investments?

A

primarily provide exposure to risk factors not easily accessible by stock/bond:

1) real estate
2) (long-only) commodities

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11
Q

What are Modern Alternative Investments?

A

provide exposure to specialized investment strategies run by outside manager (added value heavily depended on skills of manager):

1) HFs
2) managed futures

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12
Q

What are Alternative Investments that combine the feature of modern and traditional?

A

1) Private Equity funds

2) distressed securities

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13
Q

What is decision risk?

A

risk of changing strategies at the point of max loss

risk is increased by strategies that by nature have 1) frequent small positive returns but likely to have large losses
2) frequent big swings in returns

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14
Q

Size of real estate market?

A

1/3 to 1/2 of world’s wealth

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15
Q

What is the benchmark for direct real estate investment?

A

NCREIF Property index

value weighted, quarterly benchmark - sample of commercial pptys
property appraisal based
not investable index

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16
Q

What is the problem with NCREIF Index?

A

due to infrequency of appraisals, values exhibit remarkable inertia - index tends to underestimate volatility of underlying values and SMOOTHing bias

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17
Q

What is NAREIT?

A

principal benchmark for REITs

real-time, monthly computed, market-cap weighted index of all REITS traded on exchange

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18
Q

How do you unsmooth NCREIF?

A

By using transaction based data

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19
Q

Which real estate benchmark is leveraged?

A

NCREIF represents nonleveraged investment only

REITS are often has >50% in debt so levered exposure to real estate, thus higher standard deviation

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20
Q

What is the performance of real estate investments?

A

REITs have high return= 12.71% and high s=12.74%

Appraisal-based RE have low return=6.14% and low s=3.37%
if smoothed, s doubles

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21
Q

What is a “hedged” REIT return series?

A

remove overall equity market return part

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22
Q

What is RE role in portfolio?

A

Asset allocation increasing

Diversifier in portfolio, diversification within RE itself, and investment globally

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23
Q

What are two segments of buyout funds?

A

Middle-market and mega-cap

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24
Q

Middle-market buyout funds

A

funds concentrated on spin-offs from large parents

- can’t efficiently get capital

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25
Mega-cap buyout funds
funds concentrated on taking publicly traded firms private
26
How do buyout funds add value?
1) restructure company's ops/mgmt 2) buying companies for less than intrinsic value 3) creating value by leverage/restructure existing debt
27
What are exit strategies for buyout funds?
1) selling companies thru private placements 2) IPOs 3) div recapitalizations
28
Dividend Recapitalizations
Under direction of buyout fund, company issues large debt and pays large special dividend to buyout fund and other equity investors - changes company's leverage but not owners (still retains control)
29
Commodity Investment Properties
direct or indirect investments liquid low correlation with stocks/bonds and business-cycle sensitivity positive correlation w/ inflation
30
Hedge funds classifications
``` equity market neutral convertible/FI/merger arbitrage distressed securities hedged equity global macro emerging markets FOFs ```
31
Managed Futures holdings
trade only derivatives markets (vs. HFs trades spot/futures) - more macro view
32
Managed Futures accounts
private commodity pools CTA managed accts publicly traded commodity futures funds - available to small investors
33
Managed Futures trading strategies
Systematic Trading strats -- follows rules includes Trend-following and Contrarian strats Discretionary Trading strats -- depend on mgmt judgement may invest in all financial markets, current mkt only or mix of derivatives and underlying commodities
34
How does managed futures' std deviation compare to stock and bonds?
generally between stock and bonds correlation to equities is low and often negative correlation to bonds is higher but below 0.50
35
What is the risk/return of buyout funds?
less risk then VC funds - good diversification
36
What is risk/return of Infrastructure funds?
low risk/return - good diversification
37
What is risk/return of distressed securities?
depends on skill-based strategies - can earn higher returns due to legal complications and due to others not being able to invest in them relatively high avg return but large negative skew - can't compare and Sharpe ratios are misleading
38
What is distressed securities?
may be part of he
39
Issuers of Venture Capital
companies seeking capital
40
Formative-stage companies
new or young firms
41
Expansion-stage companies
need funds to expand revenues or prep for IPO
42
Investors/Suppliers of VC investing
venture capitalists - speclists Corporate venturing - large firms that invest in VC oppty angel investors - expert individuals who are first to invest (non-founders or relatives)
43
Stages of private companies
Early stage - seed money Start-up funds - begin product development/marketing First-stage funding - begins manufacturing/sales Expansion stage - young companies with established products looking to grow or launch IPO Second-stage financing -- supports add'l major expansion of production/sales Third-stage financing - "" Mezzanine/Bridge Financing -- prep for IPO (may be include debt and equity capital) EXIT stage - IPO, merger or acquisition (may be VC fund specializing in such activity)
44
VC vs Buyout funds
``` Buyout funds have... higher leverage earlier and steadier cash flows less error in return measurement (since mostly cash) less frequent losses less upside potential ```
45
Direct VC investment in Convertible Preferred Stock
pref shareholders must be paid a specified amount ahead of common shareholders typically - investors in later rounds of financing receive pref stock with claim that is senior that previously issued pref stock seniority is included to entice subsequent investors
46
Typical structure of private equity fund
``` limited partnerships (sponsor = general partner) LLCs (sponsor = managing director) ```
47
Private equity strategy issues
1) low liquidity 2) diversification through a of positions 3) diversification strategy 4) plans for meeting capital calls - investor needs to be be prepared to meet the commited funds calls
48
Indirect vs. Direct commodity investment
direct - more exposure but has carrying costs, increase # of investable indices so makes it avail to smaller investors indirect - more convenient but may be very little exposure especially if company is hedging risk itself
49
What are components of the return in commodity futures?
total return = spot return +collateral return + roll return
50
What is collateral return?
periodic risk-free return
51
Roll Yield/return
change of futures contract price for the time period minus change in spot price of the commodity for the period
52
Bacwardation
downward-sloping term structure of futures prices (price gets lower into the future) positive roll return = future price increases to converge with spot price
53
Contango
upward-sloping term structure of futures prices negative roll return
54
Why is commodity a good unexpected inflation hedge?
storability and demand relative to economic activity
55
5 segments to HF strategies
1) RV 2) event-driven 3) hedged equity 4) global asset allocators 5) shorting
56
High Water Marks
avoid incentive fee double-dipping
57
Lock-up Period
limit withdrawals by requiring minimum investment period and pre-set exit windows
58
HF performance conventions
Funds do better when... have longer lock-up periods then short youger funds vs. older smaller funds vs. bigger
59
Downside Deviation
measures dispersion of returns below specified threshold return - usually either zero or risk-free rate of return if threshold = recent avg return then downside deviation is called semivariance purpose is to focus only on negative returns and not on high positive returns (i.e. so it doesn't look like they are more risky for having large high returns and a few avg positive ones)
60
Sharpe Ratio formula
(return - risk free rate)/ std
61
Sharpe Ratio limitations
``` time dependency assumes normality assumes liquidity assumes uncorrelated returns stand-alone measure ```
62
Managed futures benefits
significant diversification potential (impoved Sharpe ratios) positive correlation to equities/bonds in up markets negative correlations during falling markets private funds add value vs. publicly traded funds do poorly
63
CTA correlations
risk - CTAS often show negative correlations w/ equities and correlations between CTAs range from 1 to modestly positive
64
whats a good indicator of future risk-adjusted performance of CTAs?
beta -- relates performance of individual CTA to fund of CTAS
65
Major types of Distressed Securities investing
1) long-only value investing 2) distressed debt arb 3) private equity
66
"fallen angel"
issue of debt fallen from investment grade to below-investment grade
67
High-yielding investing
buying publicly traded, below-investment grade debt
68
Orphan equities investing
buying firm equity of companies emerging from reorg
69
Distressed debt arb
buying firm's distressed debt while shorting company's equity
70
How is private equity "active" approach?
investor buys positions in distressed company and gets some measure of control
71
Vulture Funds
specialize in buying undervalued distressed securities
72
Distressed securities investing concerns
Event Risk Market Liquidity risk Market risk J-factor risk
73
Type of commodities not good to hedge against unexpected inflation
nonstorable commodities (i.e. agricultural like corn, livestock, etc.) - negatively affected by unexpected increases to inflation

Alternative Investments (2 decks)

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