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1、Lecture 6Alternative Investments Reading:UBS Pension Fund IndicatorsBrown and Reilly, Chapter 24Solnik and McLeavey (2003), International Investments Chapter 8MN50322 Investment ManagementAimsAfter this topic you should know:Know the characteristics & properties of mutual funds/unit trustsKnow the c

2、haracteristics & properties of closed-end funds/investment trustsKnow the meaning of Net Asset ValueKnow the characteristics & properties of Exchange Traded FundsKnow the different types of venture capital/private equityKnow the characteristics & properties of hedge fundsKnow the properties of real

3、estate and other alternative assets as an asset classMN50322 Investment ManagementGlobal fund managementMN50322 Investment ManagementAlternative investmentsMiscellaneous category of investment instruments includes anything other than equities, bonds or derivatives. Asset class that increase returns

4、and benefit from diversificationGrown in popularity due to “Search for yield” Alternative investments have a number of similar features:Relatively illiquid;Uncertainty about current market value;Limited historical data/information;Extensive investment analysis required.MN50322 Investment ManagementW

5、hat is an Investment Company?An investment company invests a pool of funds belonging to many individuals in a portfolio of individual investments such as stocks and bondsInvests in other companies sharesCollective investment schemes: Co-mingling of assetsRather than buy individual securities directl

6、y from the issuer, investors acquire shares indirectly through shares in an investment companyDiversification at low costInvestment management skills?Investment companies sell shares in itself and uses proceeds to buy securities The total market value of all investments divided by the number of fund

7、 shares outstanding is the net asset value (NAV)MN50322 Investment ManagementInvestment Companies PoliciesCommon stock fundsMany different funds with varying stated investment objectivesAggressive growth, e, precious metals, international stocksSector funds concentrate in an industryInternational fu

8、nds invest globallyBond fundsInvest in long-term government, corporate, or municipal bondsBond funds vary in bond quality selected for investment Balanced funds/Managed fundsInvest in a combination of stocks and bonds depending on their stated objectivesTwo types of investment companies:Open-end fun

9、ds (mutual funds, unit-trusts)Closed-end funds (investment trusts)MN50322 Investment ManagementMN50322 Investment ManagementA closed-end fund/investment trust is an closed-end collective investment. Closed end because the number of shares in issue is fixedCollective because it puts together money fr

10、om different investors for a professional investment manager to manage. Investors buy/sell shares in the closed end fund on a stock exchange.Closed end funds are not redeemable”Fixed number of sharesInvestors who sell shares in the fund, sell them to another investorPrice of closed-end fund shares d

11、epend on supply and demand May trade above or below the shares net asset value (NAV). Closed-end fund discountsClosed-end funds/investment trustsMN50322 Investment ManagementA mutual fund/unit trust is an open ended collective investment. Open ended because the number of units in each trust will var

12、y according to supply and demandCollective because it puts together money from different investors for a professional investment manager to manage. Investors buy/sell shares in the mutual fund from the fund itselfInstead of stock exchange.Mutual fund shares are redeemable from fundWhen investors buy

13、 shares in mutual funds, the fund manager will use money to buy additional securitiesInvestors pay NAV to acquire shares in mutual plus any fees that fund imposes at purchase (such as sales loads)Mutual Funds/Unit Trusts MN50322 Investment ManagementClosed-end investment companyStock trades on secon

14、dary marketNet asset value (NAV) is determined twice daily, but market price determined by supply and demandDiscounts from NAV can be opportunitiesFewer restrictions on illiquid investmentOpen-end investment companiesInvestors trade with the mutual directlySell and repurchase shares at NAVDifference

15、s between Closed-End and Open-End FundsNet Asset Value Net asset value, or NAV, of an investment company is the companys total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, the investme

16、nt companys NAV will be $90 million. Because an investment companys assets and liabilities change daily, NAV will also change daily. NAV might be $90 million one day, $100 million the next, and $80 million the day after. “Per share NAV“ is obtained by dividing its NAV by the number of shares that ar

17、e outstanding. For example, if a mutual fund has an NAV of $90 million, and investors own 10 million of the funds shares, the funds per share NAV will be $9MN50322 Investment ManagementMutual Fund CostsLoad versus no-load open-end fundsLoad funds charge sales commission up to 8.5% of NAV, but usuall

18、y not a redemption feeNo-load imposes no initial sales charge, so it sells shares at NAV, but may charge a small redemption fee of 1/2%Barber and ODean (2005) show that investors are more performance sensitive to load fundsContingent deferred sales loads, or redemption charges, or “rear-end loads”,

19、decline over timeFund management feesTypically around 1-2% of assets under managementPortfolio turnoverExpense ratiosMN50322 Investment ManagementExchange-Traded Funds (ETFs)An ETF is a type of investment company whose portfolio mimmicks a particular market index. For example, Spiders or SPDRs, inve

20、sts in all of the stocks contained in the S&P 500 Composite Stock Price Index ETFs are depository receipts (like ADRs), where a financial institutions buys a basket of securities (mimicking a particular index), and then issuing share certificates against these assetsUnlike unit trusts, ETFs trade on

21、 an exchangeMN50322 Investment ManagementS&P Depository ReceiptsAmerican Depository ReceiptsAdvantages & Disadvantages of ETFsBeing similar to stocks, exchange traded funds offer more flexibility than your typical mutual fund. ETFs can be bought and sold throughout the trading day, allowing for intr

22、aday trading - which is rare with mutual funds. Traders have the ability to short or buy ETFs on margin. Low annual expenses rival the cheapest mutual funds BUTCommissions - like stocks, trading exchange traded funds will cost you. Unlike mutual funds, ETFs dont necessarily trade at the net asset va

23、lues of their underlying holdings, meaning an ETF could potentially trade above or below the value of the underlying portfolios. Bid-ask spread, meaning you might buy the ETF for 15 1/8 but can only sell it for 15MN50322 Investment ManagementHedge FundsHedge funds are a private equity vehicle that u

24、ses a variety of investment strategies to seek to exploit inefficiencies in marketsGrown in number from as few as 300 in 1990 to anything up to 9,000According to data by Chicago-based Hedge Fund Research Inc. (HFR); CityUK Assets have grown from around $200 billion in 1998 to about $1.8 trillion at

25、the end of 2010Originally terms refers to “market-neutral” funds, going long and short in a market to exploit an inefficiencyHence hedging market riskSubsequently, term hedge fund has come to pass a wide variety of alternative investment strategies.Effectively an unregulated investment pooled vehicl

26、e which may invest in various financial instruments Free from regulatory and disclosure requirementsBut increasingly under pressure to be regulated Often small: extremely flexible in their investment options and change their portfolio faster than larger regulated vehiclesMN50322 Investment Managemen

27、tGrowth of hedge fund industryMN50322 Investment ManagementHedge Fund PerformanceHedge funds generate “value” from two sources: Alpha Risk-adjusted excess returns According to Fung, Hseih, Naik & Ramadorai (2005) average hedge fund monthly returns from TASS 1994-2004 were 0.9% In contrast S&P monthl

28、y returns were 0.8% Diversification Earns positive returns when other asset classes are performing poorly But beware performance figures of hedge funds: survivorship biases unregulated “only sing when youre winning”MN50322 Investment ManagementAverage Hedge Fund ReturnsMN50322 Investment ManagementD

29、ifferences between Hedge Funds & Mutual FundsMN50322 Investment ManagementWhy are hedge funds successful? Small & flexible Technological innovations (IT) has led to financial innovations Allows traders who understand financial innovation to benefit Specialised Focused on their own areas of expertise

30、 Tending to avoid risks outside those areas; Operates on a performance fee structure (2:20) Attracts successful managers and Incentivises these managers Incentive alignment: hedge fund managers often have their own money invested in the fund.MN50322 Investment Management Stock selection/equity hedge

31、d combinations of long-short positions, normally in equities, aiming to exploit under and overvalued securities): what is short-trading? bottom-up rather than top-down; though risk-management may be top-down pairs trading - market neutral combination of assets from same issuer Directional Trading st

32、rategies based on speculation about market direction Relative value strategies arbitrage focused on the spread relationships between pricing components of financial assets may involve minimal market risk but often requires leverage to enhance returns. Covered interest rate parity Convertible arbitra

33、ge Event driven Mergers: buy target/short acquirer Specialist credit strategies vulture funds: distressed securities investing distressed debt Funds of fundsTaxonomy of hedge fund strategiesMN50322 Investment ManagementVenture Capital/Private EquityVenture capital involves an equity stake in a start

34、-up or relatively young company, which is not listed on a stock market. A venture capitalist is a financial intermediary raising funds from private equity market to invest these funds in a limited number of start-up companiesAs well as providing equity VC will also monitor and advise the start-up co

35、mpany.Seat on BoardAim of the VC is to ultimately exit the company via a stock market listingPrivate equity is an equity stake in an unlisted company (irrespective of age)Private equity fund raises funds from private equity market to invest in a portfolio of unlisted companiesKay Report (2012) comme

36、nts on the decline in number of companies listed on London Stock Exchange due to growth in Private EquityMN50322 Investment ManagementStage/type of venture capital investmentSeedStart-upOther early stageExpansion.Management buy-out (MBO)Management buy-in (MBI)Buy-in management buy-out (BIMBO)Institu

37、tional buy-out (IBO)VCPrivateEquityMN50322 Investment ManagementTypes of Private EquityMN50322 Investment ManagementVC/PE PerformanceMN50322 Investment ManagementSource: BVCA, 2010Real Estate/PropertyReal estate investments include land, buildings, warehouses, offices, car-parks, retail space and re

38、present a tangible investment.Forms of real estate: Free and clear equity (full ownership rights);Leveraged equity, which includes ownership rights but subject to a debt (mortgage); Mortgage loans are a type of debt instrument. Aggregation (collective investment) vehicles are investment companies with investments in real estate: REITsA mortgage is a pledge of real estate ownership