Alternative Investments:

Managers use derivate, leverage invest in illiquid assets and short securities. Many types of real estate
investment are considered alternatives to traditional investments as well.
 Hedge fund, private equity, real estate, etfs.
 Fee structures are different, higher management fees on average and addition on returns
 Less liquid of assets, more specialized, more problems wih historic, less reg, legal tax treatment
Hedge funds: may use leverage, hold long/short, derivatives invest in illiquid assets. Not rly redge risk
Private equity: equity of company’s that are not publically traded or public wants to go private
 Leveraged buyout uses borrowed funds to purchase equity
Real estate: commercial/residential. Full, leveraged ownership of individual properties, private and
publically traded securites backed by a pool of properties or mortgages
Commodities: to gain exposure to change in commodities price, investors can own physical
commodities, derivate or the equity of commodity producing firms. Hold derivs to match index.
Infrastructure: long lived assets that provide public services. Roads, airports, schools
Other: tangible collectible assets: fine wine, stamps, automobiles, art

Alternative investments: low correlation with those of traditional investments over long periods,
primary motivation is low correlation of returns with those of traditional inv. Use risks other than stndv
 Historical returns have been higher on average, some less efficiently priced
 Survivorship bias Backfill bias previous performance data of firms recently added to a index
Hedge funds: prime brokers: many services, custodial, admin, lending, short
 Absolute basis: e.g. 10% or relative: above 5% of a benchmark
 Limited partnership and parternes are investors
 Lockup period is a time after initial investment withdrawals not allowed 30-90 days additnl fees
 Fund of fund investment company invests in hedge funds giving inestors diversification among
 Event driven: restructuring (merger arb, distressed, activist: to influ, special situations)
 Relative: buying a security and short selling related security (abs, conv, volatility, muti classes)
 Macro: global economic trends
 Equity hedge fund strategies: profit from long or short postions in publically traded equties/derv
 Technical or fundamental for undervalued
 Investment strategy, investment process, source of comp advantages, historical returns
Private equity: lev buyout: borrowed to buy debt
 Mezzanine financing: debt or preferred shares that are subordinate to high yield bonds give
participation to investors when equity value increases
 Management buyouts: existing management team is involved in the purchase
 Management buyin: external management team to replace
 Commited capital: amount provided, it is drawn down over 3-5 yrs
 Clawback requires manager to return any periodic incentive if receiving less than a target
Portfolio companies: companies in which a venture capital fund is invested
 Formative stage: earliest stage
 1 angel: very early idea stage 2 seed stage product develop, market, resrch 3 early commercializ
 Later stage: company has production and sales and is operating commercialy, expansion
 Mezzanine: capital provided to firm for an IPO
Private equity exit stragies: holding period is 5 years
 Trade sale: sell to competitor, IPO, recapitalization: issue debt to fund a dividend distribution to
equity, secondary sale: sell portfolio company to another private firm, write off
Choice of manager, interest rate, valuation methods, incentive fees and drawdowns
REITS: issue shares that trade publically like shares of stock
 Appraisal index periodic estimate of property values, smoothed modest
 Repeat sales index: price changes for properties that have sold multiple times,
ETFS: futures, forwards, options swaps are forms of derivatives.
 Etf suitable for investors who are limited to buying equity shares
 Equities linked to a commodity: price movement of stock and commodity may not b perf corlatd
 Managed future funds: actively managed flexible
 Returns on commodities have been lower than returns on global stocks, sharpe ratios low, can
act as a hedge to inflation
Brownfield investments: infrastructure assets already constructed
 Stable cash flow, relatively highyields little potential for growth
Greenfield: to be constructed, more volatility

Profits can be: gains in value, any gains in value in excess of management fee, gains excess of hurdle
 Hard hurdle: incetive fees earned only n returns in excess of benchmark
 Hgh water mark: incentive not paid on gains that just offset prior losses
Value 100 million 20% incetive 5% hurdle
 Management fee =2 , gross value end of year $125.75
 Incentive fee= (125.75-100-2-(100x 5% hurdle) x 20%= 3. 75
 Total fee is 5.75$ ending value net of fees 125.75-5.75= 120.00
Hedge funds: non liquid securites calculate a trading NAV adjust for illiquidity
Priavate equity: market comparables approach, a discounted cash flow, asset based
Real estate: comparable sales, income approach, cost approach
Commodity: spot