Saturday, November 19, 2011

Alternative investment for CFA level 1 and Level 2

Alternative investment for CFA level 1
By: Shivgan Joshi


Introduction
This is a relatively small area but is very interesting, areas like ETF are very fascinating as some of them like Gold ETF are negatively correlated with the index. Also the information on return on an investment for a Venture Capitalist based on failure rate was interesting. The last and the one with some numerical computations was real estate. The whole topic is about common sense, and requires you to be confident and use common sense.

Real estate Investments:
NOI= potential income(1 -vacancy bad debt%) - RE taxes - maintenance - other expense
Real estate value = NOI / required return
Annual after tax cash flow= (NOI - dep - Interest)*(1 - tax rate) - principal repayment + depreciation

Commodities 
Collateral Yield is the return on the collateral posted to satisfy margin requirement
Price return is the gain or loss due to change in spot price
Roll Yield is the profit or loss from re-establishing as contract expire


In CFA Level 2 the alternative investment is more to do with Private Equity than anything. How to get in, and how to get out in a private equity investment. There are various ways to find out the exit points and compute the returns. Interest paid questions were quite tricky that I found in my final mock exam.
VC, real estate and Hedge funds are three important parts of Alternative Investments. Then we have Buyouts which again is one the most hot topic of IB. Hedge funds use various techniques and there is separate HF certification, but a bit of idea is given here like merger arbitrage.

Ratchet, waterfall, carried interest are ways to allocate money.

RVPI, PIC etc also are important aspects for the exam.
NAV of private Equity fund.

In all this is an area of great interest, and we can see that there are other Specialization as well for this like HF certification.

Conclusion: Small area,  requires no great deal of effort.

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