Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
“ALTERNATIVE INVESTMENTS”
1. INTRODUCTION
� AIs are perceived to behave differently (provide diversification) from traditional
investments.
� Absolute return objective ⇒to provide +ve return throughout the economic
cycle.
� Relative return objective ⇒ return relative to an equity or F.I benchmark.
F.I = Fixed Income
PE = Private Equity
RE = Real Estate
VC = Venture Capital
LBO = Leverage Buyout
ABS = Asset Backed Securities
AIs = Alternative Investments
MBS = Mortgage Backed Securities
2. ALTERNATIVE INVESTMENTS
� AIs are alternatives to long-only positions in stocks, bonds & cash.
� AIs are almost always actively managed.
� Characteristics common to many AIs:
� Illiquid underlying investments.
� Narrow manager specialization.
� � Correlation with traditional investments.
� Less transparency & low level of regulation.
� Limited historical data.
� Unique tax & legal considerations.
� High net worth individuals & institutions are the typical investors in AI.
� HF indices may be inherently biased upwards due to survivorship & backfill biases.
� Different weightings & constituents in index construction can significantly affect the indices & their
results & comparability.
2.1 Categories of Alternative Investments
Hedge Funds Private Equity Funds
� Manage portfolio of securities &
derivative positions using variety of
strategies.
� Often highly leveraged & employ
long & short positions.
� Generally invest in private
companies or public companies with
the intent to take them private.
� Majority of PE activity involves LBOs
& VC investments.
Real Estate Commodities
� Direct or indirect investment in
buildings & / or land.
� Securitization structures broadened
the definition of RE investing.
� Physical commodity investments or
investments in businesses engaged
in the production of physical
commodities.
� Main vehicles ⇒ commodity futures
contracts & funds benchmarked to
commodity indices.
Others
These investments may include tangible assets (e.g.
wine, art, stamps etc) & intangible assets (e.g. patents).
1
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
2.2 Return: General Strategies
Ways to Achieve Returns
Passive Return Active Return
� Assume that markets are efficient &
focus on β drivers of return.
� Expected alpha return is zero for
passive managers.
� Efficiently take on market risk.
� Assumption ⇒ inefficiencies exist &
alpha return after adjusting for β
risk is possible.
� Alpha returns are results of
managers’ special skills in capturing
non-systematic opportunities in the
market.
Absolute Return Market segmentation
� Return independent of market
returns.
� No market index to beat.
� Formal performance objective ⇒
cash rate, real return target or
absolute nominal return.
� Capital can’t migrate effortlessly from
lower expected return areas to higher
ones.
� Segmentation brought on by investment
constraints that provide an opportunity
for more flexible managers to move into
higher returning segments quickly.
Alpha Seeking Strategies
Concentrated Portfolios
� Concentrating assets among fewer securities, strategies
& / or managers (less diversification).
� Higher return if these concentrated positions
outperform the market (�alpha potential).
Risks of AIs
� Risks can be considered both on stand-alone basis & within the context of
portfolio.
� Risks ⇒ low liquidity, transparency & limited redemption availability.
� ��������⇒�ℎ������� = ���������������
����������������� ����
� Sharpe ratio & downside risk measures ignore low correlation of AIs with
traditional investments.
2.3 Portfolio Context: Integration of Alternative Investments
with Traditional Investments
� Key motivation for investing in AIs ⇒ diversification
potential.
� AIs also improves portfolio’s risk-return profile.
2
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
2.4 Investment Structures
� Most common structure ⇒ partnership.
� Fund is the general partner (GP) ⇒ investors are limited partners (LPs).
� Less regulation.
� GP runs the business & bears unlimited liability.
� Management fees are based on assets under management.
� Incentive fees are based on realized profits.
� Fee is only earned after the fund achieves a specified return (hurdle rate).
� High water marks ⇒ highest cumulative return used to calculate an incentive fee.
3. HEDGE FUNDS
� Characteristics of HF:
� Aggressively managed & highly leveraged portfolio of investments across asset
classes.
� Fewer investment restrictions & goal of generating high returns.
� Usually set up as a private investment partnership.
� Often imposes restrictions on redemptions.
� Funds of funds ⇒ funds that hold a portfolio of HFs.
� Provide diversification.
� Available for smaller investors.
� Expertise in conducting due diligence on HFs.
3.1 Hedge Fund Strategies
3.1.1 Event-Driven Strategies
� Seek to profit from short-term events (e.g.
acquisitions or restructuring).
� Bottom-up strategy.
Merger Arbitrage Distressed/Restructuring
� Generally involve going long on stock of
Target Company & short on stock of
acquiring company when merger is
announced.
� Primary risk ⇒ acquisition does not
occur.
� Focus on the securities of companies
either in bankruptcy or near to
bankruptcy.
� Variety of ways to profit from distressed
securities.
Subdivisions
Activist Special Situations
� Purchase of sufficient equity in order to
influence a company’s policies or
direction.
� These funds operate in public equity
market.
� Opportunities in the equity of companies
that are currently engaged in
restructuring activities other than M&A
& bankruptcy.
3
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
3.1.2 Relative Value Strategies
� Seek profit from a pricing discrepancy b/w related securities.
� Expectations ⇒ pricing discrepancy will be resolved in time.
Fixed Income Convertible Arbitrage Fixed Income Asset Backed
� Zero β investment strategies that seek to
exploit a perceived mispricing b/w a
convertible bond & its component parts.
� Typically involves buying convertible
debt securities & selling the same
issuer’s common stock.
� Focus on relative value b/w a variety of
ABS & MBS.
� Seek to take advantage of mispricing
across different ABS.
Examples
Fixed Income General Volatility
� Focus on the relative value within the FI
markets.
� Currency dynamics & govt yield curve are
important considerations.
Use options to go long or short market
volatility either in a specific asset class or
across asset classes.
Multi-Strategy
� Relative value within & across asset classes.
� Looks for investment opportunities wherever
they might exist.
3.1.3 Macro Strategies
� Focus on top down approach to identify economic trends evolving across
the world.
� Trade in FI, equity, currency & commodity markets.
� Use long &/or short positions to potentially profit from a view on overall
market direction.
3.1.4 Equity Hedge Strategies
� They are focused on public equity markets & take long & short positions
in equity & equity derivative securities.
� Use a “bottom-up” as opposed to “top down” approach.
Market Neutral Fundamental Growth
� Use fundamental &/or quantitative
analysis to identify under/overvalued
securities.
� Portfolio should have a β of
approximately zero.
� Intent ⇒ profit from individual securities
movement while hedging against market
risk.
� Fundamental analysis to identify
companies expected to exhibit high
growth & capital appreciation.
� Long position in identified company
securities.
Examples
4
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
Fundamental Value Quantitative Directional
Fundamental analysis to identify
undervalued securities
� Technical analysis to identify companies
that are under/overvalued.
� Net long or short position depending
upon anticipated direction of market.
Examples
Short Bias Sector Specific
� Technical or fundamental analysis to
identify overvalued equity securities.
� Net short exposure is based upon
market expectations.
� Exploit expertise in a particular sector.
� Use technical & fundamental analysis to
identify opportunities in the sector.
3.2 Hedge Funds and Diversification Benefits
� HFs lack performance persistence.
� Traditional view of HF ⇒ arbitrage players ⇒ seek to earn return while
hedging against risk.
� HFs provides diversification benefit because of less than perfect
correlation with stock market.
3.3 Hedge Fund Fees and Other Considerations
� Common fee structure in HF market is “2&20” which reflects a 2%
management fee & 20% incentive fee.
� Incentive fee is calculated independent of management fees.
� Hurdle rate is frequently set based on a RF rate proxy plus a premium.
� Incentive fee can be based on returns in excess of the hurdle rate or on
the entire return (soft hurdle rate).
� High watermark provision may also included in fee structure.
3.3.1 Fees and Returns
� Leverage has the effect of magnifying gains or losses because the HF can
take a large position relative to the capital committed.
� HFs normally trade through prime brokers.
� The � the margin requirement, the � leverage is available to the HF.
� Redemptions can magnify losses for HF.
� When drawdown occurs, investors may decide to exit the fund or
redeem at least a portion of their shares.
� Redemption fees ⇒ discourage redemption & help to recover
transaction costs.
� Lock up period gives the HF manager time to implement & potentially
realize the expected result of a strategy.
� FOFs may offer more redemption flexibility than afforded by direct
investment in HFs.
3.3.2 Other Considerations
5
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
� Valuations are important for calculating performance & meeting
redemptions.
� When market prices or quotes are used for valuation, funds may differ in
which price or quote they use:
� Common practice ⇒ use avg. quote.
� Conservative practice ⇒ use bid prices for longs & ask prices for
shorts.
� Any model should be independently tested, benchmarked & calibrated
to industry-accepted standards to ensure a consistency of approach.
� Liquidity discounts are necessary to reflect fair value.
� Trading NAV ⇒ incorporates liquidity discounts ⇒ based on the size of
the position held.
� Reporting NAV ⇒ based on quoted market price.
3.4 Hedge Fund Valuation Issues
� FOFs have an additional layer of fees.
� Key due diligence factors include:
� Investment strategy.
� Investment process.
� Competitive advantage.
� Track record.
� Size & longevity.
� Management style.
� Key person risk.
� Reputation & plans for growth.
� Systems risk management & investor relations.
3.5 Due Diligence for Investing In Hedge Funds
� There are different stages & types of PE investing.
� The focus of PE firms may ∆ as business conditions & the availability of
financing change.
4. PRIVATE EQUITY
Leveraged Buyouts Venture Capital
� LBO funds that acquire public
companies or established private
companies mainly through debt.
� Assets of the target company serve as
the collateral for the debt.
� After the buyout, the target becomes or
remains a privately owned company.
� Invest or provide financing to private
companies with high growth potential.
� VC can be provided at a variety of stages.
Categories of PE
Development Capital Distressed Investing
Minority equity investments in more
mature companies that are looking for
capital to expand or restructure operations
� Buying the debt of mature companies in
financial difficulties.
� Turnaround investors ⇒ buy the
company’s debt & plan to be more active
in the management & direction of the
company.
6
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
� PE funds are typically structured as partnerships similar to HFs (outside investors
are LPs & PE firm as GP).
� PE firms usually charge both a management fee & an incentive fee on a fund basis.
� Management fees generally range from 1 to 3% of committed capital.
� GP does not earn an incentive fee until the LPs have received their initial
investment back.
� Claw back provision ⇒ requires the GP to return any funds distributed as
incentive fees until the LPs have received back their initial investment & 80%
of the total profit.
4.1 Private Equity Structure and Fees
� Management Buyouts (MBO) ⇒ current management is involved in the acquisition.
� Management buy-ins (MBIs) ⇒ current management team is being replaced & the
acquiring team will be involved in managing the company.
� Potential returns in this category are to a large extent due to the use of leverage.
4.2.1 Leveraged Buyouts
4.2 Private Equity Strategies
� PE firms use debt to finance a significant proportion of each deal to � equity
returns & no. of transactions.
� Typical LBO capital structure ⇒ equity, bank debt & high yield bonds.
� Mezzanine financing (MF) ⇒ debt or preferred shares with a relationship to
common equity due to a feature such as attached warrants or conversion options.
� Being subordinate to senior & high yield debt MF pays a higher coupon rate.
4.2.1.1 LBO Financing
� Some characteristics of attractive target companies for LBOs include:
� Depressed stock price.
� Willing management.
� Inefficient companies.
� Strong & sustainable CF.
� Low leverage & significant amount of physical assets.
4.2.1.2 Characteristics of Attractive Target Companies for LBOs
� Portfolio Company ⇒ the company that is being invested in & will
become part of the portfolio of the VC fund.
� VC investors are actively involved in portfolio companies.
4.2.2 Venture Capital
Formative Financing Later-Stage Financing
� Company is in the process of being formed.
� Angel investing ⇒ capital provided at idea
stage.
� Seed-stage financing⇒ supports production
development & market research.
� Early stage financing ⇒ provide to companies
moving toward operation but before
commercial production & sales have occurred.
� This financing is provided after
commercial production & sales have
begun but before any IPO.
� Funds may be used for initial expansion
or major expansion.
VC Fund Financing
7
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
� Provided to prepare to go public.
� Represents the bridge b/w the
expanding company & the IPO.
VC Fund Financing
� Several other specialties for PE firms include:
� Minority equity investing.
� Distressed investing ⇒ purchasing the debt of a troubled company.
� Distressed debt investors are called vulture investors.
� Investing in companies in specific industries.
4.2.3 Other Private Equity Strategies
� Ultimate goal for PE ⇒ improve underperforming businesses & exit them at high
valuations.
� Exit strategies:
� Trade sale ⇒ sale of a company to strategic buyer such a competitor.
� IPO ⇒ selling of shares to public investors through an IPO (highest price).
� Recapitalization ⇒ not a true exit strategy.
� PE firm maintains control but allows the PE investor to extract money from
the company.
� Popular strategy when IR is�.
� Secondary sale ⇒ sale to another PE firm or group of investors.
� Liquidation ⇒ occurs when transaction has not gone well.
4.2.4 Exit Strategies
� Due to less than perfect correlation with traditional investments, PE
funds can add diversity to portfolio.
� By identifying skillful PE fund managers, investors may benefit from
superior returns.
4.3 Private Equity: Diversification Benefits, Performance, and Risk
4.4 Portfolio Company Valuation
Market or Comparables Approach Discounted Cash Flow Approach
� Use multiples of different measures.
� Large, mature private companies ⇒
EBITDA multiple.
� Values a company or its equity as the PV
of the relevant expected future CF.
� ���� ��������� = ���������
������
Approaches to PE Valuations
Asset-Based Approach
� Value of a company based on the values of its underlying assets
less the value of any related liabilities.
� Value of the company to the equity holders.
� Valuations can be arrived at using fair or liquidation values.
� Liquidation value ⇒ net amount that will be realized if
the business is terminated.
8
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
� IR, capital availability expectations & refinancing risk must be
considered & evaluated.
� PE investments are long-term illiquid investments.
4.5 Private Equity: Investment Considerations and Due Diligence
� Direct or indirect equity investing in RE property such as land & buildings.
� Debt investing in RE includes mortgage loans or MBS investing.
� Reasons for investing in RE:
� Competitive long-term total return potential.
� Multiple year leases with fixed rents lessen CF impact from economic shocks.
� Diversification benefits.
� Provide inflation hedge if rents can be adjusted quickly for inflation.
� Unique features of RE compared with other investment asset classes:
� Indivisibility.
� Unique characteristics.
� Fixed location.
5. REAL ESTATE
Debt Equity
Private � Mortgages � Direct ownership of real estate.
Ownership can be through sole
ownership, joint ventures, real estate
limited partnership, or other
commingled funds.
Public � Mortgage-backed securities (residential
and commercial)
� Collateralized mortgage obligations
� Shares in real estate corporations
� Shares of real estate investment trusts
5.1 Forms of Real Estate Investment
Reference: Level I Curriculum, Volume 6, Reading 66, Page 205
� Leveraged ownership ⇒ property title is obtained through an
equity purchase combined with mortgage financing.
� Mortgage loans represent passive investments where the
lender expects to receive a predefined stream of payments.
� Direct equity investment in a residence with the intent to occupy.
� If purchase is partially financed, any �(�) in the value of the home �(�) the owner’s equity
in the home.
� Securitization provides indirect, debt investment opportunities in residential property.
5.2 Real Estate Investment Categories
5.2.1 Residential Property
� Appropriate direct investment (equity & debt) for institutional funds or high-net-
worth individuals with long time horizons & limited liquidity needs.
� Direct investment requires active & experienced, professional management.
� Lender conducts financial analyses to establish the creditworthiness of the borrower
before providing the debt financing.
5.2.2 Commercial Real Estate
9
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
� Mortgage REITS ⇒ risk & return characteristics similar to fixed income investments.
� Equity REITS ⇒ invest primarily in commercial or residential properties & employ
leverage.
� Sources of return to equity REITS= rental income – debt servicing.
5.2.3 REIT Investing
� MBS structure ⇒ buying a pool of assets & assigning the income & principal returns
into individual security tranches for commercial MBS.
5.2.4 Mortgage-Backed Securities (MBS)
Combination of Funding
Debt
70%-75%
Property
Owners’ Equity
25%-30%
Pool of
Loans
Collection of Assets
Real
Estate
Asset
Pool of
Properties
Assorted Securities
Investment-Grade
CMBS 60%-70%
High-Yield
CMBS
5%-10%
BB Rated
B Rated
Unrated
Commercial Mortgage-
Backed Securities First
Loss
Last
Loss
Reference: Level I Curriculum, Volume 6, Reading 66, Page 208
� Timberland ⇒ offers an income stream based on the sale of timber products as a
component of total return (low correlation with other asset classes).
� Flexible investment ⇒ harvest more trees when timber prices are up & delaying
harvests when prices are down.
� Farmland ⇒ perceived to provide an inflation hedge.
� Returns ⇒ related to harvest quantities & agricultural commodity prices.
� Two main property types:
� Row crops⇒ planted & harvested annually.
� Permanent crops ⇒ grows on trees or vines.
� Little flexibility in harvesting as compared to timberland.
5.2.5 Timberland and Farmland
� RE index can generally be categorized as an appraisal index, transactions-based index
or a REIT index.
� Appraisal indices ⇒ use estimates of value as inputs to the indices.
� Rely on comparable sales & CF analysis techniques.
� These indices understate volatility because appraisals are done periodically.
� Transactions-based indices ⇒ use repeat sales of properties to construct the indices.
� Sample selection bias.
� Higher the no. of sales the more reliable & relevant is the index.
� REIT indices ⇒ use the prices of publicly traded shares of REITS to construct the
index.
� Index may not represent the properties of interest to the investor.
5.3 Real Estate Performance and Diversification Benefits
Property Owners’
Equity 25-30%
10
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
Comparable Sale Approach Income Approach
� Approximate value based on recent sales
of similar properties.
� Adjustments are made for differences in
key characteristics of property ⇒
condition, age, location & size.
� Direct capitalization approach
� Estimates the value of an income
producing property based upon the
level & quality of NOI.
� NOI ⇒ income to the property after
deducting operating exp (property tax,
insurance, maintenance utilities &
repairs) but before depreciation,
finance cost & income tax.
� �������ℎ������ = ���
������
� Cap rate ⇒ discount rate-growth rate
� Discounted CF approach ⇒ discounts
future projected CFs to arrive at a PV of
the property.
5.4 Real Estate Valuation
Cost Approach
� Evaluates the replacement cost of the
property by estimating the value of land
& the costs of rebuilding using current
construction costs & standards.
Income Based Valuation Asset Based Valuation
� Typically similar to direct cap approach.
� Funds from operation (FFO) & adjusted FFO
are used as measure of income.
� FFO = NI + Dep ± gains (loss) from sale of RE
property.
� AFFO adjusts the FFO for recurring capex.
� This approach calculates a REIT’s NAV.
� REIT’s NAV = Estimated MV of REIT’s total
assets – value of its total liabilities.
� REIT shares are often traded at value other
than NAV per share.
5.4.1 REIT Valuations
� RE investment may fail to perform in accordance with expectations.
� Other risks include:
� Change in govt regulation.
� Ability of fund management to select finance & manage real properties.
� Leverage magnifies the impact of gains & losses.
5.5 Real Estate Investment Risks
� Commodities ⇒ physical products.
� Return ⇒ based on ∆ in price rather than on an income stream.
� Most commodity investors trade in commodity derivatives to avoid storage &
transportation costs associated with holding the underlying commodity.
� Commodities include precious & industrial metals, energy products & agri products.
� Commodity derivatives may be attractive to investors because these investments
provide an inflation hedge & diversification benefits.
6. COMMODITIES
� Commodity derivatives include futures, forwards, options & swaps.
� Commodity indices typically use the price of futures contracts on the commodities
included in them rather than the prices of the commodities themselves.
� Commodity indices vary in the commodities included in them & the weighting
methods used.
6.1 Commodity Derivatives and Indices
11
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
� Alternative means of achieving commodity exposure include:
� ETF ⇒ suitable for investors who can only buy equity shares or seek the
simplicity of trading them.
� Common stock of companies exposed to a particular commodity.
� Managed futures funds.
� Individual managed accounts.
� Funds that specialize in specific commodity sectors.
6.2 Other Commodity Investment Vehicles
� Arguments for investing in commodities include:
� Potential for return ⇒ investors believe prices will � in the short or medium
term.
� Portfolio diversification ⇒ commodities behaved differently during the business
cycle from stocks & bonds.
� Inflation hedge ⇒ commodity prices affect inflation calculations.
6.3 Commodity Performance and Diversification Benefits
� Commodity spot prices are a function of:
� Supply & demand.
� Cost of production & storage.
� Value of users.
� Global economic conditions.
� The inability of suppliers to quickly respond to changes in demand levels may results
in supply levels that are too low in times of eco. growth & too high in times of eco.
slowing.
6.4 Commodity Prices and Investments
� The price of a commodity futures contract may be approximated by the following
formula
����������� ≈ �������1 + �� + ���������� −convenience �����
where
r = period’s short term risk free rate.
Convenience yield ⇒ yield related to convenience of having physical possession of
the commodity.
� Contango (backwardation) ⇒ futures price > (<) spot price & commodity forward
curve is upward (downward) sloping.
� Source of return for commodity futures contract:
� Roll yield ⇒ Diff. b/w the spot price of a commodity & the price specified in the
future contract.
� Collateral yield ⇒ interest earned on the collateral posted as a good faith
deposit for the futures contract.
� Spot prices ⇒ primary determinant is relationship between current supply &
demand.
6.4.1 Pricing of Commodity Future Contracts
� Collectibles:
� Tangible assets such as antiques & fine art, fine wine, rare stamps & coins,
jewelry & watches etc.
� Provide no current income but potential for higher capital gains.
� Highly illiquid.
� No. of indices that provide information about returns to these investments.
7. OTHER ALTERNATIVE INVESTMENTS
12
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
� The manger of an investment portfolio makes investment decisions consistent with
the portfolio’s established investment policies, taking risk into account.
� Investor due diligence should be used to ensure portfolio risk is effectively managed
by the portfolio manager.
8. RISK MANAGEMENT OVERVIEW
8.1 Investment and Risk Management Process
� Risks vary across alternative investments.
� PE & HF may have long lockup periods.
� Poor manager selection can create a lingering drag on the portfolio.
8.1.1 Risk Management Issues
� Investors should recognize that past performance is not necessarily
representative of future performance.
� In case of illiquid investments, portfolio should be diversified
sufficiently to reduce the possibility of 100% loss.
8.1.2 Risk Issues for Implementation
� Sharpe ratio may not be the appropriate risk – return measure for
alternative investments because measure of return & SD may not be
relevant & reliable.
� Returns are overstated & volatility is understated in alternative
investments.
� Alternative investment returns tend to be leptokurtic &
negatively skewed.
� Downside risk measure (e.g. ���) focus on the left side of the return
distribution curve & Sortino ratio uses downside deviation as
opposed to standard deviation as a measure of risk.
8.2 Risk – Return Measures
A Typical Due Diligence Process
Organization: � Experience and quality of management team, compensation, and staffing
� Analysis of prior and current funds
� Track record/alignment of interests
� Reputation and quality of third-party service providers, e.g., lawyers, auditors, prime brokers
Portfolio Management: � Investment process
� Target markets/asset types/strategies
� Sourcing of investments
� Role of operating partners
� Underwriting
� Environmental and engineering review process
� Integration of asset management /acquisitions/ dispositions
� Disposition process, including how initiated and executed
Operations and
Controls:
� Reporting and accounting methodology
� Audited financial statements and other internal controls
� valuationfrequency and approach(es)
� insurance and contingency plans
Risk Management: � Fund policies and limits
� Risk management policy
� Portfolio risk and key risk factors
� Leverage and currencyrisks/constraints/hedging
8.3 Due Diligence Overview
13
Copyright © FinQuiz.com. All rights reserved.
2013, Study Session # 18, Reading # 66
A Typical Due Diligence Process
Legal Review: � Fund structure
� Registrations
� Existing/prior litigation
Funds Terms: � Fees (management and performance ) and expenses
� Contractual terms
� Investment period and fund term and extensions
� Carried interest
� Distributions
� Conflicts
� Limited partners’ rights
8.3 Due Diligence Overview
Reference: Level I Curriculum, Volume 6, Reading 66, Page 222-223
14
Top Related