TOPIC 10 : Alternative investments (+ traditional) Flashcards
(16 cards)
What are the main issues with Alternative Investments (Hedge Funds, PE, VC)?
Illiquidity, Valuation issues, Limited transparency, High agency costs
Why are REITs more liquid than direct real estate or private equity?
REITs are closed-ended funds that trade on exchanges, offering daily liquidity and price visibility.
What sectors do REITs typically invest in?
Office, Industrial, Retail, Healthcare, Residential, Timberland, Lodging, Specialty, Infrastructure, Data centres
Why do hedge funds employ strategies like long and short positions?
To generate abnormal returns regardless of market direction.
What is an “Event Driven” hedge fund strategy?
Takes positions based on corporate transactions, distressed companies, or special situations.
What is a “Macro” hedge fund strategy?
Profits from movements in economic variables across currencies, stocks, bonds, and commodities.
What is “Relative Valuation” (or convergence)?
Profits from pricing inefficiencies between related instruments.
Why is survivorship bias a key data issue for hedge fund return estimates?
Funds that perform poorly drop out of databases, upward biasing average returns.
Why do private equity and venture capital fund structures typically have 10-year horizons?
To allow portfolio companies to grow and execute their strategies before exiting.
What are the main strategies within private equity?
Venture Capital (high-risk, high-reward), Distressed (catalytic, buying at discount), Leveraged Buyouts (LBO), Angel, Seed, Late-stage, Mezzanine financing
Why are alternative assets desirable in portfolios?
To improve risk-adjusted return through diversification (low correlations).
Why do alternative fund structures typically attract institutional over retail investors?
Higher minimum investment, illiquidity, complexity, and less oversight — not suitable for small investors.
Why do incentives (like 20% carry or 2% management fee) create agency issues in hedge funds and private equity?
Manager’s incentives may not align with investor’s goals — fund may take excess risk to boost profits.
Why are commodities classified differently from traditional assets (like stocks)?
They don’t produce cashflows, Values driven by supply and demand or storage conditions.
How are commodity prices typically determined under the “Theory of Storage”?
Futures price = Spot price (1 + risk-free rate) + Storage - Convenience Yield
What are the main commodity instruments for investing?
Spot transactions, Forward and futures, Commodity-linked notes, Producer stocks
