Alternative Investments

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Alternative Investments
Mapping to Curriculum
Reading 66: Alternative Investments Reading 67: Investing in Commodities
This files has expired at 30-Jun-13 Expect around 12 questions in the exam from todays lecture
Neev Knowledge Management Pristine
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Key Concepts
Mutual Funds : Types of Funds, fees and NAV Exchange Traded Funds (ETF) Forms and Valuations of Real Estate investment Venture Capital Investing Hedge Funds Closely held Companies Investing in commodities
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Mutual Funds
Mutual Funds
A comingled investment pool in which investors in the fund each have a pro-rata claim on value of the fund. The returns of a mutual fund can be found by using the Net Asset Value (NAV) NAV is calculated based on the closing price of the assets in the fund and is calculated daily.
Open End Mutual Funds

Accepts new investment money and issues more units at the rate of the NAV Funds are withdrawn This at the NAV files has expired at 30-Jun-13 Inflows and redemptions can create pressure on the fund to meet liquidity requirements
Closed End Mutual Funds

Doesnt accept new investment money Investors who want to liquidate their position need to sell their units to another investor The total number of units does not change Units can sell at a premium or discount to the NAV Do not face liquidity problems due to additions or redemptions.
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Mutual Funds: Types, Fees And NAV

Open-end fund: The corpus of the fund keeps changing. MF units are purchased or redeemed by the investment company at that days NAV Closed-end fund: The corpus of the fund is fixed. MF units are traded in the secondary market (stock market) just like shares. Net asset value (NAV) = Value of the funds assets Liabilities
Open-end fund will always equal the NAV (not expired traded in secondary market) This files has at 30-Jun-13 Closed-end fund may trade at a premium or at a discount to the actual NAV since the share price is determined in the secondary market (traded in secondary market)
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Mutual Funds: Types, Fees And NAV

Types of Fees Load charges
Front-end - sales commission charged at purchase Back-end redemption fee/contingent deferred sales charges
Components of Expense Ratio

Fund Management Charge (FMC) Administrative fees This files Continuing distribution fees - 2b-1 fees
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The expense ratio is built into the NAV of the fund and affects fund returns.
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Strategies Of Funds
Various types of equity investment strategies:
Style: Focus on underlying investment characteristics
Value(low P/E) vs. growth (high P/E) Large cap, midcap, small cap
Sector: A particular industry focus.

Banking Industry Energy Sector
Index: Index funds track a specific index.

S&P 500 DJIA Nifty
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Types Of Funds
International: Includes securities from all over the world excluding securities from the home country. The major part of these kind of fund is the currency fluctuation of different countries. Global: Includes securities from all over the world including securities from the home country. Stable value: Invests in short-term fixed income government securities Guaranteed: Investment contracts which are guaranteed by the issuing investment company and This has expired at 30-Jun-13 pay principal and a set rate files of interest.
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Mutual Funds
No Load Funds
No fee upon investing in the fund or redemption There is an annual fee which is a percentage of the assets under management.
Load Funds
It is in addition to the annual fund management fee A percentage fee is charge for investing in the fund or at the time of redemption.
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Mutual Funds
Mutual Funds (Asset Types)
Stocks Funds
Largest Based on Assets under Management Actively Managed
Stock Selection Higher Fund Management Charges Higher Portfolio Turnover
Bond Funds
Global Government Corporate High Yield Inflation Protected expired at 30-Jun-13 National tax-free bonds
Passively Managed
This files has
Index Funds Lower Fund Management Charges Low Portfolio Turnover
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Mutual Funds
Hybrid or Balanced Funds
Contain both bonds and shares Gaining popularity with the growth of lifecycle funds Asset mix determined based on desired retirement date
Money Market Funds

Taxable High quality, short term corporate debt and federal debt Tax-Free Short term state and local government debt
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Key Topics
Mutual Funds : Types of Funds, fees and NAV Comparing Mutual Funds with other Investment Products Exchange Traded Funds (ETF) Forms and Valuations of Real Estate investment Venture Capital Investing Hedge Funds Leverage and risks of hedge funds Closely held Companies This files has expired at 30-Jun-13 Investing in commodities
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Comparing Mutual Funds With Other Investment Products

Exchange Traded Funds (ETFs)
Mutual Funds
Investors investing in an Index Fund buys fund units directly from the Fund Do not incur brokerage costs All purchases and redemptions in the same day occur at the same price
Exchange Traded Funds

Investor buys the units from other investors just as they buy stocks. Incur brokerage costs Each purchase or sale price depends on the market price at that time. ETFs are traded throughout the day. has expired at 30-Jun-13
Dividends are paid out to the investor
This files
Generally dividends are reinvested
Minimum required investment is higher Minimum required investment is lower. Can even be a single unit.
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Separately Managed Accounts (SMA)
Mutual Funds
Asset not directly owned by the investor Investor has no control of the transactions
Separately Managed Accounts (SMA)

Assets are owned directly by the individual Investor has control over transactions and their timing
This files has the expired Does not consider the tax needs Considers specific tax at of each investor requirement of the investor
Minimum required investment is lower
30-Jun-13
Higher minimum investment, usually above $100,000
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Hedge Funds
Mutual Funds
Performance reporting is mandatory Sold to public
Hedge Funds
Exempt from reporting requirements Sold only via private placement
Can be purchased by anyone

Number of investors are not limited Lower minimum investment
Sold only to accredited investors

Have fewer investors Higher minimum investment
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Buyout and Venture Capital Funds
Mutual Funds
Passive Investors Equity held is traded on public markets No exit strategy
Private Equity Funds

Play an active role in the management of the company Equity held is private Plans an exit strategy
This Minimum investment amount is lower

High Liquidity
files has expired at Minimum investment amount is 30-Jun-13

high Limited Liquidity Fund management fee is based on performance
Fund Management Fee is based on assets under management
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Key Topics
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Exchange Traded Funds

Exchange traded Index fund (ETF) Index-based investment products Allow investors to buy or sell exposure to an index through a single financial instrument They trade on stock exchanges Can be shorted or margined ETFs have in-kind creation & redemption of shares which differentiates them from other mutual funds. Eg: SPY

Basket of Securities ETF Creation Units
ETF Trust/ Fund
Investor (Buyer)
ETF Market Makers
Capital Markets
ETF Shares
Securities
Source: CFA Level I Curriculum

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Advantages And Risks - ETFs

Advantages of ETFs:

Imp
Efficient and effective method of diversification. ETFs can be traded intraday, shorted, and margined. Underlying assets are published daily. Low operating expense ratio. In-kind creation and redemption of shares keeps premiums and discounts to NAV at a minimum. Less capital gains liability compared to open-end funds. Immediate reinvestment of dividends.

Risks of ETFs:
Market risk of the index tracked by the ETF. Investors are subject to asset class or sector risk. Trading prices of ETFs can differ from NAV. Leverage and credit risk for ETFs that use derivatives. Tracking error risk. Currency and country risk for ETFs based on international indices.
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Key Topics
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Real Estate Investments

Real estate investments can be categorized into one of four major groups:
Free and Clear Equity - Outright ownership Leveraged equity position: Ownership plus obligation of debt, Mortgages: A pledge of real estate ownership rights if the loan terms are not met. Aggregation vehicles: Helps investors to diversify by investing in a group of projects
Example :- real estate limited partnerships, commingled funds, and real estate investment trusts (REITs).
Characteristics of real estate:

Properties are not movable, are unique assets This and files has expired at 30-Jun-13 Properties are unique - can never be exactly compared to another property Properties can be illiquid There lacks a national, or international auction market for properties. It is hard to assess market value High transaction costs Real estate market itself can be inefficient - information not as readily available
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Valuation Of Real Estate

Cost Approach:
Imp
Analogous to the use of replacement cost of total assets in the calculation of Tobins Q for equity valuation. Its based on current construction costs An appraisal of land value is required which may not be easily attainable The market value may be much more or less than the replacement cost.
Sales comparison Approach:

Similar to the price multiple comparable approach in equity valuation Market value is estimated relative to a benchmark This files has expired at 30-Jun-13 Benchmark average or median of market prices of similar real estate properties Benchmark must be adjusted timely Unique features of the property may not be reflected in this approach Problem if there are no comparable recent transactions.
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Valuation Of Real Estate (Cont..)

Hedonic price estimation
Imp
A formal variation of the sales comparable approach Major characteristics of a property that can affect its value are identified Wherein the various factors affecting the price of the security are determined and quantified and put in as a regression equation to finally arrive at the price of the security.
Income Approach:
Values the property using a perpetuity discount type of model. Net Operating Income(NOI) -the annual rent revenue less the operating expenses. Market Cap Rate rate used files by markethas in recent transactions to capitalize future income into a present This expired at 30-Jun-13 market value
Appraisalprice
Market cap rate
NOI Market cap rate
Benchmark NOI Benchmark transaction price
Benchmark comparable property The Income Approach can be adjusted for special cases of a constant growth rate in rentals.
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Valuation Of Real Estate (Cont)

Discounted After tax cash flow Model : It links the value of property to an investors specific marginal tax rate The NPV is equal to the present value of after tax cash flows Only those project that are making positive NPV would make financial senses. After tax refers to the investors marginal tax rate. The after cash flows are discounted at the required rate of return, less the equity portion of the investment.
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Real Estate NOI (Example)

Mr. David is planning to buy a small office building. For the analysis purpose he calculate the NOI.
The information are as follows : Gross Rental Income 500,000 Vacancy and Collection loss rate 5% Taxes 40,000 Insurance 12,000 This files has expired at 30-Jun-13 Maintenance charges 40,000
Solution: Net operating Income :
= 500,000 ( $500,000 * 0.05 ) 40,000 12,000 40,000 = 383,000
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Sales Comparison Approach

The specifics of a simple hedonic model are as below:
Characteristic
Number of Rooms Distance to nearest public transportation Gym in the neighborhood
Units
Number Miles 0 or 1
Slope Coefficient In $
50,000 -5,000 10,000
The characteristics of a specific real estate property:
Has 5 bedrooms, half mile away from the bus stop, and no gym in the neighborhood.
The appraised value is:

(50,000)*(5) + (0.5)*(-5,000) + (0)*(10,000) =250,000 2,500 = 247,500
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Income Approach
Apartment XYZ
Gross Potential Rental Income Estimated Vacancy and Collection Losses Insurance and Taxes Maintenance Depreciation $500,000 10% $50,000 $20,000 $15,000
Interest on Financing
$15,000

If there was a similar sale with an NOI of 100,000 and its sales price was 1,000,000, find the market value of apartment XYZ. Ans) Apartment XYZ NOI = 500,000 0.10*500,000 50,000 20,000 (depreciation and finance costs not included in NOI) = 380,000 For a similar transaction, NOI/Market Price = 100,000/1,000,000 = 0.10 (Cap Rate) Market Price of XYZ = NOI/Cap Rate = 380,000/0.10 = $3.8 Million
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Key Topics
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Venture Capital Investment

Seed Stage: This stage pertains to providing capital to fund research and development for new ideas
Early Stage: This includes:

Start-up financing: to complete product development, fund initial marketing First stage financing: to start commercial production and sale of the product
First two stages are also known as the Formative Stage Later Stage:
Second-stage investing: enable a company to carry forward production and sales Third-stage financing: to fund a major expansion of the company Mezzanine or bridge financing: to help a company to go public
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Venture Fund Investment Characteristics

Illiquidity Long-term investment horizon Difficulty in valuation Limited data Entrepreneurial/management mismatches Fund manager incentive mistakes Timing in the business cycle Requirement for extensive operations analysis
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NPV Of Venture Capital Projects

The NPV of a venture capital project is calculated like any other NPV problem The probabilities of the possible outcomes is used to arrive at the expected cash flows Question: A VC fund manager wants to invest $1,800,000 in a new project that is expected to give $8,000,000 after four years. The cost of equity is 14%. The conditional probabilities probability of failure is given as: (Year, Probability)
(1,0.25) (2,0.2) (3,0.15) (4,0.12)
Calculate the NPV of the potential investment. This files has expired at 30-Jun-13
Solution:
Probability of survival = (1-0.25)(1-0.20)(1-0.15)(1-0.12) = 0.4488 NPV of project if successful = -1,800,000 + 8,000,000/1.14^4 = 2,936,642 Expected NPV of the project = (2,936,642* 0.4488) + (-1,800,000*0.5512) = 325,805
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Key Topics
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Hedge Funds
Objectives
The common objective of all hedge funds irrespective of their investment strategy is to generate absolute returns. This is in contrast to ,Institutional fund managers who try to beat the benchmark. Hedge fund managers generally try to isolate specific bets for the purpose of generating alpha. Hedge fund managers seek freedom to achieve high absolute returns and wish to be rewarded for their performance.
Legal Structure

Typically set up as a Limited Partnership, Liability Limited Partnership, or Offshore Corporation This allows them to use derivatives and leverage without any restrictions. Advertising no allowed No more than 100 partners No more than 499 qualified purchasers Fund advisors are prohibited from misrepresenting fund performance Minimum investment is typically several hundred thousand dollars Offshore funds have an attractive legal structure.
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Hedge Funds
Fee Structure
Base Management Fee
Typically between 1%-3% of the AUM
Incentive Fee
Proportional to profits above the risk free rate (typically around 20%)
High water mark

If any year, the fund has losses, the hedge fund manager must recover it before he gets his incentive fee.
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Hedge Funds : Classification

Long/short funds:
The most prevalent strategy and is employed by most of the hedge funds. It involves taking long and short positions in the securities. It is not necessarily market neutral and carries high leverage positions exposed to a variety of risks. The volatility is quite high and the general market/systematic risk is always present along with specific sector-specific or idiosyncratic (firm-specific) risks. They ensure that irrespective of market movements, they earn profits
Market-neutral funds:
Attempt to maintain zero betafiles (market risk) through balanced short/long positions in the equity markets. This has expired at 30-Jun-13 Not neutral to other risk factors, like sector, style, country-specific and idiosyncratic (stock specific) risks
Global macro funds:

Generally bets on some global asset classes like equities, fixed income, currencies, derivatives, etc. Usually span over a lot of markets and offer a heterogeneous risk profile. Decisions are based on fundamental and technical analysis
Event-driven funds:
These funds strive to take advantage of events like mergers and acquisitions, by investing in distressed securities etc.
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Hedge Funds: Fund Of Funds

Benefits of Funds of Funds
Enables investors to diversify their holding by investing in a single fund
Drawbacks of Funds of Funds

The management fees of a Fund of Funds manager is in addition to the hedge funds fees
Helps overcome the limitation of Diversification reduces the risk as the limit on the number of investors well as the return

Enables investors with limited capital to take exposure to hedge funds Professional fund selection
The manager of the fund of funds may not deliver superior returns
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Key Topics
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Leverage And Risks Of Hedge Funds

Most of the hedge funds employ large amount of leverage in their strategies Increases the returns earned by them but also exposes them to disproportionate amount of risk Risks in investing in Hedge Funds:
Illiquidity Mispricing of Securities Counterparty Credit Risk Settlement risk/errors This files has expired Short selling may result in short covering losses Meeting margin calls
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Performance Of Hedge Funds
Imp
Hedge are not compelled by any law to disclose their performance. Disclosure is completely voluntary The following have been observed with respect to their results:
Lower risk(standard deviation) compared to equity investment Higher Sharpe ratio compared to Equity investments A low correlation with conventional investments
Some significant biases that exist are:

Self-selection bias This files has expired at 30-Jun-13 Backfill bias Survivorship bias only successful funds report their performance Smoothed pricing Option-like strategies Fee structures and gaming
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Key Topics
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Closely Held Companies

Following valuation approaches are used:
Cost Approach:
Cost to replace assets of the company in their present form
Comparable Approach:
Compare with a benchmark
Income Approach:
NPV of discounted cash flows
In addition to the above, a premium is added controlling at interest This files has for expired 30-Jun-13
Discount made for illiquidity or minority interest
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Distressed Securities :
Distressed Securities / Bankruptcies
They are the securities of companies that have filed or are close to filing for bankruptcy or are seeking out of court debt restructuring to avoid bankruptcy. Two types of Bankruptcy protection
Chapter 7 liquidation Chapter 11 - reorganization

Distressed Securities Investing: This strategy involves holding debt securities of such companies with the hope of getting a share on the equity
Possibility of mispricing
It is similar to VC investing and is faced with Illiquidity, long investment period, in depth analysis The source of distress must be identified and considered while making the investment
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Questions
1. Which of the following statements is not true?
A. Units of an open-ended fund are traded in the secondary market. B. Close-ended funds have a fixed corpus. C. There is a limit on the expenses that can be charged by the AMC to the fund.
2. Which of the following is not an advantage of ETFs?

A. ETFs help in diversification of the portfolio. B. ETFs result in lower incidence of capital gain tax for the investors. C. ETFs cannot be shorted like traditional investments.
This files has expired at 30-Jun-13 3. The Gross rental income estimated from a property is $3,00,000. The vacancy is estimated at 7%. Other charges include; Repairs and maintenance $21,000; Insurance $12,000; Municipal Taxes $11,000. Calculate the NOI of the property.
A. 235,000 B. 279,000 C. 256,000
4. If the market capitalization in the above example is 12%, what is the value of the property?
A. 1,958,333 B. 28,200 C. 23,25,000
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Questions (Cont)
5. Mezzanine Financing enables a company to: A. Fund its research and development expenditure of new ideas B. Raise money from the public via IPO C. Commence commercial production of a new product 6. High watermark provision in the incentives of the manager of an hedge fund: A. Guarantees a minimum return to the manager of the fund B. Encourages the manger to take more risk if the fund has earned negative returns C. Guarantees a minimum return to the investors
This files has expired 30-Jun-13 7. Which of the following is not a risk associated with Hedge at Funds:
A. Excessive Leverage B. Counterparty credit risk C. Excessive Liquidity
8. One of the hedge fund bias is that only those fund managers with a good past track record would be willing to be included in an index. This is known as:
A. Self-selection bias B. Backfilling bias C. Survivorship bias
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Solutions
1. 2. 3. 4. 5. 6. A. Units of an open-ended fund are traded in the secondary market C. ETFs cannot be shorted like traditional investments A. (300000)(0.93) 21000 12000 11000 = 235,000 A. Value of property = NOI/market capitalization rate = 235000/0.12 = 1,958,333 B. Raise money from the public via IPO B. Encourages the manger to take more risk if the fund has earned negative returns because under high watermark provision manager gets more of his income from the profits that he earns 7. C. Excessive Liquidity This files has expired at 30-Jun-13 8. B. Backfilling bias
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Key Topics
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Key Issues In Investing In Commodities

Contango and Backwardation Risk and Return on Commodity Investment Commodities index strategies. Investing in Commodities
A market that transacts business with commodities of all nature referred as commodity markets. Compliments the investment opportunity offered by shares of a company that use those commodities as raw material Gives the investor a share in the commodities the countrys production and consumption This files has component expiredofat 30-Jun-13 Commodity investing was initially received well only by a few sectors. Commodities investing were first restricted to the trade and exchange of commodities meant for regular and day to day use. However the awareness in the subsequent stages has brought all sectors into the manifold of commodity investing and has enabled speedy movements, transfer and transaction of goods and services.
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Investing In Commodities
Investing in Commodities Derivatives
For investors who dont want to store the underlying commodity Commodity futures are the cheapest and easiest way to invest in commodities Commodity Index Goldman Sachs Commodity Index (GSCI) Passive Investor diversification Active Investor Speculative Profits
Investing in Commodity-Linked Securities
This Commodity Linked Bonds

Commodity Linked Equity
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Inflation Indexed Gilts Treasury Inflation Protected Securities (TIPS) in the USA Oil and Gas Industries are directly affected by oil prices Gold mining companies affected by world gold prices
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Contango And Backwardation

Contango refers to a situation where the future price is above the spot price. This happens when the prices are expected to increase and most hedgers in the market are people going long on the futures contract.
Contango Backwardation
Backwardation refers to a situation where the future price is below the spot price. This happens when most of the traders are producers of the commodity trying to hedge their positions from an expected fall in the prices.
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Risk And Returns

Risks and Returns
The spot price return on commodities depends on the movement of the prices of the commodities Taking long term positions on derivatives will require rolling over the short term contracts as and when they expire. Rolling forward contracts may result in a gain or loss which is known as the rolling yield. For future prices in backwardation, the investor will have a positive roll yield. However, if the prices are in contango, the investor will have a negative roll yield. Sometimes treasury bonds are deposited as a collateral for entering into a future/forward contract in commodities. In such case the yield is the yield on treasury securities known as the collateral yield
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Roll Yield
The gain and loss resulting from re-establishing positions as contract expire. Roll yield is positive if the future market is in backwardation Roll yield is Negative if the future market is in Contango.
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Commodity Index Strategy

Commodity Index Strategy:
Commodity Index Strategy is not a passive strategy as the Equity Index Strategy The manager will have to actively manage when to roll over their open futures/forwards. This decision will depend on the effect it has on the roll yield As commodity index weightings keep changing over time, the manager should ensure that the exposure is appropriate at the time of each roll over The manager also need to keep track of the collateral yield as and when they mature and replace them
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Collateralized Commodity Futures Position

Collateralized Position in Futures
It is a portfolio in which an investor takes a long position in futures for a given amount of underlying value and simultaneously invests the same amount in treasury bills. Typically used by a passive investor Means of diversification
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Questions
1. Collateralized commodities futures refers to: A. Long commodity Futures + Long Treasury securities equal to the value of commodities Futures position. B. Long commodity Futures + Short Treasury securities equal to the value of commodities Futures position. C. Short commodity Futures + Long Treasury securities equal to the value of commodities Futures position. 2. In a Contango commodity market an unchanged spot price will result in a roll yield that will be: A. Positive B. Negative C. Zero
3. Compared to a active investor a passive investor invests in commodities: A. To make speculative profits B. To provide current income C. To hedge against inflation risk
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Questions
4. A position squeeze occurs in the commodity markets when A. A large institutional player takes advantage of a structural imbalance in supply and demand B. A future is priced higher than the expected spot price C. A future is priced cheaper than the spot price
5.
The least likely means to enhance the return from a commodity index is to A. Roll management B. Rebalancing C. Securitization
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Solutions
1. A. Long commodity Futures + Long Treasury securities equal to the value of commodities Futures position. 2. B. In a contango commodity market an unchanged spot price will result in a roll yield that will be negative 3. C. To hedge against inflation risk 4. A. A large institutional investor generally creates a positional squeeze when it takes advantage of
the imbalance in the supply-demand of a commodity. 5. C. Returns from an index can be enhanced through the use of a high collateral return, roll management, rebalancing and maturity management.
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Extra-Quiz Questions
1. The limitation in which the disclosure of past performance of all the funds managed vests with the fund manager is termed as:
A. Back-filling bias B. Survivorship bias C. Self-selection Bias
2. An investor is considering the purchase of a commercial real estate and provided following information:
Gross potential rental income Vacancy & collection loss rate Insurance Taxes Utilities and maintenance

175,000 8% 15,000 12,000 25,000
Calculate the appraisal value of the property if market cap rate is 10%?
A. 1,210,000 B. 1,090,000 C. 1,230,000
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3. Which of the following is least likely correct?
A. Survivorship bias leads to the index being calculated on the basis of surviving funds only and may ignore the funds which are closed and hence the risk is over stated. B. The investments made by hedge funds may not be traded actively resulting in the managers using stale prices and hence reporting stability in the fund's performance, thus under stating the variance (risk). C. Managers may cherry pick and report only those funds which have strong performance leading to self selection bias.
4. The probabilities that a venture capital investment will fail is given below:
1st year 2nd year 3rd year 4th year 18% 23% 25% 17%
An investment of $ 15mn is expected to return $ 90mn if the investment company survives till the end of the 4th year. Calculate the rate of return earned on this investment by venture capitalist?
A. 56.5% B. 23.9% C. 32.7%
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5. Which of the following are most likely associated with ETFs?
A. Due to liquidity factors, ETFs may trade at a price different from its NAV B. ETFs cannot be short sold C. ETFs are actively managed
6. When can a hedge fund manager claim to have achieved the high watermark?
A. When the fund manager provides a return in excess of a specified target return B. When the fund manager earns a return in excess of the risk free rate This filesthe has expired at till 30-Jun-13 C. When the value of the fund exceeds highest level achieved date
7. A UK Global macro fund manager wants to invest his funds. Which of the following scenarios are least likely suitable for him for investing purposes?
A. Steep fall in the US dollar
B. An acquisition of a distressed firm by another foreign company on expectations of synergy benefits C. Low volatility in the Japanese stock markets
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Solutions
1. C.
When the index only includes surviving funds and not the discontinued ones, its called survivorship bias. Hence B is incorrect. Hedge fund index includes mostly those managers who have strong track record is called back-filled bias. Hence A is incorrect. However the funds to be disclosed voluntarily at the discretion of the fund manager leads to Self-selection bias, hence C is correct.
2.
B.
NOI= 175000*(1-8%)- 25000 15000- 12000= 109,000 Appraisal value= 109,000/10%= 1090,000
3.
A.
Due to survivorship bias the risk depicted by the index is under stated as it does not factor the performance of the poorly performing funds.
4.
B.
Projected cash flow at the end of 5th year= 0.82*0.77*0.75*0.83*90mn= 35.37mn 35.37= 15*(1+r)4 r =23.9%
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Solutions
5. A.
ETFs can be short sold and margined. ETFs are constructed to mirror the composition and structure of an index, hence they are passively managed.
6. C.
When the value of the portfolio reaches the highest level since vintage, its termed high watermark. Hence option C is correct.
7. B.
An event driven fund manager would be looking for investment in the distressed firm's acquisition.
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Five Minute Recap

Types of Fees Load charges Front-end Back-end Components of Expense Ratio Fund Management Charge (FMC) Administrative fees Continuing distribution fees - 2b-1 fees Style: Underlyings investment characteristics Value(low P/E) vs. growth (high P/E) Large cap, midcap, small cap Sector: A particular industry focus. Banking Industry Energy Sector Index: Index funds track a specific index. S&P 500 DJIA Nifty
Some significant biases that exist are: Self-selection bias Backfill bias Survivorship bias Smoothed pricing Option-like strategies Fee structures and gaming

Advantages of ETFs: ETFs can be traded intraday, shorted, and margined. Low operating expense ratio. In-kind creation and redemption of shares keeps premiums and discounts to NAV at a minimum. Less capital gains liability compared to open-end funds. Immediate reinvestment of dividends. Risks of ETFs: Market risk of the index tracked by the ETF. Trading prices of ETFs can differ from NAV. Leverage and credit risk for ETFs that use derivatives. Tracking error risk. Net asset value (NAV) = Value of the funds assets Liabilities ----------------------------------------------(Number of Units)
Types of Funds International: All over the world - home country. Global: All over the world + home country. Stable value: Short-term fixed income government securities Guaranteed: Guaranteed by the issuing investment company, pay principal + set rate of interest.
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Five Minute Recap

Contango Backwardation
Risks in investing in Hedge Funds: Illiquidity Mispricing of Securities Counterparty Credit Risk Settlement risk/errors Short selling may result in short covering losses Meeting margin calls
This files has expired at 30-Jun-13 Hedge Fund Classification:

Commodity Index Strategy: It is not a passive strategy The manager will have to actively manage when to roll over their open futures/forwards. As commodity index weightings keep changing over time, the manager should ensure that the exposure is appropriate at the time of each roll over The manager also need to keep track of the collateral yield as and when they mature and replace them Long/short funds: Market-neutral funds: Global macro funds: Event-driven funds:
Income Approach for Real Estate Valuation
NOI Market cap rate Benchmark NOI Market cap rate Benchmark transaction price Appraisalprice
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Open End Mutual Funds

Closed End Mutual Funds

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Mutual Funds: Types, Fees And NAV

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Mutual Funds: Types, Fees And NAV

Components of Expense Ratio

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Sector: A particular industry focus.

Index: Index funds track a specific index.

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Index Funds Lower Fund Management Charges Low Portfolio Turnover

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Money Market Funds

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Comparing Mutual Funds With Other Investment Products

Exchange Traded Funds

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Comparing Mutual Funds With Other Investment Products

Separately Managed Accounts (SMA)

Higher minimum investment, usually above $100,000

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Comparing Mutual Funds With Other Investment Products

Can be purchased by anyone

Sold only to accredited investors

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Comparing Mutual Funds With Other Investment Products

Private Equity Funds

This Minimum investment amount is lower

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Fund Management Fee is based on assets under management

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Exchange Traded Funds

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ETF Trust/ Fund

ETF Market Makers

Source: CFA Level I Curriculum

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Advantages And Risks - ETFs

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Real Estate Investments

Characteristics of real estate:

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Valuation Of Real Estate

Sales comparison Approach:

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Valuation Of Real Estate (Cont..)