*Official Alternative Investment Discussion Thread*

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thepinkman

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OK we’ll see where this goes. I am having a little difficulty studying Alt Investments as its such a small section and there are not many questions on it. Yet as we know there could be 10-15% coming from here. So lets all post small points that we might be tested on. I have a feeling there will be some minute QUALITATIVE stuff. So let the poster below me start it off as I got nothing….
 
I have no clue either what in the world will be tested for “alternatives”. I’ve asked numerous colleagues, no one has got a clue.
all I can think of is the hedge fund stuff and maybe the real estate valuation stuff.
Real estate - MV = NOI/cap rate (cap rate = r-g). Then there are all those real estate investment stuff…apt, warehouses, commericial, land, etc…why people buy them, liquidity issues etc.
So to calculate “r”
1. Direct market cap approach – see above
2. Band of Investments – (mortgage weights x mortgage cost) + (EQ weight x EQ cost)
3. Built up Method - pure interest rate + liquidity premium + recapture premium + risk premium
Hedge funds – EQ investments use Russell 3000, fixed income use ML high yield index (although both indexes are still rather inappropriate BMs). Beta volatility was smooth over the past, so beta estimates are not very accurate. Hmm….I can’t remember anymore.
I need a beer, I swear to god.
 
investment risk, operations risk,fraud risk
investment risk: fixed income investments have equity risk too
 
It’s real estate & hedge funds. I still need to review this part more thoroughly, I was getting killed on HF’s yesterday - even though I get paid for reviewing them full-time at work! CFA is quite spastic about the benchmarks.
 
like value at risk.
I ve never been able to figure out what it is!
 
var
measures the left tail of the left end of a distribuion…holy crap say that 5 times fast…
just know its 2 main strengths
1-gives us a measure of loss (just like max draw down)
2–gives us a probability of it happening ( this is what it does over just looking at max draw down)
know its 3 limitations
1–it is based of off historicals-thus is manager changes stlye it is not as useful
2–it assumes normal distribution of the left tail
3–it assumes risk is addaditive (it is really multiplicitive)
 
kellyc319 Wrote:
——————————————————-
> I have no clue either what in the world will be
> tested for “alternatives”. I’ve asked numerous
> colleagues, no one has got a clue.
>
> all I can think of is the hedge fund stuff and
> maybe the real estate valuation stuff.
>
> Real estate - MV = NOI/cap rate (cap rate = r-g).
> Then there are all those real estate investment
> stuff…apt, warehouses, commericial, land,
> etc…why people buy them, liquidity issues etc.
>
> So to calculate “r”
> 1. Direct market cap approach – see above
> 2. Band of Investments – (mortgage weights x
> mortgage cost) + (EQ weight x EQ cost)
> 3. Built up Method - pure interest rate +
> liquidity premium + recapture premium + risk
> premium
>
> Hedge funds – EQ investments use Russell 3000,
> fixed income use ML high yield index (although
> both indexes are still rather inappropriate BMs).
> Beta volatility was smooth over the past, so beta
> estimates are not very accurate. Hmm….I can’t
> remember anymore.
>
> I need a beer, I swear to god.
I think Kelly has most of it…
With the real estate valuation I think they might try and confuse people by dressing it up like a Corp Finanace question…
calc CFAT = NOI - debt service - taxes payable
calc ERAT = Selling price - selling cost - mortage balance - taxes payable
If the above is required I can them throwing in a requirement to calculate “recaptured depreciation”.
If they ask a question on the Band of Investments like Kelly has described above and they wanted to really test us they “might” ask about the “sinking factor”.. in which case I’m almost certain to lose that mark…
For those asking about VaR .. think about quants, hypothesis testing and normal distribution, then apply that to your hedge funds expected returns. For example,
your hypothesis test might try to evaluate a loss of 20% at the 95% confidence level. Variations of this kind of hypothesis testing and you “should” end up with a largest expected loss @ a given probability level… Hopefully I got that right and not misleading anyone!
I think given how much alt inv is underplayed by schweser it might be an idea to look at the LOSs and make sure one can answer each one……
Good luck all x
 
i think schweser did a good job in alt inv…
cfa has no questions on the topic at all…also schweser actually tests it often, in their q-bank….
to be honest i would have blown it off, but i kept getting smoked on pratice tests and it started pissing me off..
level 1 there was 2 questions on the actual exam w/ realestate one was calculation questuion…
 
I imagine there will be an entire vignette on real estate valuation. You will probably have to compute taxes payable for one question, CFAT for another and ERAT for the last. The first three will probably be valuation questions.
 
Raw Land -
* Low loan to value
* no deprecation (no cash flows)
* investors are speculators
Keep it going…
 
First off its 5-10% so you can GUARANTEE ONE ITEM SET on this…and only one.
It will be a real estate question with one hedge fund q imo…
Look at exam 3pm in Book 6 for a comprehensive example on real estate…
it will be a mix of
quant q’s – calc ATCF, ATER, Gross Inc Mult
qual q’s – why you should use the BOI and how WACC is included…etc.
 
Dude what book in schweser is hedge funds/alternative/real estate in…i dont even remember anymore. :(
 
Just an easy way to calculate taxes on REIT
If the the firm value has appreciated
1. recaptured depreciation = accumulated depreciation
2. capital gains = final selling price - purchase value
else if firm value has depreciated
only
recaptured depreciation = final selling price - book value
both cases final selling price = selling price - selling costs
correct me if i’m wrong….
 
I still don’t know what a “Real Estate Novelist” is from Piano Man. I think Billy Joel is trying to give me a clue.
 
the exam will have a huge table with a 1000 numbers in it to scare the shite out of you….but the q’s will be really easy if you know the concept….imo not a lot of heavy calculations just pull the right numbers from the tables…..
that looks right quant…
 
I’m going to be nauseous, then I’m going to get back to work, but not before I make a note to myself to add this to me quickly-growing list of things to review. Ack.
 
To find Capitalization Rates through Market Extraction Method => (NOI of Comparable) / (MV of Comparable)
To find property values from:
Direct Income Capitalization => (NOI of Actual) / (Cap rate found in Mkt Extration)
Gross Income Multiplier => (Gross Income of Actual) * (MV of Comparable / Gross income of comparable)
 
Apartment complexes:
moderately active,
iflation hedge (u can adj rents/leases)
high leverage
risk: need good management
investor: need big pockets
 
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