CFALEVEL1 STUDYSESSION18

ALTERNATIVE INVESTMENTS

Open- end vs. Closed- end NAV

a. Managed investment companies (mutual funds)

Investment company fees

one-time fees ongoing annual fees

Style Sector

b. Strategies

Index Global Stable Value

Definition

mimic an index

In-kind process

Advantages

price tax

Diversification

74.1. Alternative InvestmentsPart 1

Advantages

Exchange traded Better risk management Composition is known Operating expense ratio No trading at a discount or premium Tax

b,c. ETF

Dividend Few indices Disadvantages Intraday trade Inefficient markets Larger investors Market risk Asset class/ sector risk Risks Trading prices # NAV (depth and liquidity) Tracking errors Derivative risks --> credit risk Currency and country risks

Outright ownership

a
Types Leveraged equity position Mortgages Aggregation vehicles

Characteristics

d,e,f. Real Estate Investment

Cost method

e,f. Approaches to the valuation of real estate

Sales comparison method

Income method

Discounted after tax cash flow model

Seed stage

R&D

Formative stage

Start-up financing Early stage First stage financing

Initial marketing

74.2. Alternative InvestmentsPart 2

Commercial production

Stages

Balanced stage Expansion stage financing Later stage Second stage investing

Producing and selling products Not yet generating income

Third stage financing

Major expansion

g,h. Venture capital investing

Illiquidity

Mezzanine (bridge financing)

IPO

Long term horizon Difficulty in valuation Limited data Characteristics Entrepreneurial / Management mismatches Fund Manager incentive mistakes Timing in the business cycle Requirement for extensive operations analysis h. NPV of a venture capital project

Absolute return Limited partnership Forms Limited liability corporation Offshore corporation Long/short funds Classifications Market-neutral funds Global macro funds Event- driven funds Leverage Illiquidity Potential for mispricing k. Counterparty credit risk Settlement errors Short covering Margin calls Performance Self-selection bias Backfilling bias l. Biases Survivorship bias Smoothed pricing Option-like strategies Fee structures and gaming Effect of survivorship bias

i. Hedge fund

Unique risks

74.3. Alternative InvestmentsPart 3

Fund to invest in hedge funds

j. Fund of funds investing

Benefits Drawbacks

m. How legal issues affect valuation

m,n. Closely held companies

n. Valuation methods

Cost approach Comparable approach Income approach

o1. Distressed securities investing

o2. Compare VC with distressed securities investing

Role as an investment vehicle Commodities Motivation for investing in Commodities derivatives Commodity-linked securities Sources of return on Collateralized commodity futures position

p,q,r Commodities

a. Relationship between spot prices and expected future prices

Contango Backwardation

75. Investing In Commodities

Sources of return b. Commodity investment Risk Effect on portfolio

c. Commodity index strategy

Active investment