CIFA Advanced Level

Alternative Investments Analysis flashcards

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On which four dimensions do alternative investments differ from conventional ones?

Liquidity: generally illiquid, often with long lock-ups, against liquid exchange trading. Regulation: lighter, often open only to sophisticated or institutional investors. Return drivers: manager skill (alpha), illiquidity premia and idiosyncratic risk, rather than broad market beta. Valuation: infrequent, by appraisal or model, rather than frequent market prices.

In a limited partnership fund, how are liability and control split between the partners?

General partner (the manager): unlimited liability and full management control. Limited partners (the investors): liability limited to their committed capital and no role in day-to-day management.

How is an income-producing real asset valued by direct capitalisation?

Value = net operating income / cap rate, with the cap rate implied by comparable transactions. Example: NOI of KES 4,500,000 at a 6% cap rate gives 4,500,000 / 0.06 = KES 75,000,000. It is the same perpetuity logic as a stable income stream capitalised at a required return.

What does a high-water mark do to a hedge fund's incentive fee?

The manager earns an incentive fee only on new gains above the fund's previous highest value. A fund recovering from a loss pays no incentive fee until it exceeds that peak, so investors never pay twice on the same recovered losses. The management fee is still charged.

What is the private equity J-curve?

The shape of cumulative net cash flow (or return) to limited partners over a fund's life. Early years: capital calls, management fees and write-downs push it below zero. Later years: exits produce distributions and the line rises, finishing well above zero if the fund has performed.

How is the equity return on a leveraged buyout worked out at exit?

Equity value at exit = exit enterprise value - debt outstanding. Equity multiple = equity value at exit / equity invested; annualised return = multiple^(1/years) - 1. Example: KES 1,000m bought with 350m equity and 650m debt, 250m repaid, sold for 1,400m: equity at exit = 1,400 - 400 = 1,000m, multiple 2.86x, about 23.4% a year over five years.

In a tranched securitisation, which tranche bears pool losses first, and why does that matter?

Losses hit the equity (most junior) tranche first, then the mezzanine, and the senior tranche last; cash reaches the senior tranche first. So identical collateral produces a senior claim far safer than the average loan and an equity claim far riskier.

What does the option-adjusted spread of an MBS measure, and how is the option cost found?

OAS: the constant spread across all simulated rate paths that makes the model's average present value equal the market price. It is the compensation for credit and liquidity risk after removing the value of the borrower's prepayment option. Option cost = Z-spread - OAS.

How is roll yield calculated, and what sign does it take in contango and in backwardation?

Roll yield = (old contract price - new contract price) / old contract price. Contango (longer-dated contracts cost more): negative, a drag on a long, rolled position. Backwardation (longer-dated contracts cost less): positive.

How are reward crowdfunding, equity crowdfunding and peer-to-peer lending told apart?

By what the funder receives. Reward: a non-financial reward, typically an early or discounted unit of the product, closer to a pre-order. Equity: an equity stake in the company. Peer-to-peer lending: a debt claim repaid with interest.

What are the defining features of alternative investments?