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Pays dividends before common stock, option can be exercised if stock
is purchased at a premium in a buyout scenarioDebt still ranks ahead of
them
Usually an index with varying underlying assets (GSCI is common)pay
attention to differences in economic conditions between historical
period used for forecasting and today as effect on commodity prices may
be major
DiversificationExposure to nontraditional risk factors and
strategiesIlliquidityLimited access to informationNeed for complex
diligenceDifferent tax treatmentsDifficult to appraise
performance/establish benchmarksMay create concentrated
positionsDecision risk- risk of investors irrationally changing strategy
when returns are extreme
Direct- invest in futures/forwardsIndirect- invest in companies that
product commodities (may be less efficient/have higher basis risk if
these companies hedge)More likely to hedge unexpected inflation when
storable and demand is tied to economic activity (rather than
stable)Close to 0 correlation with other asset classes, so provide
diversification (even though no return enhancement)Exposure to event
risk that changes spot prices (political, economic, natural disaster,
etc)Return= spot return + roll yield
SD is biased since returns are skewed and leptokurtic-May use downside
deviation to focus on negative returns only and not penalize for
positive volatilitySharpe ratio may be gamed-Dependent on how returns
are calculated/time periods-Using out of the money options can increase
today's return by collecting premiums now-Longer time periods used can
create lower volatility-Assumes normality- HF returns aren't
normal-Illiquid assets, stale prices have lower vol and bias the SR
up-SD may have serial correlation
NAREIT- REIT index (indirect investments); includes leveraged
positions and returns are net of fees, more correlated with
equitiesNCREIF- index of direct investments based on appraisal values
(smoothed); unleveraged properties, lower correlation with equities,
returns gross of fees
Indices vary a lot in composition and report infrequentlyDiverse
strategies make funds hard to compareParticipation is voluntary and past
data may not be relevantSubject to popularity, survivorship, backfill
and stale price biasesIndex components are infrequently priced due to
fewer events like IPOs, M&A, etcMany claim there are no direct
benchmarks and use absolute returns/a hurdle rate as a benchmarkMay use
single/multifactor models or create tracking portfolios with comparable
risk/return characteristics
Limit withdrawals for a minimum period to prevent sudden withdrawals
Normal considerations: market opportunity (out of the universe),
investment process, org structure, people, service providers, etc++
Taxes, Suitability of AI (holding periods, fees, risk, etc), Decision
Risk- not as much of a concern when investors don't make rash
decisions(should also consider other closely held funds if all the other
considerations have already been made)
More common, tend to smooth results and understate volatility, overstate correlation
