Reading 47

____ provide investors with much greater liquidity, lower trading costs, and better transparency than owning physical real estate.

REITs

Although the ____ ratio is widely used to express a return-to-risk relationship for traditional investment products, the asymmetric returns distributions common among alternative investments makes that measure less meaningful.

Sharpe

Neither the _____ nor the _____ ratio capture the effects of correlation with the target pool of assets to diversify.

Sharpe; Sortino

Which of the following assets is not likely to be held by a real estate fund?

Single-family homes. Real estate funds typically invest almost exclusively in commercial real estate, which includes multi-family properties of four units or more. This is primarily due to the size of the assets they are deploying; residential home prices are very low in comparison to commercial real estate properties.

A hedge fund manager is hoping to combine traditional with alternative investments to enhance returns to his portfolio. The manager is most likely to invest in:

a corporate bond and cattle.

A financial investment characterized by highly leveraged short and long positions in equity index funds would most likely be characterized as:

a hedge fund.

Which measure is an analyst least likely to use in assessing the downside risk of an alternative investment? a) Sharpe ratio b) Sortino ratio c) Value at risk

a) Sharpe ratio

The type of private debt with the greatest excess return potential is: a) mezzanine b) unitranche b) infrastructure

a) mezzanine

Infrastructure assets are least likely to be characterized based on: a) project size b) type of assets c) geographic location

a) project size

Which of the following would most likely be considered a drawback against using appraisal based-indexes as a real estate investment benchmark? a) representativeness of owned properties b) appraisal based indexes overstate volatility c) difficulty of contracting competent appraisers

a) representativeness of owned properties

What does a direct investment involve?

an equity position in a property

A mutual fund manager adds alternative investments to her equity and fixed-income portfolio most likely because they:

are expected to enhance returns.

What are macro strategies?

attempt a top-down approach to exploit perceived market trends or expected changes in economic variables using both long and short strategies

Which funds provider would be excluded from the venture capital field? a) Seed b) Angel c) Mezzanine

b) Angel

Which is common to both event-driver and macro hedge fund strategies? a) a top-down approach b) both long and short positions c) technical analysis of market cycles

b) both long and short positions

Investors in a private equity fund are concerned that the general partners can receive distributions over time rather than receiving a share of distributions only at exit. Which of the following is most likely to prevent GPs from receiving excess fees? a) high hurdle rate b) clawback provision c) lower capital commitments

b) clawback provision

Why do large institutional investors consider timberland investments?

because the harvest flexibility allows investors to decide when income from cutting trees can be made

What is a volatility strategy?

buy or sell mispriced volatility instruments across or within markets

Which investment method is least likely to use a special vehicle? a) co-investment b) fund investment c) direct investment

c) direct investment Fund investment invests all capital into a special vehicle and co-investment invests partly into a special vehicle

Compared with traditional investments, alternative investments are most likely to be: a) transparent b) unleveraged c) less correlated with other asset classes

c) less correlated with other asset classes

What does the Treynor ratio do?

captures the relationship between alternative investments and beta via excess return divided by beta of the alternative asset return to a relevant benchmark

In ______, an investor contributes to the general fund but also has rights to purchase a position in the same assets

co-investing

While taking full control over an infrastructure asset may afford the opportunity to reap greater rewards, it may also result in:

concentration and liquidity risks.

What is a venture capital strategy?

describes investment in or financing for private growth companies ranging from idea inception to acquisition or initial public offering launch

What is the Calmar ratio?

divides compound annual return by maximum drawdown (MDD) to establish a measure of return relative to risk

What does the Sortino ratio do?

divides variance from target return by downside semi-deviation

What is the Sharpe ratio?

excess return over the risk-free rate divided by standard deviation of investment returns

What is a leveraged buyout strategy?

involves taking a public company private or taking over an established private company

What is the main drawback of Treynor?

its use of historical beta to establish the ratio

What does an indirect investment usually involve?

loaning the money (debt) to an investor wishing to establish an equity position

What are commodities trading advisors (CTAs)

managed futures funds that traditionally focused primarily on commodities futures, but now apply technical and quantitative analysis to use futures with equity, fixed-income, and currency exchange rates as the underlying

What is the sector specific strategy?

managers employ fundamental and technical or quantitative analysis along with special expertise in the sector to identify opportunities

What is a special situations strategy?

managers focus on opportunities other than mergers, acquisitions, or bankruptcy such as asset sales or spin-offs, rescue finance, security issuance or repurchase, and special capital distributions

What is an activist strategy?

managers purchase enough equity to buy a controlling position in a company and then advocate for capital distributions to shareholders, changes in management or company strategy, divestitures, or restructuring that will improve their equity position

What is an asset-backed, mortgage-backed, and high yield strategy?

managers seek to exploit relative value discrepancies in the markets for these securities while earning the higher coupon

What is the fundamental L/S growths strategy?

managers use fundamental analysis to go long companies likely to experience long-term growth and short the securities of growth companies expected to stumble

What is the fundamental value strategy?

managers use fundamental analysis to identify undervalued and underappreciated companies where a path to recovery seems possible

What is the short biased strategy?

managers use fundamental and technical or quantitative analysis to identify overvalued equity securities, often with little offsetting long positions

An investor looking to perform due diligence before investing in Miller's Hedge Fund would least likely:

perform an industry and economic analysis to verify Miller's investment decisions.

What does private equity describe?

private capital raised to make investments in privately held companies or in a public company to take it private

Milton Corp. (MC) is a commercial real estate firm that emerges from bankruptcy proceedings with restructured debt that is likely to be repaid only if MC's existing product lines become more profitable. Heights Capital (HC) is a financial institution that purchases USD 100 million in MC debt and intends to play an active role in the management of those product lines. HC has experience in strategic planning for this type of firm. HC is most likely a:

private equity firm.

What is venture debt?

provides private debt funds to start-up or early-stage companies that may be generating little or negative cash flow

What is a distressed/restructuring strategy?

purchasing securities of companies either near or in bankruptcy

What do alternative investments involve?

real estate and commodities, which are possibly the oldest types of investment, as well as other asset classes that tend to have low correlation with traditional investments and are not described as traditional investments

A money manager pursues a strategy of using long and short positions in futures contracts written on gold, silver, and platinum. The manager expects commodity prices to change dramatically over the next 12 months and plans to roll over the contracts to gain on price movements and convenience yields. The manager is most likely pursuing a(n):

relative value volatility strategy.

What is a multistrategy?

searches for investment opportunities across asset classes and strategies, often with different groups of managers executing their unique market approaches and insights

What is a general fixed income strategy?

seeks to profit from relative mispricing, especially in the sovereign debt market and investment-grade corporate debt

What is a waterfall provision in a limited partnership (LP)?

specifies how distributions of funds from the partnership are prioritized to the LPs before they are split with the general partners (GPs)

Infrastructure includes essential assets designed for public use that are typically financed, owned, and operated by:

the government

What is the market neutral strategy?

the hedge fund is long undervalued companies and short overvalued companies, attempting to maintain neutrality with respect to market risks and other return drivers in a selection of portfolio companies

What is a collateralized loan obligation?

the manager combines many loans made to a single company for similar purpose into a pool and, from the proceeds of that pool, creates debt or equity tranches representing different seniority and security profiles for investors

What are event driven strategies?

they seek to use bottom-up fundamental analysis of impending corporate events such as acquisition or restructuring

Greenfield involves investing in assets that are ____, while brownfield involves investing in _____.

to be constructed and may involve building; existing infrastructure assets

What is a merger arbitrage strategy?

typically involve shorting the acquiring company and going long the target company at a price below the announced acquisition price

What is a convertible bond arbitrage strategy?

typically involves buying convertible debt securities and seller the issuer's common stock into which the bond would be convertible

What is mezzanine debt?

unsecured debt often used to finance LBOs, acquisitions, and recapitalizations

What is the MAR ratio?

uses full investment history and average drawdown

Do REITs avoid tax income?

yes

What funds providers are included in venture capital field?

- angel - seed - early - later - mezzanine

What are some relative value strategies?

- convertible bond arbitrage - general fixed income - asset-backed, mortgage-backed, and high yield - volatility - multistrategy

What are some examples of private debt?

- direct lending - mezzanine debt - venture debt - distressed debt

What are the benefits/risks of hedge funds?

- diversification benefits decline during contagion - speed up price responses - arbitrage opportunities decrease in efficient markets - performance can be higher - redemptions can occur at the worse time in the market

What are some characteristics of hedge funds?

- few investment restrictions - aggressive pursuit of returns - private investment partnership - restricted redemptions - limited number of qualified investors

What are some private equity strategies?

- leveraged buyout - venture capital

What are some equity hedge strategies?

- market neutral - fundamental L/S growth - fundamental value - short biased - sector specific

What are some event-driver strategies?

- merger arbitrage - distressed/restructuring - special situations - activity

What are some infrastructure owner benefits?

- returns (stable cash flows, inflation adjustments, growth) - low correlation with other asset classes - long-term liability matching

What are some exit strategies for private equity providers?

- trade sale - IPO - recapitalization - secondary sales - write-off or liquidation

How do you calculate the management fee?

AUM * MF% - AUM = assets under management - MF = management fee

____ describes an investor purchasing a stake in an asset without the benefit of a special vehicle such as a fund.

Direct investing

____ measures have become an important metric for private equity and real estate funds.

IRR

_____ are increasingly used to develop and deliver public sector services via contracts with private sector firms.

Public-private partnerships