CAIA level 1 - Topic 2 Introduction to alts with Complete Solutions

4 types of alternative assets - ANSWER-Alternatives are defined by inclusion: Real Assets Hedge Funds Private Equity Structred products Real Assets - ANSWER-Direct ownership of non financial assets: - natural resources - commodities - real estate - land - infrastructure - IP (intellectual property) 5 Structures of Alternatives - ANSWER-TRICS: - trading - marked by high skill & complex strategy (hedge fund) - regulatory - marked by lower government regulation and taxation ( - institutional - private & non-retail markets - compensation - performance based fee & incentive structure - securities - unlike traditional equity & debt cash flow structure Structures of Real assets - ANSWER-Institutional Securities Regulatory Compensation Hedge Funds - ANSWER-Privately organized investment vehicles with little regulation - involved shorting, leverage or derivatives - includes managed future Private equity - ANSWER-Equity and debt positions which are not publicly traded - venture capital - LBOs - mezzanine debt - distressed debt Structured Products - ANSWER-Instruments created to exhibit particularly return, risk, taxation, or other attribute - include CDOs and credit derivatives Return characteristics of alternatives - ANSWER-NIDI Non-normality - do not follow bell curve (not easily modeled or predicted) Illiquidity - investment trades infrequently and/or with low volume; often nondivisible lumpy assets Diversifiers - low correlation with traditional assets; absolute return products Inefficiency - market prices do not reflect all available information; may lead to superior risk-adjusted performance Methods of analysis - ANSWER-RSVP - return computation - use cash flows due to lack of market values - statistical - incorporate the non-normality of returns - valuation - incorporate evaluation of fund managers, investment illiquidity, unique cash flows & appraised valuation - portfolio management - address non-normality and illiquidity Other factors of alternatives - ANSWER-3is Information asymmetries Incomplete market Innovation 4 goals of alternatives - ANSWER-- active management (outperform benchmark) - arbitrage - simultaneous long and short relative value positions - return enhancement - increasing average returns - return diversifier - focus on decreasing risk Absolute return standard - ANSWER-Returns are evaluated independently of market, usually against zero or risk less rate Relative return st