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Alternative Investments

Terms in this set (76)

Sortino Ratio
(Portfolio Return - Target Return) / Target Semideviation
2 Main Types of Fees in Alternative Investment Management
management fee, performance fee (incentive fee)
Management Fee (Definition)
a fee based on the amount of assets under management
Performance (Incentive) Fee
a fee based on the profit of fund, sometimes using a hurdle rate, for which the fee is only collected when the fund reaches some minimum return objective
High Water Mark Fee Provision
the high water mark signifies the highest return a fund has achieved, and can be used to protect investors from being charged a double performance fee when the fund reaches a high water mark, dips, and then rises again
Greenfield Development
type of infrastructure project that refers to a new construction project
Brownfield Development
type of infrastructure project that refers to building on an existing piece of infrastructure
Master Limited Partnership (MLP)
a publicly traded investment in infrastructure that trades on exchanges, which allows infrastructure investment to be more liquid (investors become LPs, with the GP still handling actual decisions)
2 and 20
common fee structure for hedge funds which involves a 2% management fee and a 20% incentive fee
1 and 10
less common fee structure for hedge funds which involves a 1% management fee and a 10% incentive fee (more common for fund of hedge funds than individual funds)
4 Main Types of Hedge Funds
event driven, relative value, macro, equity hedge
4 Types of Event-Driven Hedge Fund Strategies
merger arbitrage, distressed/restructuring, activist, special situations
Merger Arbitrage Strategy
event driven strategy which focuses on the buying and selling of securities specifically at the point when a company has decided to or made an announcement of a merger by taking advantage of the spread between the deal price (too high) and the true value by shorting the acquirer and buying the target
Distressed/Restructuring Strategy
event driven strategy which focuses on buying stock in companies who may go bankrupt, with the hope that they instead restructure and the stock price grows
Activist Strategy
event driven strategy which attempts to purchase enough of a stake in companies to gain control or relative power with the goal being to ultimately pull strings in terms of leadership and policy
Special Situations Strategy
event driven strategy which focuses on profiting from any major event besides a merger or bankruptcy
5 Types of Relative Value Strategies
fixed income convertible arbitrage, fixed income general, fixed income asset backed, volatility, multi-strategy
Fixed Income Convertible Arbitrage Strategy
relative value strategy which focuses on buying convertible bonds of undervalued companies while simultaneously selling short at the strike price of a convertible bond
Fixed Income General Strategy
relative value strategy which focuses on mispricings of any two securities in the bond market
Fixed Income Asset Backed
relative value strategy which focuses on profiting from a mispricing of a bond that is backed by assets
Volatility Strategy
relative value strategy which focuses on profiting from the volatility in the market as a whole or for a specific asset class by going long or short on related options
Multi-Strategy
relative value strategy which focuses on profiting from price discrepancies wherever they exist
Macro Strategy
hedge fund strategy that looks to profit from movements of funds across global markets by using forecasts and taking positions in currency, commodities, and equity
6 Types of Equity Hedge Strategies
fundamental growth, fundamental value, short bias, market neutral, sector specific, quantitative discretional
2 Ways that Hedge Funds Value Liquid Investments
averaging the bid/ask quote, using the bid price for long positions and the ask price for short positions (more conservative and theoretically accurate)
Trading NAV vs. Reporting NAV
two methods for valuing more illiquid hedge fund investments, with the trading NAV reflecting a liquidity discount and the reporting NAV not reflecting it
4 Main Categories of Private Equity Investments
leveraged buyout, venture capital, development capital, distressed investing
Private Equity in Public Companies (PIPE)
smaller private equity strategy in which management looks for minority equity to take a noncontrolling stake just prior to going public
Committed Capital
refers to the money that limited partners give to private equity funds, as it is often unable to be withdrawn until a certain amount of time
Clawback Provision
provision in private equity fees which requires a specific amount to go to the investors before management takes its fees
Leveraged Buyout (LBO)
type of private equity investment in which the investors have the goal of taking a public company private, restructuring the organization, and then taking it public again
Management Buy-In (MBI)
type of LBO in which the PE firm chooses to replace the management entirely
Management Buy-Out (MBO)
type of LBO in which the PE firm chooses to keep the current management
3 Common Types of LBO Financing
leveraged loan, equity, high-yield bonds (or mezzanine financing)
4 Characteristics of an Attractive LBO Company
existing management is willing to make a deal, company is undervalued with inefficiencies, strong and sustainable cash flow opportunities (helps pay down leveraged loan), good balance sheets
Venture Capital
type of PE investing in which the investor places funds into a portfolio of companies
Formative-Stage Financing
type of VC financing in which the company needs to use the money to take its business from an idea to a reality
Later-Stage Financing
type of VC financing in which the company needs to use the money for business operations after commercial production is complete but before going public to develop the product and penetrate the market
Mezzanine-Stage Financing
type of VC financing in which the company needs to use the money for the process of going public and in which the investor can get their money back through stock
Angel Investor
a wealthy private investor who provides capital for businesses at an even earlier stage than VC funds
5 Common PE Exit Strategies
trade sale, IPO, secondary sale, recapitalization, liquidate and write-off losses
Trade Sale
when a PE firm sells a portfolio company to a competitor of the company
Secondary Sale
when a PE firm sells a portfolio company to another PE investor
Recapitalization
when a PE firm refinances their investment by adding debt to pay themselves a larger dividend but still retain control (more of a reduction of ownership than an exit)
Private Equity vs. Venture Capital
venture capital is technically a form of private equity, with the main difference being that PE firms prefer more stable companies to invest in while VC companies go for smaller companies with large growth potential
4 Broad Types of Real Estate Investment
private, public, equity, debt
Private Real Estate Investment
form of real estate investment in which the investor is either the sole investor or at the least still has managing input
Public Real Estate Investment
form of real estate investment in which the investor invests through a corporation or trust and owns shares as part of a portfolio
Equity Real Estate Investment
form of real estate investment in which the investor has a stake in some form of real property
Debt Real Estate Investment
form of real estate investment in which the investor utilizes the financing of real property (mortgage) as the investment vehicle
Real Estate Investment Trust (REIT)
type of public real estate investment which sells shares that are a mix of both equity and debt real estate investments
Equity REIT
type of REIT that owns and operates income-producing real property, so share value relies on vacancy rates and the predictability of rent payments
Threshold for REIT to Maintain Tax Benefits
the percentage of revenue after expenses distributed as dividend should be close to 90% (high dividend yield)
Income-Based Approach to REIT Valuation
method of REIT valuation which uses FFO Yield compared to an average rate of return from real estate investments to value the REIT (FFO Yield > Average Rate = Good Investment)
Funds from Operations (FFO) Formula
Net Income + Depreciation - Gains on Sale of Property + Losses on Sale of Property
Adjusted Funds From Operations (AFFO)
adjustment to FFO which adjusts for capital expenditures
FFO Yield (Formula)
FFO / Market Cap
Asset-Based Approach to REIT Valuation
method of REIT valuation which uses NAV
NAV Formula (REIT Valuation)
Estimated Market Value of REIT Total Assets - REIT Total Liabilities
3 Main Categories of Real Estate Indices
appraisal index, repeat sales index, REIT index
Appraisal Index
type of real estate index which uses estimates of real estate value provided by experts to construct the index, often using comparable sales figures and cash flow analysis
Repeat Sales Index
type of real estate index which uses the change in prices of properties with repeat sales to construct the index, making it subject to survivorship bias
REIT Index
type of real estate index which uses the prices of publicly traded shares of REITs to construct the index, meaning that the index is more reliable when more shares trade (more correlated to equity, less correlated to bonds)
Timberland
type of commodity investment which consists of land that consists of trees of a certain density that are suitable for commercial use
Key Benefit to Commodity Investment
serves as an inflation hedge
Commodity Index Pricing
typically uses the price of futures contracts on commodities rather than the actual commodities themselves
Commodity Futures Contract Pricing (Formula)
[Spot Price * (1 + Risk-Free Rate)] + Storage Costs - Convenience Yield
Convenience Yield
the benefit you would get from holding an actual physical commodity which you forgo by purchasing a commodity derivative
2 Most Volatile Types of Commodities
energy, food
Contango
term for when the futures price is greater than the spot price for commodities, which happens in normal conditions since people are willing to pay a premium to have delivery of a commodity delivered because of the costs of holding it (low convenience yield)
Backwardation
term for when the futures price is less than the spot price for commodities, which is less common because people are not usually willing to pay a premium to hold the commodity today instead of in the future (happens during shortages)
Roll Yield
the additional return from rolling into a new futures contract, which typically sums to zero as the futures price and spot price tend to converge in the long run
Implication of Contango on Roll Yield
if the commodities market is in contango it means the roll yield is negative because futures prices are higher than spot prices, which means that it costs increasingly more to buy a new futures contract as time progresses
Implication of Backwardation on Roll Yield
if the commodities market is in backwardation it means the roll yield is positive because futures prices are less than spot prices, which means that there is still benefit to buying more futures contracts as time progresses
Collateral Yield
any return generated from the money that you're required to post as collateral for a futures contract, which is generally just the risk-free rate
Typical Distribution of Alternative Investments
negatively skewed
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