200 likes | 411 Views
A LTERNATIVE I NVESMENTS P ORTFOLIO M ANANGEMENT. Portfolio Management Prof. Ali Nejadmalayeri. Universe of Investments. Universe of Investment. Modern Alternative Investments. Traditional Alternative Investments. Traditional Investments. Hedge Funds Managed Futures
E N D
ALTERNATIVE INVESMENTS PORTFOLIO MANANGEMENT Portfolio Management Prof. Ali Nejadmalayeri
Universe of Investments Universe of Investment ModernAlternative Investments Traditional Alternative Investments Traditional Investments • Hedge Funds • Managed Futures • Distressed Securities • Private Equity • Commodities • Real Estate • Stocks • Bonds
Concerns • Tax Issues • Suitability • Communication with Client • Decision Risk • Equity Stakes in Closely Held Companies
Real Estate • Type of Investments • Real Estate Investment Trust (REIT) • Equity REIT, Mortgage REIT, Hybrid REIT • Commingled Real Estate Fund (CREF) • Infrastructure Fund • Benchmarks • NCREIF, measure of direct investment • quarterly sample of commercial properties owned by large institutions • NAREIT, measure of indirect investment • Real-time, market-cap weighted all REITs in NYSE and AMEX • Other indexes as well produced by NAREIT
Real Estate: Characteristics • Investment Characteristics • Advantages • Tax subsidies, leverage, direct control of assets, geographical diversification, low volatility • Disadvantages • Divisibility, information asymmetries, high transaction costs, high operating costs, locality risk • Role as a Diversifier • Advantages • Some benefit but not when hedge funds and commodities considered • Geographical differences and return persistence
Private Equity/Venture Capital • Purpose • Early stage (seed, start-up, first-stage) and Large-stage financing (2nd, 3rd and mezzanine financing) • Ventures • Angel Investor • Venture Capital Funds and Trusts • Mega- and Mid-Cap Buy-Out Funds • Benchmarks • Annualized IRRs by NVCA and Thomson Venture Economics
PE/VC: Characteristics • Private Equity Investment Characteristics • Illiquidity • Long-term Commitment • Higher risk than seasonal equity • Higher IRR • Limited Information • Private Equity vs. Venture Capital • Buy-out funds are highly levered • Cash flows to BO funds’ investors are often and steady • VC returns are more vague and uncertain
Commodity Funds • Types • Direct Commodity Investment • Purchase of physical commodities • Indirect Commodity Investment • Purchase of commodities-linked companies • Benchmarks • Goldman Sachs Commodity Index (GSCI) • S&P Commodity Index (S&PCI) • Dow Jones – AIG Commodity Index (DJ-AIGCI) • Benchmarks • Total return = collateral + roll + spot returns
CF: Characteristics • Investment Characteristics • Business Cycle related Supply & Demand • Convenience Yield • Future – spot = interest rate + storage + convenience • CY is the consumption timing option return • At low levels of inventory CY is high and vice versa • Real Option Yield • Backwardation (inverted future price curve) is a sign of real option under uncertainty • Role of Commodities • Potential Hedge Against Inflation • Risk Diversifier
Hedge Funds • Types • Equity market neutral: short + long positions • Arbitrage • Convertible Arbitrage: long CB + short stocks • Fixed Income Arbitrage: hedges against direction • Merger Arbitrage: long target and shorting acquirer • Distressed Securities: long distressed bonds • Hedged equity: unbalanced short + long • Global macro: major global trends • Emerging markets: long in EM stocks • Fund of funds: combo of hedge funds
Hedge Funds (Cont’d) • Benchmarks • Monthly • CISDM by the University of Massachusetts, 90 • Credit Swiss/Tremont, 94 • EACM Advisors, 90 • Hedge Fund Intelligence Ltd., 98 • HFR, 90 • Daily • Dow Jones Hedge Fund Strategy benchmark • HFR Indices • MSCI Hedge Invest Index • S&P Hedge Fund indices
Issues with Hedge Fund Indices • Concerns about index construction • Selection, Styles, Weighting, Rebalancing, Investability • Alpha determination • How to measure of alpha • Biases in Indexes • Persistence of volatility thru time • Survivorship bias, poor tracks exit the index • Stale price bias, caused by infrequent trading • Backfill bias, missing parts of return in simulated
Hedge Funds: Characteristics • Investment Characteristics • Long-bias in return leads to less diversifier effect • Replication using stocks and option data is limited • Only reflects certain strategies • New frontiers: • Using stocks, bonds, commodities, etc as risk factors in hedge fund analysis, refer to Prof. Andrew Lo (MIT) • Role as Diversifier • Issues to consider in the context of MVO: • Persistence of performance, portfolio rebalancing, impact of highly non-normal return distributions
Decomposition of HF Returns • “CAN HEDGE-FUND RETURNS BE REPLICATED?: THE LINEAR CASE” Jasmina Hasanhodzica and Andrew W. Lo, Journal of Investment Management, 5(2), 2007, pp 5 – 45
HF Performance Evaluation • Questions • Return achieved? • Rolling return: 1/12 * [R t + … + R t – 12 ] • Volatility including downside risk • Downside deviation (DD): [1/12*∑{min(Rt – R*, 0)}2]1/2 • What performance measure is suitable? • Sharpe ratio: [Ret. – RF]/Std Dev. • Sortino ratio: [Ret. – RF]/Downside Dev. • Gain-to-loss ratio: [# Pos. / # Neg.]*[Up Ret./Dn Ret.] • Correlations • Skewness and kurtosis • Consistency
Managed Futures • Types • Systematic trading strategies • rule-based trend following • Discretionary trading strategies • Based on portfolio managers’ judgments • Benchmarks • CISDM CTA • CTA$ dollar weighted index • CTAEQ equal weighted index
Managed Futures: Characteristics • Investment Characteristics • Zero-sum game; long-run return is risk-free rate • If hedgers pay a premium for liquidity, or arbitrage out inefficiencies • Momentum strategies can have excess return and impart the positive skewness • Options allow to trade on volatility patterns • Role as Diversifier • Can add value to stock/bond/hedge funds • Public commodity pools have had poor performance but private pools added value
Distressed Securities • Types • Hedge fund or Private Equity fund • Asset types • Public debt & equity of distress firms • Orphan equity: shares of reorganized firm • Bank debt or trade notes of distressed firms • Benchmarks • Distressed securities hedge fund indexes • CISDM, HFR, EACM • Altman-NYU Salomon Center Defaulted Public Bond and Bank Loan Index
Distressed Sect.: Characteristics • Investment Characteristics • Negative skewness and large kurtosis • Bad events happen more often than “normal” • Dependent on economic conditions • “Fallen Angel” phenomenon – almost like what is going on CDO market right now! • Role as Diversifier • Only 5% of institutional funds invest in DS!
Distressed Securities Strategies • Long-only Value Investing • High yield (Junk Bond) Investing • Orphan Equity Investing • Distressed Debt Arbitrage • Buy distressed debt and short distressed equity • Private Equity • Prepackaged bankruptcy (vulture funds) • Event risk, liquidity risk, market risk, J-factor risk