Concepts Description
Alternative Investment Portfolio Management
Common features 1. Group based on portfolio role :
‐ Real estate + commodities : offer exposure to risk factors / return that stock / bonds can't provide
‐ Hedge funds + Managed futures : depend on manager skill → offer exposure to special investment strategies
‐ Private equity + Distress securities : combine of 1 & 2
2. Common features :
‐ Low liquidity
‐ Diversification : low correlation with stock and bond
‐ Due dilligence costs :
+ High cost in research + maintain investment
+ Require specialised expertises + skills
+ Market lack transparency → difficult to obtain informa on
‐ Difficult to evaluate performance
Due dilligence assessment 1. Assess market opportunity : are there exploitable inefficiencies that suit manager's specialty
2. Assess investmetn process :
‐ Manager's advantages
‐ Process to identify opportunities
3. Assess the organisation :
‐ Stable + Well run
‐ Staff turnover
4. Assess the people : character, integrity, competence
5. Assess terms and structure of investment :
‐ Fee structure
‐ Alignment between manager's interest and investor
‐ Lock‐out period
‐ Exit strategy
6. Assess service provider : outside firms support the business
7. Review documents
8. Write‐up
Issues for private wealth clients 1. Issues :
‐ Tax : require tax expert
‐ Suitability : suit with investor's time horizon and liquidity needs
‐ Communication : difficult to communicate complex strategy
‐ Decision risk : risk of emotionally abandon a strategy at max loss
‐ Concentrated position of closely held companies and private residence
2. Solution : core‐satellite portfolio (core stock and bond + satellite alternative investment)
Real estates 1. Types :
‐ Direct : ownership of residences, commercial real estates / land
‐ Indirect : invest via Real estate investment trust (REIT), Commingled real estate funds (CREF), separately managed accounts, and infrastructure funds
2. Advantages / Disadvantages :
‐ Advantages :
+ Low volatility return
+ Low correlation with stocks and bonds
+ Inflation hedge
+ Tax advantage
+ Potential leverage return
+ Direct control of properties (direct investment only)
+ Able to diversify geographically (direct investment only, since indirect investment is already diversified)
‐ Disadvantages :
+ High info + transaction costs
+ Potential changes in tax law
+ High operating cost
+ Inability to subdivide direct investment
+ Large idiosyncratic risk component
+ Geographical risk ‐ deteriorate neighborhood (direct investment only)
Alternative Investment Portfolio Management
Common features 1. Group based on portfolio role :
‐ Real estate + commodities : offer exposure to risk factors / return that stock / bonds can't provide
‐ Hedge funds + Managed futures : depend on manager skill → offer exposure to special investment strategies
‐ Private equity + Distress securities : combine of 1 & 2
2. Common features :
‐ Low liquidity
‐ Diversification : low correlation with stock and bond
‐ Due dilligence costs :
+ High cost in research + maintain investment
+ Require specialised expertises + skills
+ Market lack transparency → difficult to obtain informa on
‐ Difficult to evaluate performance
Due dilligence assessment 1. Assess market opportunity : are there exploitable inefficiencies that suit manager's specialty
2. Assess investmetn process :
‐ Manager's advantages
‐ Process to identify opportunities
3. Assess the organisation :
‐ Stable + Well run
‐ Staff turnover
4. Assess the people : character, integrity, competence
5. Assess terms and structure of investment :
‐ Fee structure
‐ Alignment between manager's interest and investor
‐ Lock‐out period
‐ Exit strategy
6. Assess service provider : outside firms support the business
7. Review documents
8. Write‐up
Issues for private wealth clients 1. Issues :
‐ Tax : require tax expert
‐ Suitability : suit with investor's time horizon and liquidity needs
‐ Communication : difficult to communicate complex strategy
‐ Decision risk : risk of emotionally abandon a strategy at max loss
‐ Concentrated position of closely held companies and private residence
2. Solution : core‐satellite portfolio (core stock and bond + satellite alternative investment)
Real estates 1. Types :
‐ Direct : ownership of residences, commercial real estates / land
‐ Indirect : invest via Real estate investment trust (REIT), Commingled real estate funds (CREF), separately managed accounts, and infrastructure funds
2. Advantages / Disadvantages :
‐ Advantages :
+ Low volatility return
+ Low correlation with stocks and bonds
+ Inflation hedge
+ Tax advantage
+ Potential leverage return
+ Direct control of properties (direct investment only)
+ Able to diversify geographically (direct investment only, since indirect investment is already diversified)
‐ Disadvantages :
+ High info + transaction costs
+ Potential changes in tax law
+ High operating cost
+ Inability to subdivide direct investment
+ Large idiosyncratic risk component
+ Geographical risk ‐ deteriorate neighborhood (direct investment only)
