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Agenda

Fixed Income - Session 18

Dated 12th October 2014

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Alternate Investments

Key differences with traditional investments

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Alternate Investments

5 categories of alternate investments

1) Hedge Funds

2) PE Funds

3) Real Estate

4) Commodities

5) Other – Art, Furniture, Antiques etc

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Alternate Investments

Potential benefits of Alternative Investments

1) Low correlation – Historical trend

2) Higher return on an average - Mispricing

Two potential problems

3) Survivorship Bias

4) Backfill Bias

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Alternate Investments

Hedge Funds

Key things:

1) Absolute vs Relative Basis – Return

2) Less regulated

3) Less Liquidity – Lock-in period, Redemption fees

4) Fund of Funds – Portfolio of hedge funds

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Alternate Investments

Hedge Funds

Strategies

1) Event driven1) Merger Arbitrage2) Distressed Restructuring3) Activist shareholder

2) Relative Value Strategies

3) Macro Strategies

4) Equity hedge fund strategies

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Alternate Investments

Private Equity

1) LBOs1) MBOs2) MBI (Mgmt buy-in)

2) Venture Capital1) Formative Stage2) Later stage3) Mezzanine Financing

Exit Strategies

3) Trade Sale4) IPO5) Recapitalization6) Secondary Sale7) Write-off / Liquidation

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Alternate Investments

Private Equity Company Valuation

1) Market Comparables Approach

2) DCF

3) Asset Based Approach

Real – Estate Investment

4) Residential Property5) Commercial real estate6) REITs

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Alternate Investments

Real Estate Valuation

1) Comparable sales approach

2) Income approach

3) Cost approach / Replacement cost

Commodities

4) ETFs

5) Equities linked to commodity business1) Might not be perfectly correlated

6) Managed future funds

7) Individual managed funds

8) Specialized funds

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Alternate Investments

Commodity future pricing

Cotango vs Backwardation

Hedge Fund Fees

1) Management Fee and

2) Incentive Fee – Hurdle Rate

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Alternate Investments

Due Diligence

1) Organisation

2) Portfolio Management

3) Operations and Controls

4) Risk Management

5) Legal review

6) Fund Terms

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