CFA Notes - Alternative

Note

I. Hedge Fund

（1）Definition

Hedge funds are private investment vehicles that manage portfolios of securities and derivate positions using a variety of strategies. Its strategies include

1. event-driven strategies；
2. realtive value strategies；
3. marco strategies；
4. equity hedge strategies.

（2）Event-driven Strategies

Event-driven strategies seek to profit from short-term events, typically involving potential changes incorporate structure such as an acquisition or restructuring, that are expected to affect individual companies.

（3）Relative Value Strategies

Relative value strategies seek to profit from a pricing discrepancy between related securities. The expectation is that are pricing discrepancy will be resolved in time. This strategy typically involves buying and selling related securities.

（4）Macro Strategies

Macro strategies are seeking to profit from expected movements in economic variables influenced by major economic trends and events.

（5）Equity hedge Strategies

Equity hedge strategies are focused on public equity markets and take long and short positions in equity and equity derivative securities. They can be thought of as the orginal hedge fund category. Equity hedge strategies are not focused on equity trades catrgorized as consistent with event-driven or macro strategies.

i. Types of Equity Hedge Strategies

1. Market neutral 市场中性策略是指同时构建多头和空头头寸以对冲市场风险，在市场不论上涨或者下跌的环境下均能获得稳定收益的一种投资策略；
2. Fundamental value 基本价值策略指运用基本面分析寻找价值被低估的公司，并买入这些公司的股票；
3. Quantitative directional 走势策略是指运用技术分析估值公司股票，通常根据市场预测方向决定做空或做多的程度

ii. Fee Structure

common fee structure = management fees + incentive fees

e.g., “2 and 20” = 2% management fees + 20% incentive fees

（6）Due diligence

1. Investment strategy；
2. Investment process；
3. Competitive advantages；
4. Historical returns；
5. Valuation and returns calculation methods；
6. Longevity；
7. Amounts of assets under management；
8. Management style；
9. Key person risk

（7）Case of Hedge Fund

II. Commodities & Real Estate

（1）Commodities

i. Definition

The returns of commodities are based on changes in price rather than on income stream such as interest, dividends or rent. And holding commodities incurs costs for transporation and storage, thus most investors trade commodity derivatives.

ii. Types of Commodities

1. Spot goods；
2. Futures

iii. Cantango

The contango usually refers to the fact that the spot price is lower than the futures price under normal supply and demand, and the short-term contract is lower than the forward contract price.

iv. Backwardation

The backwardation refers to the fact that the spot price is higher than the futures price under special circumstance; or the price of the recent month contract is higher than that of the forward month contract price.

（2）Real Estate

i. Definition

Real Estate refers to an economic activity that capital owners invest their capital in the real estate industy in order to get the expected return in the future. There are various forms of real estate investment. Real estate development by related enterprises is one of the most familiar forms.

ii. Valuation Methods of Real Estate

1. Comparable sales approach 比较收入法；
2. Income approach 收入法；
3. Cost approach 成本法

iii. Investment Risks in Real Estate

1. Property values are subject to variability based on national and global economic conditions, local real estate conditions, and interest rate levels.
2. Property development is subject to regulatory issues, construction delays, and cost overruns；
3. Leverage increases the risk to equity investors and also debt investors.

iv. Case of Real Estate

REITs = R eal E state I nvestment T rusts

III. Private Equity

（1）Definition

Private equity（PE）means invest either in privately owned conpanies or in public companies with the intent to take them private. It mainly includes：

1. Leverage Buyouts；
2. Venture Capital；
3. Developmental Capital；
4. Distressed Investing

（2）Leverage Buyouts

i. Definition

Leverage buyouts mean acquiring public companies or established private companies with a significant percentage of the purchase price financed through debt.

ii. Categories of Leverage Buyouts

1. Management buyouts 管理层收购；
2. Management buy-in 管理层换购

（3）Venture Capital

i. Definition

Venture capital（VC）is a form of financing that is provided by firms or debt to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth （in terms of number of employees, annual revenue）.

ii. Stage of Venture Capital

1. Formative stage 成型阶段；
2. Later stage 后期阶段；
3. Mezzanine-stage 成熟期/夹层资本

（4）Developmental Capital

Development capital means minority equity investment in mature firms that are looking for capital to expand or restructure.

（5）Distressed Investing

Distressed investing is investing debts of mature companies in financial difficulties in expectation of their debt increasing in value.

（6）Difference

按股权大小由高到低排序：

1. Leverage buyouts；
2. Venture capital；
3. Developmental capital