TOP

PERCENTILE?
 PRIVATE EQUITY
PRIVATE DEBT
HEDGE FUNDS
STOCKS REAL ESTATE
INFRASTRUCTURE
BONDS VS COMMODITIES
CASH CRYPTOCURRENCIES
COLLECTIBLES
STRUCTURE PRODUCTS
ROYALTIES
 Traditional Investments Alternative Investments
Active & Passive management Typically actively managed
Lower fees (0,25%_1,5%) Higher fees (2% AUM_20%Performance)
Lower leverage Higher leverage (Debt or Derivatives)
Less concentrated Portfolio concentration
Less restricted More restricted (1_3 month advice and 7y-15y periods)
More liquid Less Liquid (Wider spread bid offer)
Wider specialization Narrower specialization
Higher Correlation of returns Lower Correlation of returns
More transparent Less transparent (Appraisals)
More regulated Less regulated (Qualified Investors)
Long only Long and Short
Retail and Institutional Qualified investors: Institution and high-net-worth people
Hedge Funds

• Manage portfolios of securities and

derivatives
• Use leverage
• Take long or short positions
• Deploy various strategies in pursuit of
superior performance

Private Equity

• Invest in private companies

• Take public companies private
• Use leveraged Buy-Out (LBO)
Strategy
• High Leverage
• High risk
• Higher Expected Return
Venture Capital
Subset of private equity: Private equity
firms mostly buy mature companies
that may be deteriorating or failing to
make profits and then streamline
operations to increase revenues.
On the other hand, venture capital
firms mostly invest in startups with
high growth potential.

Real Estate

• Equity & Debt Investments in

residential and commercial property
• Real Estate investment trusts (REITs)
publicly listed equity
• Mortgage-backed securities (MBS)
• Private investment vehicles that own
properties or associated loans
Commodities
Precious metals: Gold, Silver, platinum…
Bases metals: Copper, iron, zinc, aluminum…
Energy: Oil, Gas…
Agricultural: Wheat, Corn, soybeans…
They can have exposure to them through 3 mechanisms:
1. Own them physically: Storage cost and transportation
2. Through derivatives like futures, forwards, options,
swaps, or Funds tracking indexes ETF or Hedge Funds
3. Investing directly in commodity-producing companies

Other alternatives
Don´t generate income
Tangible collectibles:
Art, Fine wines, Stamps, Coins, Antiques

Intangible collectibles:
Patents, Domain names, Blockchain, Crypto assets
J – Curve VC according to maturity stage

IPO
Angel investor: The very Seed stage: Used for Early stage: Finance Later stage: Companies Mezzanine: When a
first funding rounds of market research, product initial comercial that already have company is preparing for
the business/idea phase development, and production and sales production and sales an IPO
High net individuals marketing. Venture capital Venture capital Private equity
(Shark tank) Venture capital Private equity
High net individuals

J – Curve Multiples
F
F PV Cash Flow
F
Asset Based
Leverage buyout (LBO)

1. Management Buyouts (MBOs):

The target company is acquired by its
existing management team and a
private equity firm (financial sponsor)
to gain more control over the strategic
direction of the business.

2. Management Buyins (MBIs):

A private equity firm acquires the
target company and replaces the
existing management team with a new
one, where the new team is expected
to deliver superior performances and Suitable targets: Companies with high
create value due to its expertise. stable and visible cash flows.
 Venture Capital (VC)
Strategies for value creation for PE Invest in Young companies with high growth
1. Management Incentives potential
2. Cost reduction • Startups: Still in the initial “birth” stage
3. Revenue enhancement • Scale-ups: has a mature, established, and
profitable product or service
Development capital/Minority investing Invest in several types of securities
Provides capital for business growth or • Equity
restructuring • Convertible shares
PIPES= Private investing in public equities • Convertible debt

Distressed investing
Investing in the debt of mature companies in
financial difficulty
Vulture Funds: Seeks out and buys securities VC Investments are a high-risk/high-return
in distressed investments approach, most startups fail before reaching
Trying to implement reorganization and maturity and are closely involved with
turnaround portfolio companies and take board seats
 Exit strategies (Illiquidity)
1. Trade sale: The portfolio company is sold
Structure & 2&20 Fee structure
to a strategic buyer in a private deal.
Hedge Funds and private equity Funds are
usually set up and run as Limited
2. Secondary sale: The portfolio company is
Partnerships
sold to another private equity firm.
Committed capital: The capital provided by
3. Initial Public Offering (IPO): Process of
investors, is drawn down gradually as
listing a company’s shares on a stock
investment opportunities are identified by
exchange, highly regulated.
the GP (Typically from 3 to 5 years)
4. Recapitalization: A company takes more
Management fees: Normally 1% to 3% of
debt to fund a dividend distribution to the
committed capital
private equity fund (Partial Cash out)
Incentive fees: Normally 20% of profits
(Above initial capital)
5. Liquidation – Write off: Close the
Clawback provition: Fund managers have
company and take a loss on the
to return any surplus of incentive fees
investment.
received above the agreed fee level
 Private equity Benefits, risk, and due diligence
Private debt or Private credit
Benefits:
Private debt funds lend money to businesses
• Higher returns
and earn a return by charging interest on
• Higher diversification
the loan. These loans are usually made to
companies that don’t qualify for traditional
Risk:
bank loans. The bulk of loans is made to
• Higher risk
mid-sized companies, smaller businesses,
• High leverage
distressed businesses, and real estate
• Survivorship bias and Backfillbias
investors.
(Inconsistent reporting practices).
The public typically can’t invest in these
assets, which is why they are referred to as
Due diligence:
private credit.
• Fund manager/GP profile
It carries more risk than traditional loans
• Valuation methods
because borrowers are often below
• Fee structure
investment grade with a higher chance they
• Drawdown procedures
won’t repay the debt and may last for several
years without access to their invested capital
 Fees
1. Managements/Base Fee on AUM
Structure 2. Incentive/Performance Fee on profits:
Limited Partners (LPs): General Partners (GPs): • Hurdle rate: A hurdle rate is the minimum
Have limited liability and a Responsible for managing a amount or returns a hedge fund must earn
profit share proportionate given investment fund,
to their investment have unlimited liability
before it can charge an incentive fee.

Investors Investment Manager

Limited Partnrship (LP)

Limited Partnership (LP):
•LPs are pass-through entities that offer little to no
reporting requirements. • High watermark: Highest NAV a fund has
•There are three types of partnerships: limited reached begore a performance fee is paid.
partnership, general partnership, and limited liability
partnership.
•Most U.S. states govern the formation of limited
partnerships, requiring registration with the Secretary of
State.
•Both hedge funds and private equity Funds are usually
set up and run as Limited Partnerships
 Strategies
1. Event-driven: Based on various corporate actions
Performance
such as mergers arbitrage, acquisitions (distressed,
Absolute return VS Relative return
or restructuring), activist investing (influence
management), and Special situations (Spin-offs,
Asset sales, or share buy-backs.

2. Relative value: Profiting from temporary

discrepancies in prices relationships (Convertible
bonds vs stocks, General fixed income, or equity)
Features
Derivatives, Short positions, Leverage
3. Macro hedge Funds: Top-down approach and
identifying macroeconomic themes.

4. Equity hedge Funds: Bottom-up approach, Market

neutral (long & short ), Fundamental (growth
potential or undervalued securities), quantitative,
short bias, sector-specific expertise opportunities.
Benefits Due diligence
• Superior performance
• Diversification • Invetsment strategy
• Investment process
Risk • Historical returns
• Correlation increases during • Longevity
market turmoil • AUMs
• Due diligence is challenging • Valuation & return calculation methods
• Light regulatory disclosure • Management style
requirements • Key person risk
• Management systems
Redemption Terms • Competitive advantage
• Notice period:1-3 month advice • Reputation
or time Windows • Growth plans
• Lock-up period: 3y to 15y
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒑𝒐𝒔𝒊𝒕𝒊𝒐𝒏
Leverage Ratio=
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒆𝒒𝒖𝒊𝒕𝒚 𝒊𝒏𝒗𝒆𝒔𝒕𝒆𝒅 𝒊𝒏 𝒊𝒕
 Year 1:
Example
• 100 MM AUM Management fee = 100M* 2% = 2M
• 2% Management fee Return (Net Management fees):
• 20% Incentive fees ((90 m – 2m)/100m) – 1 = – 12%
• 8% soft hurdle rate No incentive fee
• High watermark year 0 100 mm
Year 2:

Management fee = 88M* 2% = 1,76M

Return (Net Management fees):
((110 m – 1,76m)/88m) – 1 = 23%

Incentive fee:
((110 m – 1,76m – 100 m)*20% = 1,65m
Total fees = 1,76M + 1,65m = 3,41m
Net return: ((110m – 3,41 m)/88m) – 1= 21%
 Investment Rationale:
Characteristics • Capital gains
Benefits • Diversification
• Low or moderate correlation with • Inflation hedge
other publicly traded securities
• Low correlation with bonds Major Categories:
• Residential property
Risks • Commercial property
• Local markets conditions • Timberland
• Regulation • Farmland
• Interest rates
• Leverage Real Estate indexes:
• Fund manager ablities • NACREIF
• Higher risk for distresed properties Smooth Appraisal based
and real estate Development( • Repeat sales index
Zoning, permitting, ESG Price % of Recent sales
implications). • REIT index
Trading Price of REITs
Exposure
1. Direct Equity: Property ownership funded through cash or mortgage.
Owners equity = Property value – loan
2. Direct Debt: Mortgages or Construction loans issued by Banks.
3. Tradable securities: Indirect investment through MBS which is a Pool of mortgages
Bought from a bank and then sold to investors) or CMBS (Commercial mortgage-backed
securities) as debt or Limited partnerships in the form of equity called REITs
REITs structure Investors
 Cryptos?
Commodities
They show lower historical
returns than Stocks or Bonds
and have low Sharpe ratios but Collectables
they can provide diversification Examples: Art, Wines, stamps, patents, jewelry, watches
benefits and potential inflation others
hedge characteristics.

Influenced strongly by demand

and supply factors:
• Inventories
• Economic expectations Don´t generate income
• Goverment policies Returns come mostly from Price increase
• Weather patterns Very illiquid
• Costs Require specialized knowledge to manage them
High storage costs
Trophy assets: Enjoyment of owning and viewing them
Infrastructure
Examples: Airports, Railroads, Utilities, Electric plants, Waste management facilities,
Telecommunication networks, broadcasting

Categories (Construct, sell, lease, buy, operate):

• Greenfield: New projects yet to be constructed, riskier (Planning, regulatory,
construction, contracting, cost overruns, delays) but have higher expected returns.
• Brownfield Investment in existing infrastructure, lower risk because of a stable but
lower return
Very iliquid long life cicles but can be structured as ETFs, mutual Funds, private equity
Funds or Mater Limited Partnerships (Traded publicly with tax benefits)
Offer stable returns, Offer diversification, have high regulatory and operational issues and
use leverage
Structure products
A structured note is a debt obligation that also
contains an embedded derivative component
that adjusts the security’s risk-return profile.
The return performance of a structured note
will track both the underlying debt obligation
and the derivative embedded within it
Type:
•Evergreenfund:
A type of open-ended investment vehicle with no
fixed maturity or termination date. Investors can
subscribe and redeem shares periodically, and the
fund continuously reinvests proceeds.
•Closed-End Funds:
A publicly listed investment fund that raises a fixed
amount of capital through an IPO and then trades
on a secondary market. No daily redemptions;
investors buy/sell shares on the exchange.
•Feeder Funds:
An investment fund that pools capital from
investors and allocates it to a master fund in a
master-feeder structure. This structure is
commonly used in hedge funds and private equity
to allow multiple feeder funds—often tailored
 Cons
PROS Correlation among risky assets tends to
increase in periods of market turmoil.
E(R) COMMODITIES Less liquid.
PE RE Standard deviation is not reliable due to
CASH EQUITY autocorrelation ( Worst month/drawdown)
Tail risk due to stronger negative skewness
BONDS
Less transparent

σ
Diversification: Adding a new asset class
increase portfolio utility: For two reasons a
higher expected return compared to what the
portfolio has now or because it can lower the
portfolio risk of having a lower risk or low
correlation.
Hedge funds Private Equity (IMA)
Portfolio assessment based on: Comparable multiples:
• Market values (for liquid publicly traded • Business model, geographically, growth
assets). profile
• Valuation models( Illiquid or not • EBITDA, Net income, revenue
publicly traded securities Discounted cash flow:
• Future cash Flow projections (NPV)
Conservative approach Asset-based approach:
• Bid Price for long positions • Fair market or liquidation value of the
• Ask Price for short positions portfolio company´s assets net of liabilities
Comparables Value EBITDA EV/EBITDA
Company 1 1000 100 10X
Company 2 2000 222 9X
Company 3 1500 188 8X
Average 9X
 Cost approach:
Real Estate • Estimates property replacement cost based
Comparable sales: on the cost of land, construction costs, and
• Based on recent sales of similar related items
properties
• Adjustment for age, location, condition, Net Asset Value (NAV):
and size (Apples with Apples) • Usually calculated for REITs by netting out
Income approach: the total liabilities from the total assets of
• NPV of projected future cash flows the trust.
• NOI: Net operating income
• Cap rate: Rate of return on a property
𝑵𝑶𝑰 𝑪𝑭
Property value=
𝑪𝒂𝒑 𝒓𝒂𝒕𝒆
, 𝑷𝑽 =
𝒓 NAV = Total Assets - Total Liabilities
𝑵𝑨𝑽
NAV per share =
𝑻𝒐𝒕𝒂𝒍 # 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔
100 r=10% 10 10 10 10

0
= ∞
1 0 1 2 3
Commodities
Future Price: Based on current Price, risk free rate and convenience yield (The value of
having the commodity for use over the period of the futures contract (Costs: storage,
Benefits: Income).
Roll yield (+, –): Difference between So and Ft prices (+Backwardation,– Contango)
Collateral Yield: Interest earned on a futures contract collateral.
Change in spot prices: Combination of change in spot prices and convergence of So and Ft

F(T)=(S(o)–B+C)*((1+r)^T)
Convenience yield =–Benefits+Cost
Backwardation S(t)> F(t): High convenience yield
High convenience yield (Owing the asset when it will be scarce
or the cost of storage is very cheap due to low S and high D)
Contango F(f)>S(t): Low convenience yield
(Storage cost, Insurance, etc) (Oil covid crisis april 2020 (–
30USD)
If B and C are zero = F(T)>S(o) due to the time value of money
 Key types of risk (Constantly changing)
• Operational risk: The prospect of loss resulting
Dispersion measures from inadequate or failed procedures, systems,
• Standard deviations are misleading or policies.
(Autocorrelation = smoother returns). • Counterparty risk: The risk that the other
• Nonnormal distribution (Kurtosis or party to a trade fails to fulfill their obligations
asymmetry) • Financial risk: The possibility of losses and
• Fat tails (Negative skewed, extremely insolvency of an underlying company in which
negative values) Investments are made
• Liquidity risk: The risk that the Investments
Measures alternatives cannot be bought or sold without significantly
impacting their market price

Due diligence (first line of defense:

Investment manager’s organization, portfolio
𝑹𝒑 − 𝑹𝒇 management policies, operation and controls,
Sortino Ratio=
σd risk management, legal review, and fund terms