Alternative Investments: Strategies & Performance - Chapter 21

What are the various types of alternative strategies?

1. Relative Value Strategies

   • profit from pricing inefficiencies between related securities

   • low correlation to markets (market neutral)

2. Event Driven Strategies

   • aim to capitalize on specific events such as mergers or acquisitions

   • Dependent on specific corp events

3. Directional Strategies

   • focus on anticipating market trends or movements to generate returns.

   • higher market exposure

Identify the strategies that are most likely to be used in Alternative Mutual Funds.

• Long/short equity

• market neutral equity

• global macro (liquid assets only)

• Managed futures (trend following)

• certain relative value strategies (convertible arbitrage, fixed income arbitrage)

• event driven strategies only if events involve publicly traded securities with sufficient liquidity

What are some risk measures?

Risk measures include standard deviation, beta, value at risk (VaR), and maximum drawdown. These metrics help assess the volatility and potential loss associated with an investment.

Standard Deviation → measures volatility of returns

Beta → measures sensitivity to the market

VaR → estimates potential loss in value over a defined period for a given confidence interval.

Maximum Drawdon → measures the largest peak-to-trough decline in the value of an investment.

What are some risk adjusted return measures to Alt strategy fund investments?

Risk adjusted return measures include the Sharpe ratio, which evaluates return per unit of risk taken, and the Sortino ratio, which focuses on downside risk. Additionally, alphameasures the excess return of an investment compared to a benchmark, and the information ratio assesses returns in relation to benchmark, adjusted for tracking error.

What are some challenges of benchmarking Alt investment performance?

Challenges include the lack of standardized benchmarks, differing strategies across funds, and the difficulty in assessing illiquid assets. Additionally, the heterogeneous nature of alternative investments complicates performance comparisons. Lack of transparency regarding underlying assets and strategies can further hinder benchmarking efforts.

What are the due diligence steps of benchmarking alt investment performances?

1. Understand the strategy

   • investment approach, expected return drivers, market exposure

2. Assess the manager

   • experience

3. Review fund structure

   • Fees, redemption term, liquidity, regulatory status

4. Analyze Market Risk

   • use of leverage, stop loss policies, diversification methods

5. Operational Overview

   • custodian, auditor, fund admin, compliance systems

6. Performance Evaluation

   • consistency, volatility

What investor groups might liquid alts be most suitable for?

Typically suited for retail investors ho want exposure to alt strategies without high minimums and illiquidity of hedge funds.

Moderate-to-high risk tolerance investors seeking diversification

medium to long term investment horizons

looking for inflation hedges or non-correlated returns

portfolio diversification strategies.