ALTERNATIVES MODULE 76

Question 1

76.1 Compare the features between traditional investments and alternative investments: (3 points each)

Answer 1

Question 2

76.1 Alternative investment characteristics (6 points)

Answer 2

Direct vs indirect = buying house vs investing in REIT eg

6)VALUATION CHALLENGES - without transactions of a private asset it is hard to set a real value. So we turn to appraisals (made-up valuations)
- this can lead to data smoothing (you don’t see the true level of volatility of the investment)

Question 3

76.1 who are the sophisticated investors that may have long time horizons for their investments?

Answer 3

large pension funds, sovereign wealth funds, and endowments, accredited investors, qualified purchasers

Question 4

76.1 What does the 2/20 fee structure work?

Answer 4

2% management fee and 20% share of profits

Question 5

76.1 What is the different of an LP and GP?

Answer 5

LP = limited partner. not involved in the day-to-day running of the fund, but commits their capital to it

GP = managing the whole project and investment project

Question 6

76.1 What is private capital?

Answer 6

includes both private equity and private debt.

Private debt includes loans, bonds, venture debt and distressed debt

Question 7

76.1 What is private equity?

Answer 7

take them private, improve them, IPO them and make alot of money on them - its the traditional PE structure

Question 8

76.1 What is venture capital?

Answer 8

Is a specialised form of PE

Ownership capital, either start-up phase or early life cycle

ideas and business plans, with limited operations or customers

Question 9

76.1 What is a convertible bond?

Answer 9

Is a hybrid

you are paid before the shareholder so you some more safety - and you have the option to convert your bond into stocks - so you ahve a chance at the upside

Question 10

76.1 What are real assets? (two types)

Answer 10

Question 11

76.1 What is infrastructure?

Answer 11

Normally a public dimension

Question 12

76.1 What are natural resources as a real assets investment?

(two main characteristics and subtypes)

Answer 12

Question 13

76.1 What are collectible assets?

Answer 13

Question 14

76.1 What are digital assets?

Answer 14

Question 15

76.1 Describe the forms of digital assets (flow chart)

Answer 15

Question 16

76.2 What are hedge funds? What is their investment approach?

Answer 16

average life of a hedge fund is about 5 years

the idea of “double alpha” through long and short positions

Question 17

76.2 How can you access alternative investments?

Answer 17

direct (lower costs) - investing in a company and managing it yourself

(this goes from passive to managerial investment types)

Question 18

76.2 How can you gain experience with alternatives?

Answer 18

Question 19

76.2 How is alts fund investment characterised??

Answer 19

Question 20

76.2 What are the limitations of find in vestment in alts?

Answer 20

Question 21

76.2 What are the characteristics of fund structures for alts?

Answer 21

‘investment selection’ = ‘capital call’

also PERFORMANCE BASED STYLE

Question 22

76.2 What is a ‘term sheet’

Answer 22

Where the important terms of the fund are detailed

Question 23

76.2 What is co-investment?

Answer 23

‘alongside’ - co-investing

direct investment can imply a lower fee for the investor

Question 24

76.2 What are the manager benefits to co-investing?

Answer 24

Question 25

76.2 what is direct investing?

Answer 25

large sophisticated investors - pensions, sovereign wealth funds "vintage of the investments" = the timing - you need to diversify form the vintage year

Question 26

76.2 What are some examples of direct investing?

Answer 26

Question 27

76.2 name a reason why investors may opt to invest in alts in these three ways: fund investing, co-investing, and direct investing.

Answer 27

Question 28

76.2 What are the difference sin GPs and LPs?

Answer 28

maximises the flexibility to distribute responsibilities between managers and outside investors

Question 29

76.2 What is a limited partnership agreement? (LPAs)

Answer 29

Question 30

76.2 What is a side letter?

Answer 30

rights that change as the investment continues excusal right = from a capital call

Question 31

76.2 What is a public-private partnership?

Answer 31

Question 32

76.2 what are MLPs and REITS?

Answer 32

Question 33

76.2 How does assymetry of information function in alts?

Answer 33

Question 34

76.2 What are the types of compensation in alts?

Answer 34

'pref' - in the hedge fund world 'carried interest' - in the PE world incentive fees are only shared based on the hurdle rate

Question 35

76.2 What is 'claw back'

Answer 35

In the PE world, performance fees can be 'clawed back' if the performance then declines after a good period (ups have the right to redact perf fees) This does not happen in the hedge fund world

Question 36

76.2 What is the hurdle rate? What is a hard/soft hurdle rate?

Answer 36

soft hurdle rate is more generous than the hard

Question 37

76.2 What is a catch-up clause?

Answer 37

This only applies to soft-hurdle rates

Question 38

76.2 Example of a catch-up clause:

Answer 38

40 mins in masterclass 76.2

Question 39

76.2 What is a 'high water mark'

Answer 39

Only paying an incentive fee on fresh growth (not paying twice for the same performance - see the illustrations top left

Question 40

76.2 What are waterfall structures?

Answer 40

three deal example here - no incentive paid on deal three if its on an aggregate basis it would be smaller fee

Question 41

76.2 Management fees for a private capital fund are determined as a percentage of:

Answer 41

committed capital, not invested capital

Question 41

76.2 What is the difference between a European-style waterfall provision and American-style waterfall provision?

Answer 41

An American-style waterfall structure has a deal-by-deal calculation of incentive fees to the GP. In this case, a successful deal where incentive fees are paid, followed by the sale of a holding that has losses in the same year, can result in incentive fees greater than those calculated using a European-style (whole-of-fund) waterfall.