权益类投资分析其他

TopicWeightingsinCFALevelI

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SessionNO.

Content

Weightings

StudySession1

Ethics&ProfessionalStandards

15

StudySession2‐3

QuantitativeAnalysis

12

StudySession4‐6

Economics

10

StudySession7‐10

FinancialReportingandAnalysis

20

StudySession11

CorporateFinance

7

StudySession12

PortfolioManagement

7

StudySession13‐14

EquityInvestment

10

StudySession15‐16

FixedIncome

10

StudySession17

Derivatives

5

StudySession18

AlternativeInvestments

4

Frameworkofalternativeinvestments

FundsoffundsFeestructuresVenturecapitalLBO

REITs

Performance,diversificationInvestmentvehicles

Futurespricing

HedgeFund

Privateequity

Alternative

Investments

Realestate

Commodities

Otherinvestments

3-53

R63.AlternativeInvestments

Traditionalvs.alternativeinvestments

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Traditional:long-onlyinvestmentsinstocks,bonds,andcash,etc.

Alternative:otherinvestmentvehicleswhichfalloutsidethescopeoftraditionalinvestments,extensiveuseofleverage.

Characteristicsofalternativeinvestments

Notalwaystrue!

e.g.highcorrelationinfinancialcrisis

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•

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IlliquidityofunderlyinginvestmentsNarrowmanagespecialization

Lowcorrelationwithtraditionalinvestments

Lowlevelofregulationandlesstransparency

Limitedandpotentiallyproblematichistoricalriskandreturndata

Uniquelegalandtaxconsiderations

4-53

R63.AlternativeInvestments

Returnsforalternativeinvestments

•

Empirically,themeanreturnstohedgefunds,realestate,privateequity,andventurecapitalexceededthemeanreturnstoglobalstocksandbonds.

Maybeduetoactiveexploitationoflessefficientlypricedassets,illiquidity

premiums,and/oraccountleverage.Mayalsobetheresultoftaxadvantage.

•

Risksforalternativeinvestments

•

Theaveragestandarddeviationishigherthantraditionalinvestments

Buthedgefundshaveloweraveragestandarddeviationandhighermeanreturn,thismaybeduetohedgefundindices’reportingbiases.

Historically,thecorrelationbetweenalternativeandtraditionalinvestmentsislow.Itseemsthataddingalternativeinvestmentstoaportfoliowillimprovebothportfolioriskandexpectedreturn(risk/return

profile)

5-53

Example

Addingalternativeinvestmentstoaportfoliooftraditionalinvestmentswill

mostlikelyresultinanewcombinedportfoliowithreturnsandstandarddeviationthatare,respectively:

Returns

lower

higher

higher

StandardDeviationlower

lower

higher

Solution:B

•

Becausetherisk/returnprofileoftheoverallportfoliowillpotentially

improve.Theoverallriskwillmostlikelydrop,andtheoverallreturnwillmostlikelyrise.

6-53

R63.Risk–Returnmeasures

IsSharperatioappropriateforalternativeinvestments?

•

Illiquidnatureoftheassets

Returnmaynotbereliable→overstated

Standarddeviationmaynotbereliable→understated

Normaldistribution?

•

Alternativeinvestmentreturn:leptokurtic,negativelyskewed

Non-normaldistribution→cannotusestandarddeviationforriskmeasure

VaR,Sortinoratiowouldbeappropriate

Assumingnormaldistribution→underestimatedownsiderisk

Tailevents

•

Stresstesting/scenarioanalysis

7-53

R63.AlternativeInvestments

Example:

Comparedwithtraditionalinvestments,alternativeinvestmentsaremostlikelytobecharacterizedbyhigh:

leverage

liquidity

Regulation

Comparedtomanagersoftraditionalinvestments,managersofalternativeinvestmentsarelikelytohavefewerrestrictionson:

holdingcash.

buyingstocks.

usingderivatives.

8-53

R63.AlternativeInvestments-Categories

Hedgefunds

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Manageportfoliosofsecuritiesandderivativepositionsusingavarietyofstrategies.

Longandshortpositions,highlyleveraged,absolutereturn.

Privateequityfunds

•

Investinstart-upcompaniesthatarenotpubliclytraded,orinpubliccompanieswiththeintenttotakethemprivate.

Realestate

•

Outrightownershiporthroughrealestateequity/debtinvestments.E.g.MBS,REITs,etc.

Commodities

•

Inphysicalcommodityproducts,eitherthroughowningcashinstruments,utilizingderivatives,orinvestinginbusinessesengagedintheproductionofcommodities.

Other

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Tangible(Finewine,art,stamp,coin,etc.)andintangible(patents)

9-53

R63.Hedgefunds

Characteristicsofhedgefunds

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Aggressivelymanagedinvestmentportfoliosacrossassetclasses.Useofleverages,takelongandshortpositions,and/orusesderivatives.

Aimedathigherreturns,eitherinabsoluteorrelativesense.

Privateinvestmentpartnershipopentoalimitednumberofinvestorswillingandabletomakealargeinitialinvestment.

Hedgefundindicesmaynotreflectactualperformance

Survivorshipbias

Backfillbias

LessrestrictedthantraditionalinvestmentsOftenimposerestrictionsonredemptions.

Lockupperiod

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•

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Noticeperiod

10-53

R63.AlternativeInvestments-Investmentstructures

Mostcommonstructure:Partnership

•

Limitedpartner(LP):LPistheinvestorswhounderstandandableto

assumetherisksintheinvestment.

LPownsafractionalinterestbasedontheirinvestmentandasagreedto

bythepartners.

LP’sfractionalinterestiscalledhis/hershareofthepartnership.

Thepartnershipsarelocatedintax-efficientlocations.

Generalpartner(GP):GPrunsthefund

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11-53

R63.Fundsoffunds

Fundsoffunds:

•

Fundsoffundsarefundsthatholdaportfolioofhedgefunds.

FOFsenablesmallinvestorstohavereturnsinhedgefunds.

FOFshavesomeexpertiseinconductingduediligenceonhedgefunds

Negotiatebetterredemptiontermsforinvestors.

FOFsinvestinnumeroushedgefunds,diversifyingacrossfundstrategies,investmentregions,andmanagementstyles.

FOFsmanagerschargeanadditionallayeroffeesbeyondthefeeschargedbytheindividualhedgefundsintheportfolio

12-53

Example

Forahedgefundinvestor,abenefitofinvestinginafundoffundsisleastlikelythe:

multilayeredfeestructure.

higherlevelofduediligenceexpertise.

abilitytonegotiatebetterredemptionterms.

Solution:A

•

Becausefundsoffundstypicallyhaveamultilayeredfeestructurethatmay

dilutethereturnstotheinvestor.

13-53

R63.Hedgefundstrategies

Event-drivenstrategies

Relativevaluestrategies

Macrostrategies

Equityhedgestrategies

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R63.Hedgefundstrategies-Event-drivenstrategies

Event-drivenstrategies

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•

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Seektoprofitfromshort-termeventsthatwillaffectindividualcompanies.Considered“bottomup”strategy.

Includelong/shortpositionsincommonandpreferredstocks,aswellasdebt

securitiesandoptions.

Subdivisions

•

Mergerarbitrage:longthestockofthecompanybeingacquired,andshortthestockoftheacquiringcompany.

Distressed/restructuring:focusonthesecuritiesofcompanieseitherinbankruptcyorperceivedtobeneartobankruptcy.

Activistshareholder:purchasesufficientequitytoinfluenceacompany'spoliciesordirection.

Specialsituations:focusoncompaniesthatarecurrentlyengagedinrestructuringactivitiesotherthanmerger/acquisitionsandbankruptcy.

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•

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15-53

R63.Hedgefundstrategies-Relativevaluestrategies

Relativevaluestrategies

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Seektoprofitfromapricingdiscrepancybetweenrelatedsecurities.

Examplesofrelativevaluestrategies

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Fixedincomeconvertiblearbitrage:Exploitpricingdiscrepanciesbetweenconvertiblebondandthecommonstockoftheissuingcompanies.

FixedIncomeAssetBacked:ExploitpricingdiscrepanciesamongvariousMBSandABS.

GeneralFixedIncome:focusontherelativevaluewithinthefixedincomemarkets.

Volatility:Exploitpricingdiscrepanciesarisingfromdifferencesbetweenreturnsvolatilityimpliedbyoptionspricesandmanagerexpectationsoffuturevolatility.

Multi-Strategy:looksforinvestmentopportunitieswherevertheymightexist.

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16-53

R63.Hedgefundstrategies–Macrostrategies

Macrostrategies

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•

“topdown”approachtoidentifyeconomictrends

Uselong/shortpositionstopotentiallyprofitfromaviewonoverallmarketdirectionasinfluencedbymajoreconomictrendsorevents.

Tradeopportunisticallyinthefixedincome,equity,currency,andcommoditymarkets.

•

17-53

R63.Hedgefundstrategies–Equityhedgestrategies

Equityhedgestrategies

•

Seektoprofitfromlongorshortpositionsinpubliclytradedequitiesand

derivativeswithequitiesastheirunderlyingassets

Examplesofequityhedgestrategies

•

MarketNeutral:Maintainanetpositionthatisneutralwithrespecttomarketrisk.Theintentistoprofitfromindividualsecuritiesmovementswhilehedgingagainstmarketrisk.

FundamentalGrowth:fundamentalanalysistoidentifycompaniesexpectedtoexhibithighgrowthandcapitalappreciation.

QuantitativeDirectional:technicalanalysistoidentifycompaniesthatareunder-andovervalued.

ShortBias:variesitsnetshortexposurebaseduponmarketexpectations,goingfullyshortindecliningmarkets.

SectorSpecific:exploitexpertiseinaparticularsector.

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•

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18-53

R63.HedgeFundFees

Managementfee

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Basedoncapitalundermanagement.

Attractivetoportfoliomanagersbecausethemanagementfeealonewillgeneratesignificantrevenueifassetsundermanagementarelarge.

Earnedirrespectiveofreturns.

•

Incentivefee

•

•

•

Basedonprofitsnetof(orbefore)managementfeeOnlyearnedifthereturnexceedsahurdlerateHighwatermark→highestvaluereported

Thehedgefundmustrecoverpastlossesandreturntoprevioushighwatermarkbeforeanyadditionalincentivefeeisearned.

Protectclientsfrompayingtwiceforthesameperformance.

“2and20”means2%managementfeeand20%incentivefeeforhedgefunds.

FOFsmaychargeextra1%managementfeeand10%incentivefee.

•

Negotiableterms

Fees,noticeandlockupperiodsarenegotiablewithpotentialinvestors.

longerinvestmentperiods,lowerfees.

19-53

R63.HedgeFundFees

Example1

UCisahedgefundwith$250millionofinitialcapital.Itchargesa2%managementfeebasedonassetsundermanagementatyearend,anda20%incentivefeebasedonreturnsinexcessofan8%hurdlerate.Initsfirstyear,UCappreciates16%.Assumemanagementfeesarecalculatedusingend-of-periodvaluation.Theinvestor'snetreturnassumingtheperformancefeeiscalculatednetofthemanagementfeeisclosestto:

A.11.58%

B.12.54%.

C.12.80%

20-53

R63.HedgeFundFees

Solutionto1

Biscorrect.Thenetinvestorreturnis12.54%,calculatedas:

•

•

•

•

•

•

Endofyearcapital=$250million*1.16=$290millionManagementfee=$290million*2%=$5.8millionHurdleamount=8%of$250million=$20million;

Incentivefee=($290-$250-$20-$5.8)million*20%=$2.84millionTotalfeestoUC=($5.8+$2.84)million=$8.64million

Investornetreturn:($290-$250-$8.64)/$250=12.54%

21-53

R63.HedgeFundFees

Example2

CapricornFundofFundsinvestsGBP100millionineachofAlphaHedgeFundandABCHedgeFund.CapricornFOFhasa"1and10"feestructure.Managementfeesandincentivefeesarecalculatedindependentlyattheendofeachyear.Afteroneyear,netoftheirrespectivemanagementandincentivefees,theinvestmentinAlphaisvaluedatGBP80millionandtheinvestmentinABCisvaluedatGBP140million.TheannualreturntoaninvestorinCapricorn,netoffeesassessedatthefundoffundslevel,isclosestto:

A.7.9%.

B.8.0%.

C.8.1%.

22-53

R63.HedgeFundFees

Solutionto2

Aiscorrectbecausethenetinvestorreturnis7.9%,calculatedas:

First,notethat"1and10"referstoa1%managementfee,anda10%incentivefee

Endofyearcapital=GBP140million+GBP80million=GBP220million

Managementfee=GBP220million*1%=GBP2.2million

Incentivefee=(GBP220-GBP200)million*10%=GBP2million

TotalfeestoCapricorn=(GBP2.2+GBP2)million=GBP4.2million

Investornetreturn:(GBP220-GBP200-GBP4.2)/GBP200=7.9%

23-53

R63.Hedgefunds–otherconsiderations

Usingleveragetoseekhigherreturnsbutmaymagnifylosses

•

Investorsarerequiredtoputupsomecollateral

Helpstoprotectagainstdefault.

Buyingonmargin

Themarginrequirementdependsontheriskinessoftheinvestmentandthecreditworthinessofthehedgefund.

Redemptionsalsomagnifylossesforhedgefunds

Redemptionoccurswhenahedgefundisperformingpoorly.

Whendrawdown(reductioninNAV)occurs,investorsmayrequireliquidationoftheirpositionsandincurtransactioncosts.Thusfurthermagnifythelosses.

Waystopreventredemptions

Redemptionfees

Noticeperiods

Lockupperiods

InvestinginFOFs

24-53

R63.Hedgefundvaluationissues

Whenusingmarketpricesforvaluation

•

•

Commonpractice:useaveragequote,(bid+ask)/2

Conservativeapproach:usebidpricesforlongsandaskpricesforshorts.

Illiquidunderlyingpositions

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Noreliablemarketvalues:usestatisticalmodelstocomputeestimatedvalues.

Modelsshouldbeindependentlytested,benchmarked,andcalibratedtoindustryacceptedstandardstoensureconsistency.

In-housevaluationstopreventconflictsofinterestsaffectingestimates.

Liquiditydiscounts:reflectfairvalue.

TwoNAVs

TradingNAV:incorporatesliquidityaccounts,basedonthesizeofthepositionheldrelativetothetotalamountoutstandingintheissueanditstradingvolume

ReportingNAV:basedonquotedmarketprices.

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25-53

R63.Duediligence

Fundsoffundshavetheexpertise,butthatcomesatacost.

InvestorsshouldstillconductduediligencewhenchoosinganFOFs.

Keyfactorstoconsider

investmentstrategy

investmentprocess

competitiveadvantage,

trackrecord,

sizeandlongevity,

managementstyle,

key-personrisk,

reputation,

investorrelations,

plansforgrowth,

systemsriskmanagement.

26-53

R63.PrivateEquity

Privateequity(PE):investinginprivatelyownedcompaniesorinpubliccompanieswiththeintenttotakethemprivate.

Leveragedbuyouts(LBOs):acquirecompanieswithasignificantpercentageofthepurchasepricefinancedthroughdebt.

Assetsofthetargetcompanyasthecollateralforthedebt

Thedebtbecomespartofthecapitalstructureofthetargetcompany

Venturecapital:investinprivatecompanieswithhighgrowthpotential.

Developmentcapital:minorityequityinvestmentinmaturefirmsthatarelookingforexpandingorrestructuringopportunities.

Distressedinvesting:buyingthedebtofmaturecompaniesinfinancialdifficulties.

27-53

R63.PrivateEquityStrategies–LBOs

LBOwithdebtfinancing

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Ifdebtfinancingisunavailableorcostly,lesslikelytooccur.

TypicalLBOcapitalstructure

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Equity,leveragedloans,highyieldbonds

Mezzaninefinancingisanalternativetobonds.

Mezzaninefinancingreferstodebtorpreferredshareswithwarrantsorconversionoptions.Itpaysahighercouponratethanbankloansandbonds.

Leveragedloanscarrycovenantstoprotecttheinvestors

Requirethecompanytomaintainspecifiedfinancialratioswithinlimits,submitinformation,oroperatewithincertainparameters.

Restrictthecompanyfromfurtherborrowing,orimposelimitsonpayingdividendsormakingoperatingdecisions.

Financedthroughhighyieldbonds

Keydifference:leveragedloansareseniorsecureddebt,whilebondsareunsecuredinbankruptcy.

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28-53

R63.PrivateEquityStrategies–LBOs

CharacteristicsofAttractiveTargetCompaniesforLBOs

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Undervalued/depressedstockprice

Theintrinsicvalueofthecompanyisperceivedhigherthanmarketprice.Privateequityfirmsarewillingtopayapremiumtothemarketpricetosecureshareholderapproval

Willingmanagement

Existingmanagementislookingforadeal.

Inefficientcompanies

Strongandsustainablecashflow

Cashflowisnecessarytomakeinterestpaymentsontheincreaseddebtload.

Lowleverage

EasierforPEfirmstoutilizedebt

Assets

Physicalassetscanbeusedassecurity

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29-53

Example

Whichattributeswouldaprivateequityfirmmostlikelyconsiderwhendecidingifacompanyisparticularlyattractiveasaleveragedbuyouttarget?

Sustainablecashflow

Efficientlymanagedcompanies

Marketvalueexceedsintrinsicvalue

Solution:A

Becauseprivateequityfirmslookforcompanieswithstrongcashflowandthathaveasignificantamountofphysicalassets.Thesephysicalassetscanbeusedassecurityandborrowedagainst.

30-53

R63.PrivateEquityStrategies–Venturecapital

Thestageofventurecapitalinvesting

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Formativestage:

Angelinvesting:Attheideastage,fundsareusedtotransformtheideaintoabusinessplanandtoassessmarketpotential.Oftenprovidedbyindividuals.

Seedstage:supportproductdevelopmentand/ormarketingefforts.ThefirststageatwhichVCfundsinvest.

Earlystage:helpcompaniesmovetowardoperationbutbeforecommercialproductionandsaleshaveoccurred.

Laterstage:aftercommercialproductionandsaleshavebegunbutbeforeanyIPO.Fundsmaybeusedforexpansion.

Mezzaninestage:preparetogopublic.Representthebridgebetweentheexpanding

companyandtheIPO.

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31-53

R63.PrivateEquityStrategies–Venturecapital

Angelinvesting

Seed-Stage

Formative-Stage

Early-Stage

Balanced-StageFinancing

Expansion-StageFinancing

Later-Stage

BridgetoIPO

MezzanineStage

32-53

R63.PrivateEquityStructureandFees

PEfirmsarestructuredlikehedgefunds

PEfundsarestructuredaspartnershipswherethePEfirmistheGP,andinvestorsareLPs.

Feestructuresarealsolikehedgefunds

Managementfees:1~3%ofcommittedcapital.

Distinctionfromhedgefunds:Managementfeeisbasedoncommittedcapital,

notinvestedcapital.

Incentivefees:GPdoesnotearnanincentivefeeuntiltheLPshavereceivedinitialinvestmentback.

PoliciesthatprotectLPs

Clawbackprovision:returnanyincentivefeesuntilLPsreceivedinitialinvestmentbackandtheirprofits.

33-53

R63.PrivateEquity–Exitstrategies

Commonexitstrategies:

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TradeSale:saleofacompanytoastrategicbuyer

Advantages:(a)immediatecashexit;(b)potentialforhighvaluation;(c)fastandsimpleexecution;(d)lowertransactioncoststhananIPO;(e)lowerlevelsofdisclosureandhigherconfidentiality

Disadvantages:(a)possibleoppositionbymanagement;(b)lowerattractiveness.toemployeesoftheportfoliocompany;(c)limitednumberofpotentialbuyers;(d)apossiblelowerpricethaninanIPO

IPO

Advantages:(a)potentialforthehighestprice;(b)managementapproval;(c)publicityfortheprivateequityfirm;(d)abilitytoretainfutureupsidepotential

Disadvantages:(a)hightransactioncosts;(b)longleadtimes;(c)riskofstockmarketvolatility;(d)highdisclosurerequirements;(e)potentiallock-upperiod;(f)IPOisusuallyonlyappropriateforlargercompanieswithattractivegrowth

profiles.

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34-53

R63.PrivateEquity–Exitstrategies

Commonexitstrategies(con’t):

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Recapitalization

Notatrueexitstrategy,butallowsinvestorstoextractmoneyfromthecompany.

Verypopularwheninterestratesarelow

Oftenapreludetoalaterexit

SecondarySale:saletoanotherprivateequityfirmorothergroupofinvestors

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Write-off/Liquidation:Whenatransactionhasnotgonewell,liquidatethe

investmenttomoveontootherprojects.

35-53

R63.PrivateEquity–PortfolioCompanyValuation

Threeapproachestovalueacompany

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Marketorcomparable:valueacompanyoritsequityusingmultiples

EBITDAmultiple

DCFapproach

FCFFandWACC→companyvalue

FCFEandKe→company'sequityvalue

Simpleapproach:incomeorcashflowdividedbyacapitalizationrate

Asset-based

arrivesatthevalueofthecompanytotheequityholders

assumesthatthecompanyvalue=Asset–liabilities

Canbevaluedbyusingfairvaluesorliquidationvalues

Fairvaluesassumeanorderlytransaction

Liquidationvaluesassumeadistressedtransaction

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36-53

R63.PrivateEquity–Investmentconsiderations

Currentandanticipatedeconomicconditions

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Interestrateandcapitalavailabilityexpectations

Refinancingrisk

Longterminvestments

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Requiresalong-termcommitmentonthepartofanLP

Illiquidityaversion:liquidityriskpremium

Duediligence

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GP'sexperienceandknowledge–financialandoperatingvaluationmethodology

alignmentoftheGP'sincentiveswiththeinterestsoftheLPstheplantodrawoncommittedcapital

plannedexitstrategies

37-53

R63.RealEstate

Keyreasonsforinvestinginrealestate

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Competitivelong-termtotalreturnsdrivenbyincomegenerationandcapitalappreciation.

Fixedrentsmaylessencashflowimpactfromeconomicshocks.

Diversificationbenefitsmaybeprovidedbylessthanperfectcorrelationwithotherassetclasses

Potentialtoprovideaninflationhedgeifrentscanbeadjustedquicklyforinflation.

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38-53

R63.RealEstate

Investmentcategories

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ResidentialpropertyCommercialrealestate

Appropriatedirectinvestment(equityanddebt)forinstitutionalfundsorhigh-net-worthindividualswithlongtimehorizonsandlimitedliquidityneeds.

REITInvesting

Riskandreturncharacteristicsdependonthetypeofinvestment

MortgageREITs

EquityREITs

MBS

MBSstructureisbasedonthesecuritizationmodelofbuyingapoolofassetsandassigningtheincomeandprincipalreturnsintoindividualsecuritytranches.

MBSmaybeissuedprivatelyorpublicly.

TimberlandandFarmland

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39-53

R63.RealEstate–Performanceanddiversificationbenefits

Performancemeasurements

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Appraisalindex

useestimatesofvalue(appraisals)asinputstotheindices

relyoncomparablesalesandcashflowanalysistechniques

understatevolatility

Repeatsales(transaction-based)index

usechangesinpricesofpropertiestoconstructtheindices

sampleselectionbiasREITindex

usethepricesofpubliclytradedsharesofREITstoconstructtheindices

Morefrequentlytraded,morereliableistheindex

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Diversificationbenefits

REITindexandequityreturns:highcorrelation

REITindexandbondreturns:lowcorrelation

40-53

R63.RealEstateValuation

Commontechniquesforappraisingrealestateproperty

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Comparablesalesapproach

determineanapproximatevaluebasedonrecentsalesofsimilarproperties.

condition,age,location,andsize

Incomeapproach

Directcapitalization

NOI→propertylevelCFO;caprate

strengthoftenants,theleveloflandlordinvolvement,theextentofrepairsandimprovements,thevacancyrate,managementandoperatingcosts,expectedinflationofcostsandrent.

DCFapproach

Costapproach

evaluatethereplacementcostoftheproperty

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41-53

R63.RealEstateValuation

REITvaluation

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Incomebasedapproach

Similartothedirectcapitalizationapproach

Fundsfromoperation(FFO)andadjustedfundsfromoperation(AFFO)

Caprate

Assetbasedapproach

REIT’sNAV=MKTvalueofassets–MKTvalueofliabilities

REITsharestradeatpricesthatdifferfromitsNAVpershare.(premiumsordiscounts)

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42-53

Example

Arealestatepropertyvaluationwouldleastlikelyusea(n):

incomeapproach.

asset-basedapproach.

comparablesalesapproach.

Solution:B

Thethreeapproachestovaluingapropertyareincome,comparablesales,andcost.Anasset-basedapproachcanbeusedforrealestateinvestmenttrusts,butnotforvaluingindividualrealestateproperties.

43-53

R63.IntroductiontoCommodities

Mostinvestorsinvestincommoditiesusingcommodityderivatives:

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Futuresandforwardcontracts

Futurescontractsareexchange-tradedproducts(ETPs)

Nophysicaldelivery

ForwardcontractstradeOTC

Physicaldeliverycanbeexpected

Optionscontracts

OptionscanbeETPsorOTCtraded

Swapscontracts

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•

Commodityindices

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usethepriceoffuturescontractsonthecommodities,ratherthanthepricesofthecommoditiesthemselves.

performanceofanindexcanbequitedifferentfromtheperformanceoftheunderlyingcommodities.

varyintheconstituentsandtheweightingmethodsused

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44-53

R63.OtherCommodityInvestmentVehicles

Alternativemeansofachievingcommodityexposure:

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ETF

suitableforthosewhocanonlybuyequityorseekthesimplicityoftrading.

mayuseleverage

Commonstockofcompaniesexposedtoaparticularcommodity

E.g.Sinopec

Managedfuturesfunds

Similartohedgefundsinstructure

Individualmanagedaccounts

managedbyprofessionalmanagersonbehalfofhighnetworthindividualsorinstitutionalinvestors

Fundsinspecificcommoditysectors

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•

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45-53

R63.Commodities

Theroleofcommoditiesforinvestinginproductionandconsumption

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Investingincommoditiesgivesaninvestorexposuretoaneconomy’sproductionandconsumptiongrowth.

E.g.whentheeconomyexperiencesgrowth,thedemandforcommoditiesincreases,andpriceincreasesarelikely.

Duringrecessions,commoditypricesarelikelytofallwithdecreased

demand.

Overall,swingsincommoditypricesarelikelytobelargerthanchangesin

finishedgoodsprices.

46-53

R63.IntroductiontoCommodities

Mostinvestorsinvestincommoditiesusingcommodityderivatives:

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Futuresandforwardcontracts

Futurescontractsareexchange-tradedproducts(ETPs)

Nophysicaldelivery

ForwardcontractstradeOTC

Physicaldeliverycanbeexpected

Optionscontracts

OptionscanbeETPsorOTCtraded

Swapscontracts

•

•

Commodityindices

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usethepriceoffuturescontractsonthecommodities,ratherthanthepricesofthecommoditiesthemselves.

perform