private Equity (diversification effects)

[ryanunsw]

A or B
PE offer relatively low diversification
PE offer good diversification

 

[CareerChange]

A? as they are similar to Equities.

 

[3rd Long]

A. better as return enhancement than diversification tool.

 

[ryanunsw]

yes, but the text uses “moderate” - making it quite hard to judge…

 

[comp_sci_kid]

A 100%, PE is correlated with S&P as you invest in ‘microcap’ companies

 

[ryanunsw]

initial thoughts were - all Alt inv offer pretty good diversification…

 

[bigwilly]

Depends on the PE… I can have a PE vehicle that invests in Distressed Debt. Stupid question. PE will add diversification to most portfolios.

 

[ryanunsw]

comp_sci_kid Wrote:
——————————————————-
> A 100%, PE is correlated with S&P as you invest in
> ‘microcap’ companies
agree, thanks CSK. another point saved!

 

[bigwilly]

I hate when they try to lump HFs and PEs into a single bucket.

 

[ryanunsw]

bigwilly Wrote:
——————————————————-
> Depends on the PE… I can have a PE vehicle that
> invests in Distressed Debt. Stupid question. PE
> will add diversification to most portfolios.
kinda agree with you willy, don’t think CFAI would have these kind of Qs in real exam

 

[comp_sci_kid]

yeah, if they say PE that invests in distressed then both return and low correlation, but if they just say PE, iw ould say traditional PE (buyout,vc)

 

[kr.h2006]

I think this is in one of the Book 6 exam questions - don’t have my books with me - but PE offers high returns and low diversification. I guess if they say something in the preamble that hints at diversification then maybe the diversification benefit is higher.

 

[ryanunsw]

awesome memory kr.h2006!
only posted part of the Q in compliance with the “Posting Copyrighted Materials Code”

 

[jimmylegs]

Good return, not as good diversifcation benefits as other alternative investments. They tend to be correlated with equities.

 

[kr.h2006]

oh haha yeah is that what that is? I didn’t understand why your original post was in that format. Copyright rules…ok.

 

[zigy]

Did they put distressed debt in PE category? It was in hedge fund category last year. Correct me if I am wrong since it has been awhile, but distressed debt fund buys debt and shorts equity of the same distressed firm. That certainly sounds like hedge fund strategy.

 

[comp_sci_kid]

zigy Wrote:
——————————————————-
> Did they put distressed debt in PE category? It
> was in hedge fund category last year. Correct me
> if I am wrong since it has been awhile, but
> distressed debt fund buys debt and shorts equity
> of the same distressed firm. That certainly sounds
> like hedge fund strategy.
what you described is distressed debt arb. regular distressed invests in HY debt

 

[asdffdsa]

distressed debt can be PE or HF and the distinction is the length of the holding period and the level of “activeness” in the investment.
HF: buy positions in distressed firms and hope for a turn around. they may lobby the board as active investors. usually looking for a short or medium term investment.
PE: long-term investment that involves buying the company’s debt with the intention of taking the company over and fixing it from the inside out (i.e., highly active). edit: this is sometimes referred to as vulture funds.
i think you are describing distressed debt arbitrage, which is a HF strategy.

 

[zigy]

OK, thanks.

 

[sticky]

asdffdsa Wrote:
——————————————————-
> i think you are describing distressed debt
> arbitrage, which is a HF strategy.
I don’t think so. Distressed debt arbitrage (long distressed debt and short equity of the same company) is one of the 3 distressed securities investing strategies (not HF)
p.36, Schwesar #4
- sticky