- Open-end fund: continuous offering, sales or redemption fees, ongoing management fees, possible ongoing distribution fees
- Net Asset Value = value of fund asserts - fund liabilities / #shares outstanding
- Closed-end fund: fixed number of shares, IPO; trade like stocks, bid-ask spread(share price at premium or discount)
- fixed supply of shares, trade at large discounts/premiums as demand changes
- Exchange-Traded Funds(ETF): fixed portfolio, usually mimics an index
- advantages: diversification, trade like equity, efficient operating expense ratios
- disadvantages: few indexes to track, inefficient markets(low trading volume), tracking error
- in-kind redemption
- Real Estate Investment
- close-end investment; trade on the stock market
- Comingled funds: pools of capital created by institutions to invest in real estate projects
- Net Operating Income: property's gross potential income * %vacancy or collection losses - operating expenses(maintenance, insurance and property taxes)
- investment and financing decisions are made seperately; market value analysis does not consider how the asset will be financed
- Sales comparison approach - recent trasactions
- Income approach estimation: value = NOI/required return (property valuation)
- Cost approach
- Hedonic price estimation - more formalized/structured sales comparison approach
- Venture Capital
- NPV = (probability of survival x estimated payoff) / (1+required return) - initial investment
- Hedge Funds
- seek absolute return
- pursue various investment strategies
- flat percent fee + performance-based fee(incentive)
- Risk factors
- illiquidity risk: decreased trading flexibility when trading in thin markets
- counterparty risk: exposure to creditworthiness of the broker-dealers
- settlement risk: counter-party default
- pricing risk: broker-dealers adopt extremely conservative pricing policies, which requires hedge funds to post a greater margin
- Investment strategy
- sector~ : particular industry
- index~ : portfolio to mimic the benchmark index (e.g. S&P500)
- style~ : investments with common underlying characteristics
- Funds
- Market-neutral funds: long and short positions; offset to hedge against market movements
- Long/short funds: take both long/short positions; no offset attempt
- Global macro funds: bet on direction of a market, currency, interest rate; no offset
- Event-driven funds: focus on unique market opportunities; no offset attempt
- Cherry picking: reporting selected results
- Non-market valuation: smoothes results, reduces reported risk
- Survivorship bias: poor performers bail out&disappear; returns biased upwards, risk biased downward
- Asymmetrical returns: standard deviation becomes a misleading risk measure
- Fund of Funds
- diversification
- additional management fees, dependance to manager's selection
- Closel Held Company Valuation
- legal definitions of intrinsic value, fundamental value, and fair value can differ among jurisdictions
- discount for lack of liquidity/marketability compared to comparable publicly traded firm, lack of control
- premium for control/controlling interest
- Distressed Securities: companies on the brink of bankruptcy, have filed for bankruptcy protection, or attempting to avoid bankruptcy with out-of-court debt restructuring
- similar to venture capital investing - illiquid asset, long expected investment horizon, requires heavy involvement by investors, extensive analytic work
- Commodities investment
- gives exposure to an economy's production and consumption growth
- directly related overall economy growth/recession
- savings in commodities prices are likely to be larger than changes in finished goods prices
- primary motivations: inflation hedge, speculation on the near-term direction of commodity prices
- commodity-linked equity: shares of commodity producing companies (eg. oil companies such as Shell)
- commodity-linked bonds: provide income as well as exposure to commodity price changes
- Collateralized Commodity Futures
- enter into a futures contract, buy T-bill equal to contract value
- Holding period return = T-bill %returns + futures %return(change in contract value)
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