Negative Skewness High Average Return Uncorrelated Risk adjusted performance outperforms stocks and bonds.. to bonds Similar return to stocks w/ less risk.. Low Volatility of return - hi
Trang 11. 5 Meta Types 1 Relative Value - Exploit Price Discrepancies
2 Event Driven - Distressed Debt or Merger Arb
3 Equity Hedge - L/S w/ net long short bets
4 Global Asset Alloc - L/S
5 Short Selling - Short Only
-Commodities
Direct- Buying the goods or futures - More Exposure/Carrying Costs
Indirect - Owning a mining company More convenient , but might have little correlation
to actual commodity
Direct is more common
Many investible indices are available - Which
is indicative or benefits of Derivatives!
Pros: Fairly liquid
* Low Correlation to stocks
*Positively corr to inflation (except commodities)
Energy has best returns
Higher std deviation then S&P Still beneficial to sharpe ratio due to correlation!
-Distressed
Securities
Skill based
Either a hedge fund structure or private equity
Negative Skewness (High Average Return) Uncorrelated
Risk adjusted performance outperforms stocks and bonds
-Managed
Futures
Typically Structured like a hedge fund, 2% fee plus 20% of profits over HW mark
Skill based return not asset based Strategies - 1 Trend following rules 2
Contrarian Rules 3 Total Discretion Typically financial markets or currency markets
Risk: Varies by strategy
Low/- correlation to Stocks Low Corr to bonds
Similar return to stocks w/ less risk
Higher return then bonds, but lower Sharpe
-Private Equity
Venture Cap - New Companies Buyout funds - Buy public companies and go private
Middle Market - Buys divisions that are spun off
Mega-Cap - Buys whole firms Process: Restructure Ops & mgmt., buy companies below intrinsic value, restructure debt or leverage company
Dividend Recap - Private company issues debt and pays a large special dividend Recaps leverage company, keep % ownership and extract cash
-Less of a diversifier more of a return enhancer
-Requires high IRR
- PE Returns tend to move w/ the markets, w/ some unsystematic risk in each deal
VC and Buyout underperformed in 02-05
-Real Estate
Direct - Owning the actual R.E
Indirect - Investing in managed properties Pros: Low Corr w/ stocks/bonds
Provides diversification - Each investment has unsystematic risk Direct investment provides more Diversification then REITS
Low Volatility of return - high risk adjusted return is possible due to low liquidity, large lot sizes
Inflation Hedge Tax advantaged Cons: High Info & Transaction Costs Political Risk (Tax laws)
Inability to subdivide direct investment
Issues
Selection Criteria: Size, Length, Track Record Style Class : Fairly Subjective
Weighting: By size or equal weight Rebalancing Rules ?
Investability - Depends on reporting
w/ BMs
1 Relevance of past data - Indices turn over funds No consistency between style mangers volatility of returns tends to stay constant, but returns do not!
2 Popularity Bias - If a fund gets bigger then more weight in a value index Equal weight indexes are not effectively rebalanced
3 Survivorship Bias - Indices drop failed funds/underperformers
4 Backfill Bias - Filling in past/missing data Only managers that benefit will provide the data
CFA Level III - Book 4 - Alternative Investments
Trang 29. Commodities
& Inflation
1 Storability
2 Demand relative to economic activity
Storable Metals, energy move w/ inflation -provide good diversification w/ exp inflation Non Storable - Agriculture - Not a good hedge
Level Demand (Agric) - Bad Hedge Economic Demand (gold) - Good hedge
DJ & S&P both list funds that are included -equal weight
Debt
Long Only - HY Bonds and Orphaned Equities Dist Debt Arb - Buy Debt and short stock P.E Buy a position in a company large enough
to have control "Vulture Funds"
Concerns Event Risk - Unsystematic Liquidity - Cyclical Supply demand for these types
J Factor - The role judges can play in return
anticipating a bankruptcy ruling is unpredictable
12.Due
Diligence
Checkpoints
(8)
1 Asses the Market oppty offered - What are the inefficiencies that are exploitable? Past returns don't matter
2 Investment Process - What's your competitive edge?
3 Asses the organization - Is it stable?
Turnover?
4 Asses the people - Character, integrity, &
competence
5 Terms/Structure = Fees? Do they align?
Lockout? What is their exit strategy
6 Asses Service Providers - Investigate the outside firms that support mangers business (lawyers, brokers, staff)
7 Review Docs - Prospectus, Memos, Audits, etc
8 Write up - Document the proces
Funds
10-30 Managers More Fees Better Liquidity Cash Drag Good entry level investment better benchmark then some indices Need to watch style drift
More Correlated to Stocks then individual funds
Funds Types (9)
1 Convertible Arbitrage - Exploits mispricings
of convertible bonds Buy undervalued bond and short the stock Hedges the stock and you collect yields Benefits from Stock Volatility
2 Distress Securities - Long Only
3 Emerging Markets - Long Only - No Hedge
4 MKT neutral - Pairs trading to bet on unsystematic moves
5 Hedged Equities - L/S w/ Systematic Risk
6 Fixed Income Arb L/S fixed income to play yield curve
7.Global Macro - Plays derivatives and currencies of countries
8 Merger Arb Bets on Managers L/S
9 Fund of Funds
for Private Clients (5)
1 Taxes - Many AI In are LPS that require tax expertise
2 Suitability - Is Lockup aligned w./ investors horizon and liquidity needs?
3 Communication - Can you properly explain the investment? Do they get it
4 Decision Risk - Risk of emotionally abandoning the strategy at the point of max loss Effectively explain ups and downs
5 Concentrated Positions - Does their outside investments give them exposure already?
Futures -Performance
Commodity Pool Operators - CPOS Commodity Trade Advisors - CTAs CTA either Systematic (rules) or Discretionary (No rules)
Private Pools tend to do better then public funds Watch correlation between CTA and CTA's beta
Futures Prices
Total Return = Spot Return + Collateral Return + Roll Return
Spot Return: Return of the commodity itself Collateral Return: Periodic Risk Free rate Roll Yield: Change in futures contract price -Change in spot price
Backwardation: \ Curve each futures price is lower then past positive roll yield
Contango: / newer futures prices are higher then previous Negative Roll yield
Roll Return - Change Futures Price - Change
in spot return
Indices
CISDM - Covers Hedge Funds and Mng Futures - Equal weight
Credit Suisse/Tremont - Broken down by strategies - AUM weighted
EACM - Broad Hedge 100 funds equal weight HFI - Equal Weight 50 funds
HF.net - Equal weight by strategies
Trang 319. Performance Evaluation - Create a multi-factor model or tracking portfolios w/ similar risk return Analyst should look at fees,
lockups, age of funds, size -Longer Lockup = better return -Younger funds outperform older ones -Large funds outperform smaller ones
Returns Calc'd Monthly, then compounded annually
Returns are biased by entry exit on quarterly basis and by cash flows
Rolling 12 month returns are common
St Deviation may have misleading results due to Skewness and fat tails
on HFs
-Time Dependancy - Biased Upward -Assumes Normality
-Assumes Liquidity - Upward bias for illiquidity -Assumes uncorrelated Return
-It's a standalone measure - Doesn't take into account affects of diversification Can be manipulated by managers