CFAⅠAlternative Investments

Categories,Characteristics, and Compensation Structures of Altermative Investments

Categories and Characteristics

Definition of alternative investment

Characteristics of alternative

1. Diversifying power: returns that are uncorrelated with or only slightly correlated with traditional investments.另类投资与其它投资关联度低，从而降低系统性风险
   • Can be correlated in periods of financial crisis.
2. Higher expected returns
3. Illiquidity: the investment trades infrequently.交易少
4. Inefficiency: market prices cannot reflect all availableinformation due to relatively low degree of competition.市场不有效
   • Opportunities of arbitrage and superior risk-adjusted return
5. Narrow specialization of the investment managers专业性高.
6. Less regulation and less transparency than traditional investments透明度低
7. Limited reliable historical risk and return data.数据少
8. Unique legal and tax considerations.税少
9. Higher fees, often including performance or incentive fees管理费高
10. Concentrated portfolios.另类投资本身很集中
11. Restrictions on redemptions (i.e., "lockups" and "gates"")难赎回

Market participants

1. Endowments, pension funds, Sovereign wealth funds, and family offices.
   

Investment Method

Three methods for alternative investments

1. Fund investing间接投资（GP, LP）：Indirect method. Investor contributes capital to a fund,and the fund identifies, selects, and makes investments on the investor's behalf.
   • Investment decisions are limited to either investing in the fund or not.
     
   • Fund investors are typically unable to affect the fund's underlying investments.
2. Co-investing两种都有：The investor invests in assets indirectly through the fund but also possesses rights (known as co-investment rights) to invest directly in the same assets.
   
3. Direct investing自己直接投：An investor makes a direct investment in an asse without the use of an intermediary.
   • Great flexibility and control when it comes to choosing their investments, selecting their preferred methods of financing, and planning their approach.
   • Typically reserved for larger and more sophisticated专业 investors.
     

Due diligence of three methods

1. Direct investing: the focus of the due diligence is the company itself, at a very detailed level.
2. Fund investing: the investor is responsible for conducting due diligence on the fund manager.
3. Co-investing: the investor will conduct direct due diligence on the portfolio company with the support of the manager.

Fund investing strucutre

1. General partner(GP, manager): runs the fund and bears unlimited liability for anything that might go wrong.
2. Limited partners (LP, investors): are outside investors who own a fractional interest in the partnership based on the amount of their initial investment.
   • Play passive roles and are not involved with the management of the fund.
3. There exists a principal/agent problem between GP and LPs.

Key partnership documents

1. Limited partnership agreements (LPAs)合伙协议
   • A legal document that outlines the rules of the partnership and establishes the framework that ultimately guides the fund's operations.
   • May be dense with provisions and clauses.
2. Side letters
   • Exist ouside the LPA.
   • E.g. , notice requirements in the event of litigation.

Compensation and Fees

Compensation structures

1. Management fee
   • Also known as base fee.
   • Typically ranging from 1% to 2% of AUM(hedge fund)交的钱 or committed capital (PE fund)承诺交的钱.
2. Performance fee
   • calculated on profits net of management fees基础是管理费外 or on profits independent of management fees基础包括管理费
   • Also known as incentive fee or carried interest.
   • Typically 20% of excess returns
3. Hurdle rate超过约定回报率才有激励费: a return level that LPs must receive before GP begin to receive incentive fees.
   • Hard hurdle rate超过门槛的部分: the GP earns fees on annual returns in excess of the hurdle rate.
   • Soft hurdle rate超过之前的部分: the fee is calculated on the entire annual gross return as long as the set hurdle is exceeded.
     Usually has a catch-up provision.
4. High water mark水位不断上升: reflects the highest value used to calculate an incentive fee.
   • The incentive fees are only paid when assets under management are above the highest value (net of fees) previously recorded.
   • Protects clients from paying twice for the same performance.
5. Waterfall of PE: a provision that specifies how distributions from a fund will be split and how the payouts will be prioritized.如何给不同类别的合伙人分钱
   • Deal-by-deal (or American) waterfalls: performance fees are collected on a per-deal basis每完成应该项目就分配一次. GPs get paid before LPs receive their initial investment on the entire fund.利好GP
   • Whole-of-fund (or European) waterfalls: GP does not participate in any profits until the LPs receive their initial investment and the hurdle rate has been met.LP拿够后才到GP，利好LP
6. Clawback provision of PE: right of LPs to reclaim overdistributed performance fee.利好LP
   • Are usually activated when a GP exits successful deals early on but incurs losses on deals later in the fund's life.即使不再是GP合伙人，也要为任期内错误决策付出代价，归还酬金给LP
   • Is only as good as the creditworthiness of the GP.
7. Catch-up clause of PE: allows fund managers to earn incentive fee on all profits, given hurdle rate has been achieved.利好GP
   • Profits are distributed only to the limited partners until the hurdle rate is reached.超过hard hurdle rate部分优先全给GP，直到与hard hurdle rate下的收益达到约定百分比，之后就按百分比分成
   • Additional profits are split, with 100% going to the fund manager until the fund manager receives an incentive fee on all of the profits.
     

Custom fee arrangements

1. “2 and 20” and “1 and 10” are common, but variations exist.
2. Fees based on liquidity terms and asset size.
   • Longer lockups are generally associated with lower fees.锁定期长的手续费低
   • Discount fees for larger investors or for placement agents.
3. Founders' shares entitle investors to a lower fee structure.越早投入手续费越低
4. Either/or fees: managers agree either to charge a 1% management fee or to receive a 30% incentive fee above the hurdle, whichever is greater.管理费和激励费只受高的

Different Alternative Investments

Hedge funds对冲基金

Characteristics of hedge funds

1. Private placement offering
   • Limited number of investors and large initial investments.
2. Lighter regulatory compliance burden
3. Light investment restrictions
   • Creatively selects investments in different geographic regions
   • Leverage is often used
   • Generally takes both long and short positions
4. Generate high returns (absolute or risk adjusted basis)
5. Management fees and incentive fees
6. Lockup periods: Investors may be required to keep their money in the hedge fund for a certain period before they are allowed to redeem shares.
   • Soft lockup: an expensive redemption fee is charged.
7. Notice periods: investors may be required to give notice,typically 30-90 days, of their intent to redeem.赎回要提前通知
8. The goal of hedge fund redemption restrictions is typically to increase hedge fund manager flexibility.

Categories of hedge funds

1. Hedge funds are typically classified by strategy.
   • Equity hedge strategies
   • Event-driven strategies
   • Relative value strategies
   • Macro strategies
2. Hedge fund categorization is important to allow investors to review aggregate performance data, select strategies, and select appropriate performance benchmarks.

Forms of hedge fund investments

1. Individual hedge fund
   • Extensive due diligence, high minimum invesmtnet.
2. Funds of hedge funds母基金
   • Diversification
   • Able to negotiate better redemption terms
   • Making hedge funds accessible to smaller investors
   • Expertise in conducting due diligence on hedge funds尽职调查简单
   • Drawbacks: more complex(higher) fees structures

Risk and return of hedge fund investments

1. Self-reporting and survivorship bias
   • Higher returns and lower volatility. → Higher Sharpe ratio.
2. Asymmetric distribution of returns
   • Higher downside deviation. → Lower Sortino ratio
   • Drawdown: cumulative negative returns in a certain period.
3. Risk diversification properties
   • First came to prominence with the dot-com bubble.
   • Expanded it further through direct allocations after 2008.
4. Using market prices or quotes for valuation
   • Common approach: the average quote, (bid + ask) / 2平均计价
   • Conservative approach: bid prices for long position and ask prices for short position最差情况计价
5. Valuation in highly illiquid or non-traded investments缺少流动性导致的偏差
   • "Mark-to-model" basis模型不准确
   • Returns maybe smoothed or overstated价格被平滑
   • Volatility of returns understated低估波动性

Equity hedge strategies权益对冲策略

1. Focus on public equity markets and take long and short positions in equity and equity derivative securities.
   • Generally use a "bottom-up" security-specific approach.
2. Main types:
   • Market neutral对冲风险
   • Fundamental L/S growth成长性基本面分析
   • Fundamental value价值基本面分析
   • Short biased做空有问题的公司
   • Sector specific
3. Market neutral
   • Long positions in undervalued securities and short positions in overvalued securities.
   • Maintains a net position that is neutral with respect to market risk and other risk factors (size, value, industry, etc).
     Portfolio beta is close to zero.
   • Require the application of leverage.
   • Are generally stable, low-return portfolios but are exposed to occasional spurts of volatility.
4. Fundamental L/S growth
   • Use fundamental analysis to identify companies expected to exhibit high growth and capital appreciation.
   • Take long positions in these companies while short companies under downward pressure.
   • Portfolios tend to end up long biased.
5. Fundamental value
   • Use fundamental analysis to identify companies deemed undervalued.
   • Takes long positions in these companies and sometimes hedges the portfolio by shorting index ETFs or more growth- oriented companies deemed overvalued.
   • Portfolios tend to end up long biased, value biased, and small-cap biased.
6. Short biased
   • Focus on shorting overvalued equity securities (against limited or no long-side exposures).
   • Can be useful in terms of weathering periods of market stress.
   • Have a difficult time overall posting meaningful long-term returns.
7. Sector specific
   • Exploit manager expertise in a particular sector and use quantitative (technical) and fundamental analysis to identify opportunities.
   • The more complex a sector or the more opaqueness in accounting practices, the more value sector-specific managers bring.

Event-driven strategies事件驱动策略

1. Event-driven strategies seek to profit from defined catalyst events, such as an acquisition or restructuring.
   • Is based on bottom-up security-specific analysis.
   • Tend to be long biased.
2. Main types:
   • Merger arbitrage购买要合并的公司
   • Distressed/restructuring认为有利好事件
   • Special situations有标志性事件
   • Activist成为股东控制公司
3. Merger arbitrage
   • Long the stock of the company being acquired and short the stock of the acquiring company when the merger or acquisition is announced
   • The primary risk in merger arbitrage is that the announced combination fails to occur and the deal spread re-widens to pre-merger levels.
   • Moderate expected return → application of leverage.
4. Distressed/restructuring
   • Focus on securities of companies either in or perceived to be near bankruptcy.
   • Purchase fixed-income securities trading at a significant discount to par.
   • Or purchase the so-called fulcrum debt instrument expected to convert into new equity upon restructuring.
5. Special situations
   • Focus on opportunities to buy equity of companies engaged in restructuring activities other than mergers, acquisitions,or bankruptcy.
6. Activist
   • Secure sufficient equity holdings to allow them to influence corporate policies or direction.
   • Try to create business catalysts, moving the investment towards a desired outcome

Relative value strategies相对价值策略

1. Seek to profit from a pricing discrepancy between related securities based on an unusual short-term relationship,expecting the discrepancy will be resolved over time.
2. Main types
   • Convertible bond arbitrage
   • Fixed income
   • Volatility
   • Multi-strategy
3. Convertible bond arbitrage
   • A market-neutral investment strategy seeks to exploit a perceived mispricing between a convertible bond and its component parts.
   • The classic convertible bond arbitrage trade is to purchase a convertible bond that is believed to be undervalued and to hedge its risk using a short position in the underlying equity.
4. Fixed income(general)
   • Focus on the relative value within the fixed-income markets,with an emphasis on sovereign debt and sometimes the relative pricing of investment-grade corporate debt.
   • Strategies may incorporate long-short trades between two different issuers, between corporate and government issuers, between different parts of the same issuer's capital structure, or between different parts of an issuer's yield curve.
5. Fixed income (high yield)
   • Focus on the relative value of various higher-yielding securities, including ABS, MBS, and high-yield loans and bonds
   • Opaque mark-to-market pricing and illiquidity issues are significant considerations.
6. Volatility
   • Typically use options to go long or short market volatility.
   • A short-volatility strategy involves selling options to earn the premiums and benefit from calm markets.
     It can experience significant losses during unexpected periods of market stress.
   • A long-volatility strategy tends to suffer the cost of small premiums in anticipation of larger market moves.
7. Multi-strategy
   • Trade relative value within and across asset classes or instruments.
     Looks for any available investment opportunities.
   • The goal is to initially deploy (and later redeploy) capital efficiently and quickly across various strategy areas as conditions change.

Macro and CTA strategies宏观策略

1. Macro strategies
   • Emphasize a top-down approach to identify economic trends.
   • Use long and short positions to profit from a view on overall market direction because it is influenced by major economic trends and events.
   • Generally benefit most from periods of higher volatility.
2. Managed futures funds (Commodity trading advisers, CTA)
   • Making diversified directional investments primarily in the futures markets on the basis of technical and fundamental strategies.
   • May include investments in a variety of futures, including commodities, equities, fixed income, and foreign exchange.
     Diversification benefits has diminished.
   • Mean-reverting markets is unfavorable.

Private capital私募

Overview of private capital

1. Private capital is the broad term for funding provided to companies that is sourced neither from the public markets,nor from traditional institutional providers.
   • Comprising private equity私募股权投资 and private debt私募债权投资.
     

Diversification benefits of private capital

1. Investments in private capital funds can add a moderate diversification benefit to a portfolio of publicly traded stocks and bonds.
   • Correlations with public market indexes vary from 0.47 to 0.75.
2. Private equity investments may offer vintage diversification.
3. Private debt investments, which offer more options than bonds can also serve diversification goals.

Categories of Private Equity Invests私募股权投资

1. Private equity (PE): investment in privately owned companies or in public companies with the intent to take them private.投资私有公司或者最终使其私有化
   • Portfolio companies: the companies owned by private equity funds.
2. Primary private equity strategies
   • Certainty around valuation increases as the portfolio company matures and moves into later-stage financing.对于不同时期的公司采用不同手段
     

Venture capital

1. Venture capital(VC) entails investing in or providing financing to private companies with high growth potential.对成长公司提供风险投资
   • Typically start-ups or young companies.
   • Higher expected returns with higher risks
2. Venture capitalists are active investors directly involved with their portfolio companies.
   • May also provide financing in the form of debt (commonly,convertible debt).
3. Formative stage
   • Pre-seed capital, or angel investing, is capital provided at the idea stage对idea投资. The amount of financing at this stage is typically small and sourced from friends and family.
   • Seed stage generally supports product development and marketing efforts. The first stage at which VC funds invest.验证可行性
   • Early stage, or start-up stage financing goes to companies moving toward operation but before commercial production and sales.开始少量生产
   • Later stage financing(expansion VC) is provided after commercial production and sales have begun but before an IPO takes place.开始量产，准备上市
     Support initial growth, a major expansion, product improvements, or a major marketing campaign.
     Management selling control of the company to VC.
   • Mezzanine stage financing is provided to prepare to go public.上市准备时期
     It represents the bridge financing.

Growth capital

1. Growth capital: the firm takes a less-than-controlling interest in more mature companies looking for capital to expand or restructure operations, enter new markets, or finance major acquisitions.
   • A.k.a. growth equity or minority equity investing.

Leveraged Buyouts

1. Leveraged Buyouts arise when private equity firms establish buyout funds to acquire public companies or established private companies, with a significant percentage of the purchase price financed through debt.
   • The target company's assets typically serve as collateral for the debt, and the target company's cash flows are expected to be sufficient to service the debt.
   • A highly leveraged transaction.
2. Tpyes of LBO
   • Management buyouts(管理层收购): the current management team is involved in the acquisition.
   • Management buy-ins(管理层换购): an external management team acquires a company and replaces the existing management team.
3. The returns of LBO depend greatly on the use of leverage
4. LBO investments enjoy more certainty than VC investments.

Exit Strategies

1. Trade sale: the sale of a company to a strategic buyer, such as a competitor.股票卖给战略投资者或竞争者
   • Pros: immediate cash, higher price (synergies), fast and simple, lower costs and transparency than IPO.
   • Cons: possible management opposition, limited potential buyers, lower attractiveness to employees.
2. Initial public offering (IPO): the portfolio company sells its shares to public investors.通过上市盈利
   • Pros: highest price, management approval, publicity, futur upside potential.潜在收益最大
   • Cons: higher cost, long lead times, market risk, disclosure requirements, a potential lockup period, IPOthreshold.
3. Special purpose acquisition company(SPAC): a shell company via an IPO through which sponsors raise a blind pool of cash aimed for merger or acquisition with private firms.
   • Pros: extended time for disclosure, lower volatility of share pricing, flexibiltiy, high-profile and seasoned sponsors.
   • Cons: capital risk due to potential redemptions, stockholder overhang after merger, spread between the announced and true equity value because of the dilution.
4. Recapitalization: a company issues debt to fund a dividend distribution to equity holders.发行债券以特别红利的形式发给自己
   • Not a true exit strategy.
5. Secondary sales: sale to another PE or other investors.股票卖给下一家PE或投资者
6. Write-off/Liquidation: liquidates the portfolio company before moving on to other projects.破产清算

Risk and return of private equity

1. Investors require a higher return for accepting the higher risk,including illiquidity and leverage risks.
2. Private equity return indexes rely on self-reporting and are subject to survivorship bias, backfill bias数据是他们说的，不一定准
   • This typically leads to an overstatement of returns.投资数据不客观
3. Failure to mark to market will understate measures of volatility and correlations with other investments.低估波动性和相关系数

Categories of private debt私募债权投资

1. Direct lending放贷给对方
   • Providing capital directly to borrowers.
   • Smaller number of investors than traditioanl debt.
   • Usually higher interest rates to mid-market companies.
2. Venture debt放贷给初创企业
   • Provided to start-up or early-stage companies that may be generating little or negative cash flow.
   • Lack of substantial assets for pledging as debt collateral.
3. Mezzanine debt风险最高的债权投资，仅次于股权投资
   • Private debt that is subordinated to senior secured debt but is senior to equity in the borrower's capital structure.
   • Investors commonly demand higher interest rates and may require options for equity participation.
4. Distressed debt放贷给困境中的企业
   • Buying the debt of mature companies with financial difficulty expecting companies may restructure and revive.
5. Collateralized loan obligations (CLO)
   • It pools several loans and then divides that pool into various tranches.
6. Unitranche debt单一层级债
   • consists of a hybrid or blended loan structure combining different tranches of secured and unsecured debt into a single loan with a single, blended interest rate.
7. Real estate debt or infrastructure debt放贷给公司做基础设施建设
8. Specialty loans

Risk and return of private debt

1. Investors in private debt could realize higher returns from the illiquidity premium.
2. Overall, investing in private debt is riskier than investing in traditional bonds.

Commodities大宗商品

Characteristics of commodities

1. Investment returns are based on changes in price rather than income stream such as interest, dividends or rent.收益主要来源于价差，不是票息类
2. Holding physical commodities incurs transportation and storage costs.
   • Trading in physical commodities is primarily limited to a smaller group of entities in the physical supply chain.
   • Most commodity investors do not trade actual physical commodities but, rather, trade commodity derivatives.主要使用衍生工具
3. The relative importance, amount, and price of individual commodities evolve with society's preferences and needs.
   

Forms of Commodity Investments

1. Direct investment
2. Derivatives
3. Exchange-traded products(ETPs, either funds or notes)
4. Commodity Trading Advisors (CTAs)
5. Funds specializing in specific commodity sectors

Characteristics of commodities investment

1. Benefit of commodity investment
   • Real hedge against inflation risk应对通货膨胀
   • Effective for portfolio diversification because of low correlation with other investment returns与其它投资关联度低，适合加入组合分散化风险
2. Risk of commodity investment
   • Commodity spot prices are a function of supply and demand供给导致价格波动大
   • Demand levels are influenced by global manufacturing dynamics and economic growth.需求变动大
   • Producers cannot alter commodity supply quickly because extended lead times are needed to affect production levels.供给调整满，跟不上需求

Commodity index

1. To be transparent, investable, and replicable, commodity indexes typically set their prices based on futures contracts rather than underlying commodities.
2. Different commodity indexes are composed of different commodities and index weights.
3. Overall, low correlation with other asset classes.
   • Effective for portfolio diversification

Commodity futures pricing

1. Futures price ≈ FV of Spot price + FV of Storage costs - FV of Convenience yield
   • Commodity futures price often do not adhere to a strict cost-of-carry relationship.
     
2. Futures prices may be different from spot prices
   • Contango: futures prices are higher than the spot price, the commodity forward curve is upward sloping.期货价格大于现货价格
     Occurs when there is little or no convenience yield.
   • Backwardation: futures prices are lower than the spot price,the commodity forward curve is downward sloping现货价格大于期货价格
     Occurs when the convenience yield is high.

Timberland and farmland林地农地

Characteristics of timberland and farmland

1. Timberland
   • Typically trading in larger units of land.体量大
   • Flexibility: harvesting more trees when timber prices are up and delaying harvests when prices are down.灵活度更大，想砍就砍
   • Return driver: biological growth; changes in spot prices and futures prices of cut wood; changes in the price of the underlying land.
2. Farmland
   • Typically trading in much smaller sizes体量小
   • Provide a hedge against inflation.对抗通胀
   • Little flexibility: farm products must be harvested when ripe.灵活度低，受农时影响
   • Return driver: harvest quantities; commodity prices (e.g.,the price of corn); and land price changes.

Risk of farmland investment

1. Value comes not just from the harvest but also from the offset to human activity比如失火.
   2. Low liquidity买卖流动性差
2. High risk of negative cash flow because fixed costs are relatively high(the land must be cared for and crops need fertilizer, seed, and so on)初期投资大，现金回笼慢
3. Revenue is highly variable based on the weather.价格受天气影响大
4. World trade and growing foreign agricultural competition result in declines of crop prices受国际贸易影响

Real Estate房地产

Categories

1. Owner-occupied market
   • Residential: single-family homes and multi-family units.
   • Commercial: office buildings, retail shopping centers, and warehouses.
2. Rental properties
   • Lease contract: landlord/lessor and tenant/lessee
   • Title/deed represents real estate property ownership covering building and land-use rights.

Forms of real estate investment

Characteristics of Real Estate

1. Benifit
   • Income generation and capital appreciation可以卖也可以收租
   • Fixed rents may lessen cash flow impact放贷现金流稳定
   • Diversification benefits和其他投资相关性低
   • Inflation hedge if rents can be adjusted quickly for inflation.应对通货膨胀
2. Risks
   • Property value risk价格受经济影响
   • Managment risk
   • Construction delays and cost overruns建造花费时间，超预算
   • Leverage risk高杠杆
     Especially with higher loan-to-value ratio

Real estate index

1. Appraisal index评估指数，砖家各抒己见
   • Subjective, understate volatility主观，低估波动性
2. Repeat sales (transaction-based) index基于交易数据
   • Sample selection bias和样本选择有关
3. REIT index信托基金指数
   • Use the prices of publicly traded shares of REITs to construct the indices
   • More frequently traded, more reliable is the index有活跃交易

Differences with other asset classes

1. Large required capital investment → difficult too diversified
2. Transaction costs are high → Illiquidity
3. Diversity, as no two properties are identical
4. Necessarily fixed location
5. Price discovery in the private market is opaque
6. Transaction activity may be limited in certain markets
7. No investable index
8. Typically requires professional operational management

Direct real estate investing

1. Direct private investing involves purchasing a property and originating debt for one's own account.
   • Advantages: control, taxes.
   • Disadvantage: extensive time required to manage, need for local market expertise, large capital requirements,concentrated position.
2. Many investors prefer to hire advisers or managers to manage the their direct real estate investment in a separate account.

Indirect realestate investing

1. Indirect investing provides access to the underlying real estate assets through a variety of pooled investment vehicles.
   • Intermediaries facilitate the raising and pooling of capital and the creation of investable structures.
2. Types of indirect real estate investing
   • Mortgages: whole loans or MBS.
   • Private fund investing
   • REITs

Private fund investing

1. Most private real estate funds are structured as infinite-life open-end funds.
   • Core real estate strategies: characterized by well-leased,high-quality institutional real estate in the best markets.
   • Core-plus strategies will also accept slightly higher risks derived from non-core markets.
2. Finite-life closed-end funds are more commonly used to seek higher returns.
   • Value-add investments may require modest redevelopment or upgrades, the leasing of vacant space, or repositioning the underlying properties to earn a higher return.
   • Opportunistic investing accepts the much higher risks of development, major redevelopment, repurposing of assets,taking on large vacancies, and speculating on significant improvement in market conditions.

Real estate investment trusts (REITs)

1. REITs are tax-advantaged entities that own, operate, and develop income-producing real estate property.
   • Are not taxed at the corporate level.
     Above 90% of taxable net rental income are distributed.
   • Most REITs are listed on stock exchanges.
     Greater liquidity, lower trading costs, and better transparency.
2. Mortgage RElTs v.s.Equity RElTs

Infrastructure基础设施

Overview

1. The assets are capital intensive大资本 and long lived收寿命长 for public use.
2. Increasing use of public-private partnerships(PPPs)民间出大头: long- term contractual relationship between the public sector and the private sector.
   • Investors may lease the assets back to the government, sell newly constructed assets to the government, or hold and operate the assets

Characteristics

1. Strategically important战略性
2. Monopolistic and regulated垄断性
3. Stable long-term cash flows现金流稳定
4. Significant capital investment初期投入大
5. Long operational lives使用寿命长
6. Defined risks风险各异
7. Highly leveraged financial structure高杠杆

Categories by underlying assets

1. Economic infrastructure assets support economic activity.
   • Transportation assets高速、飞机场等
   • Information and communication technology(ICT) assets基站等
   • Utility and energy assets能源
2. Social infrastructure assets are directed toward human activities.
   • Educational, health care, social housing, and correctional facilities.

Categories by Stage of development

1. Brownfield investment: investing in existing infrastructure assets.已经建了一部分
   • Privatize or lease out government assets, sell and lease back.
   • Less risky with lower expected return.
   • predictable cash flows
2. Greenfield investment: investing in infrastructure assets that are to be constructed.从零开始，要先除草
   • Lease or sell to the government or to hold and operate.
   • More risky with higher expected return.
     

Forms of Infrastructure Investments

1. Direct investment
   • Provides control and the opportunity to capture full value.
   • Large investment, concentration and liquidity risks.
2. Indirect investment
   • Funds, ETFs, company shares
   • Master Limited Partnerships (MLPs) trade on exchanges and are similar to REITs.
     Generally distribute most free cash flow to their investors

Risk of infrastructure

1. Demand risk → take-or-pay arrangements
2. Operational risk → reputable and experienced operators
3. Construction risk → fixed-price date-certain contracts
4. Financial risk → derivatives
5. Regulatory risk → clear PPP agreement or due diligence
6. Political risk → political risk insurance
7. Currency risk → adjustment mechanisms
8. Tax/profit repatriation risks → adjustment mechanisms

Return of infrastructure

1.Returns depend on investment type.

Performance Calculation and Appraisal of Alternative Investments

Issues in Performance Appraisal

Challenges of performance appraisal

1. Limited transparency
2. Low portfolio liquidity
3. High leverage and use of derivatives
4. High product complexity
5. Mark-to-market issues, especially for specialized products
6. Limited redemption availability
7. Difficulty in manager selection and diversification
8. High fees, which can have a non-trivial impact on performance

Common approaches to performance appraisal

PE and real estate performance evaluation

1. Private equity and real estate involve large initial capital outlays with capital inflows occurring much later in the investment cycle.
   • Net cash position shows J-curve effect.
   • Shorter-term risk metrics are highly inappropriate.
2. As a general rule, the best way to evaluate such investments is the IRR of the respective cash flows.
3. Multiple of invested capital （MOIC）/money multiple
   • MOIC =（Realized value of investment + Unrealized value of investment）/（Total amount of invested capital）。
4. Quartile ranking depicts manager's performance against a cohort of peer investment vehicles constructed with similar investment attributes and vintage year.
5. Cap rate: the net operating income divided by the market valuel of the property.

Hedge fund performance evaluation

1. Leverage has the effect of magnifying gains and losses.
   • Hedge funds leverage their portfolios by using derivatives or borrowing capital from prime brokers.
   • The hedge fund deposits cash or other collateral into a margin account with the prime broker.
   • An inability to meet margin calls can force the hedge fund to liquidate the losing position, leadign to further losses.
2. Illiquidity （Mark to market problem）
   • Little chance of liquidating all the shares at quoted price.
   • Funds may differ in which price or quote they use.
     A more conservative and accurate approach is to use bid prices for long positions and ask prices for short positions.
   • Highly illiquid or even non-traded investments may have no reliable market values, it becomes necessary to estimate values. （Mark to model valuation）
3. Investor redemptions may require the hedge fund manager to liquidate some positions at disadvantageous prices, while also incurring transaction costs.
   • Ability to demand a long lockup depends on reputation.
   • Ideally, redemption terms should be designed to match the expected liquidity of the assets being invested in.
   • Funds of hedge funds may offer more redemption flexibility.