More about Alternative Investment

Real Estate:

Real Estate Equity investing:

1)    Many expenses are tax deductible

2)    More leverage

3)    Direct control

4)    Geographical diversification

5)    Lower volatility

6)    Indivisible

7)    High information and commission costs

8)    Geographical risks

Private Equity:

1. Limited Partnership or LLC – limited liability and avoid double taxation
2. Timeline: Commitments + 5 years capital calls (commitment period) + 7-10years + optional 5 years
3. Compensation: sponsor’s own capital investment + management fee (1.5-2.5%) + incentive fee (carried interest 20%)
4. Sponsor is the fund manager
5. Crawl-back: give back early distributions if failed to meet target

Committed funds: commitments at the beginning and need to provide as called during the commitment period.

For investors:

Low liquidity (7-10 years), be ready for capital calls, diversification needs portfolio > 100M

Commodities:

Return of commodity futures: spot + collateral + roll

Spot return is the change of future price due to the change of spot price

Collateral return is the risk free rate return. (as you can long contract + invest in RFR instead of buying commodity right away)

Roll return: due to backwardation, future < spot, so as time goes by, you earn money already

Higher Storability and economic activity related will provide better hedge to expected inflation. Only when it is storable would people purchase more to save for the future. And high inflation means economic activity is high and will have more demand on the economic activity related commodities.

Distressed Securities:

Long-only investing – high yield because not accessible to all investors or other investors do not what to do the necessary due diligence

e.g. High-yield investing in below investment grade debt

e.g. Orphan equities investing in purchasing equities from a spun-off

Distressed debt arbitrage – buy debt and short equity

Equity decline faster than debt (when fall) but interest return higher than dividend (when rise)

Private Equity (Vulture Fund) – gain control to the company and reorganize

Risks: Event, market, market illiquid and J- (J-risk refers to human factors as the court and judge)