Reading 34: Alternative Investm....olio Management－LOS u investing

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CFA Institute Area 8-11, 13: Asset Valuation
Session 11: Alternative Investments for Portfolio Management
Reading 34: Alternative Investments Portfolio Management
LOS u: Discuss the sources of distressed securities and explain the major strategies for investing in them.

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In distressed securities investing, the strategy that focuses on trying to find opportunities where the prospects will improve is called:

A) long-only value investing. Its returns depend on the fact that the market for distressed securities is efficient.

B) a momentum strategy. The goal is to find a firm that has improvement momentum.

C) long-only value investing. Its returns depend on the fact that not all investors can invest in distressed securities.

D) an arbitrage strategy. The goal is to find a firm that has arbitrage momentum.

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Answer and Explanation

This is the basic principal of long-only value investing in distressed securities.

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In distressed securities investing, a private equity fund that seeks to partner with the company in which the fund invests would most likely be called:

A) a high yield fund.

B) an arbitrage fund.

C) an orphan equity fund.

D) a vulture fund.

Answer and Explanation

A vulture fund is a private equity fund that uses an active approach where the fund or investor acquires positions in the company, and the investment gives some measure of control. The investor can then influence and assist the company and then acquire more ownership in the process of any reorganization. By providing services and obtaining a strategic position, the investors create their own opportunity.

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In alternative investments, distressed debt arbitrage seeks to earn a return from:

A) either the decline of the stock to zero or an improvement in the prospects of the firm.

B) the decline of the stock to zero only.

C) an improvement in the prospects of the firm only.

D) neither the decline of the stock to zero nor an improvement in the prospects of the firm.

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Answer and Explanation

Distressed debt arbitrage is the purchasing of a companys distressed debt while selling the equities short. The investment can earn a return in two ways: 1) if the equity declines or goes to zero the investor gains from the short position but may continue to gain from the long bond position, 2) if the companys prospects improve, because of the seniority of bond claims, the returns to bond holders should be greater than that of equity holders. The possibility of returns from two events provides a good market opportunity.