Alternative_investment_portfolio_management_and_private_wealth_management

Hedge fund strategies

classification of hedge funds and strategies

the most important characteristics of hedge funds are summarized as follows:

1. legal/ regulatory overview

2. flexible mandates -- few investment constraints

3. large investment universe

4. aggressive investment styles

5. relatively liberal use of leverage

6. hedge fund liquidity constraints

7. relatively high fee structure

hedge funds can be classified as:

• single-manager fund: a fund in which one portfolio manager or team of portfolio managers invests in one strategy or style

• multi-manager fund

  • multi-strategy fund: in which teams of portfolio managers trade and invest in multiple different strategies within the same fund

  • fund-of-fund: in which manager allocates capital to separate, underlying hedge funds that themselves run a range of different strategies

single manager fund can be classified in various ways:

1. the instruments in which the managers invest (e.g., equities, commodities, foreign exchange, convertible bonds)

2. the trading philosophy followed by the managers (e.g., sysytematic, discretionary)

3. the types of risk the managers assume (e.g., directional, event driven, relative value)

Private clients versus institutional clients

summary		private clients	institutional clients
investment objectives		diverse investment objectives (may not be clearly defined or quantified)	specific, clearly defined investment objectives
constraints	time horizon	a shorter time horizon	theoretically infinite
constraints	scale	smaller (more limitations)	larger
constraints	taxes	significant and complex	taxable income may be more favored by a tax-exempt institution
other distinctions	investment governance	less formal governance structure	formal goverance structure
other distinctions	investment sophistication	emotional	a higher degree (more investment resources)
other distinctions	regulation	separate regulators ore shared regulatory structure
other distinctions	uniqueness and complexity	similar financial and objective, different investment strategies	similar objective, similar strategies

understanding private clients

• information needed in advising private clients

  • personal information

    • family situation, marital status, number of children, ages of members

    • proof of client identification

    • employment and career information

    • sources of a client's wealth

    • investment background: return objective; liquidity preferences and ESG issues

    • financial objectives and risk tolerance

  • financail information

    • asset/liability

  • private client tax considerations

    • common tax categories

      • taxes on income

      • wealth-based taxes, 房产税

      • taxes on consumption/ spending

    • basic tax strategies

      • tax avoidance: contribute limited amounts to certain accounts that permit tax-free earnings and future withdrawals; wealth transfer techniques

      • tax reduction: tax-exempt bonds; tax-efficient asset classes

      • tax deferral:

        • by deferring the recognition of certain taxes untial a later date

    • other relevant information:

      • estate plan

      • life insurance/ disability insureance/ excess liability coverage

• client goals: goal quantification, goal prioritization, goal changes

  • planned goals

    • retirement: different methods to analyze a client’s retirement goals,

      • mortality tables

      • annuities

      • Monte Carlo simulation

    • specific purchases

    • education

    • family events

    • wealth transfer

    • philanthropy

  • unplanned goals

    • property repairs, 房屋维修

    • medical expenses

    • other unforeseen spending

• wealth manager's role

  • goal quantification

  • goal prioritizaiton

  • goal changes

• private client risk tolerance

  • risk tolerance (willingness)

    • increase: sufficient insurance, pension, healthy, big asset base

    • decrease: high required return, important goal

  • risk capacity

  • risk perception: how a client perceives the riskiness of an investment decision or the investment climate

• technical and soft skills for wealth managers

  • technical skills:

    • capital markets proficiency

    • portfolio construction ability

    • financial planning knowledge

    • quantitative skills

    • technology skills

    • language fluency

  • soft skills

    • communication skills

    • social skills

    • education and coaching skills

    • business development and sales skills

Ethical considerations for private wealth managers include:

• “know your customer” (KYC)

• fiduciary duty and suitability

• confidentiality

• conflicts of interest.

inputs to capital sufficiency analysis

return assumption, current value of the portfolio, anticipated future contributions to the porfolio and cash flow

return 计算

TIA: total intestable asset

1. open ended

   Return% = Cash flow needs / TIA + Asset (inflation compensation)

   Cash flow needs = cash in - cash out

   if expected return > 10%, 一般指asset base较小

   • Assumption:

     • salary/expense 发生在期末

     • current portfolio 无成本变现，通通计入TIA

     • TIA收入为税后

2. close ended

investment planning

capital sufficiency analysis: also known as capital needs analysis, the process by which a wealth manager determmines whether a client has, or is likely to accumulate sufficient financial resources to meet his or her objectives

after understaning, begin to meet their objectives

• capital sufficiency analysis, 确保合理性

  • methods for evaluating capital sufficiency

    • deterministic forecasting method, "straight-line": simple to understand/ unrealistic

    • Monte Carlo Simulation: 1) key variable; 2) distribution; 3) simulation

      • potential solutions:

        • increasing the amount of contribution

        • reducing the goal amount

        • delaying the timing of a goal

        • adopting an investment strategy with higher expected returns

• retirement planning

  financial stages of life:

  • education

  • early career

  • career development

  • peak accumulation: ages of 51-60

  • pre-retirement

  • early retirement

  • late retirement

    analyzing retirement goals

  • motality tables

  • annuities

  • Monte Carlo simulation revisited

    behavioral considerations in retirement planning

  • heightened loss aversion

  • consumption gaps: spend less

  • the annuity puzzle: dislike of losing control over the assets, in many case, the high cost of annuities

  • preference for investment income over capital appreciation: lack self-control with respect to spending

• investment policy statement (IPS)

  • background and investment objectives

  • investment parameters

    • risk tolerance: ability and willingness

    • investment time horizon: long-term multi-stage

    • asset class preferences: 允许/不允许

    • other investment preference

    • liquidity preferences: short-term, 缺口

    • constraints

  • portfolio asset allocation

    • strategic asset allocation

    • tactical asset allocation

  • portfolio management

    • discretionary authority, 自主决策权

    • rebalancing

      • time-based

      • threshold-based

    • tactical changes

    • implementation

      • third-party money managers

      • proprietary investment

  • duties and responsibilities

    • wealth manger responsibilities

      • developing an appropriate asset allocation

      • recommending or selecting investment options, such as pooled investment vehicles or individual securities

      • monitoring the asset allocation and rebalancing

      • using derivatives, leverage, short sales, and repurchase agreements

      • monoitoring the costs associated with implementing the investment strategy

      • monitoring the activities of third-party service provdiers

      • drafting and maintaining the IPS

      • reporting of performance, including an indication of the base currency

      • reporting of taxes and financial statements

      • voting proxies

      • assisting with the preparation of agreements associated with private fund offerings

    • IPS review

  • IPS appendix

    • modeled portfolio behavior

    • capital market expectations

portfolio construction and monitoring

• portfolio construction

  • traditional approach

    • identify asset classes

    • develop captial market expectations

    • determine portfolio allocations

    • assess constraints

    • implement the portfolio

    • determine asset location

  • goal-based investing approach: optimized either to a stated maximum level of volatility or to a specified probability of success

    • advantage: easier to express the risk tolerance

    • disadvantage: may not lead to a optimal mean-variance efficiency

• portfolio reporting and review

  • A portfolio asset allocation report, which may reflect strategic asset allocation targets

  • a performance summary report for the current period

  • a detailed performace report, which may include asset class and/or individual security performance

  • a historical performance repot covering the period since the inception of the client's investment strategy

  • a contribution and withdrawal report for the current period

  • a purchase and sale report for the current period

  • a currency exposure report detailing the effects of exchange rate fluctuations

• ethical and compliance consideration in private wealth management

• evaluating the success of an investment program

  • goal achievement

  • process consistency

  • portfolio performance

  • definition of success

private client segments

• mass affluent segment: focused on building their investment portfolio and financial planning needs; no typically customized approach

• high-net-worth: lower client-to-manager ratio; customized investment management, tax planning, wealth transfer issues

• ultra-high-net-worth: multi-generational time horizons, highly complex tax and estate-planning consideration, and a wider range of service needs

• robo-advisor (<$25w)

returns for taxable accounts

• returns-based taxes: accrual taxes on interest and divide

$FVIF_i = [1 + r(1 - t_i)]^n$

• returns-based taxes: deferred capital gains

$FVIF_{cg} = (1 + r)^n - [(1 + r)^n - 1]t_{cg}$

• cost basis

$FVIF_{cgb} = (1 + r)^n(1 - t_{cg}) + t_{cg}B$

• wealth-based taxes

$FVIF_w = [(1 + r)(1 - t_w)]^n$

• blended taxing environments

$r^* = r(1 - p_i t_i - p_d t_d - p_{cg} t_{cg})$

• effective capital gains tax rate

$T^* = t_{cg}(1 - p_i - p_d - p_{cg}) / (1 - p_i t_i - p_d t_d - p_{cg} t_{cg})$

$FVIF_{Taxable} = (1 + r^*)^n(1 - T^*) + T^* - (1 - B)t_{cg}$

accrual taxation

$FV = PV[1 + (1 - T)R]^N$

tax drag is the reduction in return caused by the payment of taxes

tax drag% = $\frac{FV{woTax} - FV{wTax}}{FV_{woTax} - I_0}$

• as the investment horizon increases, tax drag% increased

• as the investment return increases, tax drag% increased

deferred capital gain tax

$FVIF_{CGT} = (1 + R)^N - [(1+R)^N - 1]\times T_{CG} = (1+R)^N(1 - T_{CG}) + T_{CG}$

tax drag% = tax rate

• as the investment horizon increases, tax drag% unchanged

• as the investment return increases, tax drag% unchanged

cost basis

$FVIF_{CGT} = (1 + R)^N - [(1+R)^N - 1]\times T_{CG} - (1 - B)T_{CG} = (1+R)^N(1 - T_{CG}) + B\times T_{CG}$

wealth basis

$FVIF = [(1 + R)(1 - T)]^N$

• tax drag% > tax rate

• as the investment horizon increases, tax drag% and tax drag$ increased

• as the investment return increases, tax drag% decreases; tax drag$ increases;

blend tax

$r* = r(1 - p_i t_i - p_d t_d - p_{cg} t_{cg})$

where $pd$ is portion of dividends, $p_i$ portion of the interest income and $p{cg}$ realized capital gain

accrual equivalent tax rates

$T_{AE} = 1 - \frac{R_{AE}}{r}$

accrual equivalent return

考虑所有税率后的等价收益

types of investment accounts

• taxable accounts: 完税资金，产生收益交税，取出来不用交税

• tax-deferred accounts: 未完税资金，美国养老金，产生收益不交税，取出来交税

  $FVIF_{TDA} = (1 + r)^n (1 - T_n)$
• tax-exempt accounts: 完税资金，产生收益不交税，取出来不用交税

  $FVIF_{TEA} = (1 + r)^n$

the tax effects of trading behavior

• tax allocation

• time period management

• tax loss saving/ harvesting: The practice of realizing a loss to offset a gain or income—and thereby reducing the current year’s tax obligation—is called tax loss harvesting

• HIFO: highest in, first out

estate planning in a global context

a will outlines the rights others will have over one's property after death

a testator is the person who authored the will and whose property is disposed of according to the will

probate(遗嘱认证程序) is the legal process to confirm the vailidity of the will so that executors, heirs, and other interested parties can rely on its authenticity

probate

some instances, probate can be avoided:

• joint ownership (共同所有人)

• living trusts

• retirement plans

wealth transfer taxes

• tax on income

• tax on spending

• tax on wealth

  • net worth/ wealth tax: a tax based on a person's assets, less liabilities

• tax on wealth transfer

  • lifetime gratuitous transfer, or inter vivos transfers

  • testamentary gratuitous transfer: the bequeathing or transfer of assets upon one's death

ownership rights

• forced heirship rules: 强制继承权，父子...整个estate

• comminty property rights: 共同财产继承权，范围只是共同财产

• separate property rights: 独立产权

core capital

core capital is the amount of assets (i.e., present value) necessary to meet all future liabilities. CC用无风险利率折现

human capital: an implied asset; the net present value of an investor's future expected labro income weighted by the probability of surviving to each future age.

excess capital

an investor's capital over and above that which is necessary to fund their lifestyle and reserves

relative aftwer-tax values

• taxable, receiver交税

$RV_{taxableGift} = \frac{FV_{Gift}}{FV_{Bequest}} = \frac{[1 + r_g (1 - t_{ig})]^n (1 - T_g)}{[1 + r_e (1 - t_{ie})]^n (1 - T_e)}$

• tax free

$RV_{taxableGift} = \frac{FV_{Gift}}{FV_{Bequest}} = \frac{[1 + r_g (1 - t_{ig})]^n }{[1 + r_e (1 - t_{ie})]^n (1 - T_e)}$

• A给B钱A(giver)交税

$RV_{taxableGift} = \frac{FV_{Gift}}{FV_{Bequest}} = \frac{[1 + r_g (1 - t_{ig})]^n (1 - T_g + T_g T_e)}{[1 + r_e (1 - t_{ie})]^n (1 - T_e)}$

其中$T_g T_e$为税盾

• A给B钱，B为慈善机构

$RV_{taxableGift} = \frac{FV_{charitableGift}}{FV_{Bequest}} = \frac{(1 + r_g)^n + T_{oi}[1 + r_e (1 - t_{ie})]^n(1 - T_e)}{[1 + r_e (1 - t_{ie})]^n (1 - T_e)}$

其中$T{oi}[1 + r_e (1 - t{ie})]^n(1 - T_e)$为税盾

estate planning strategy-generation skipping

$FV_{noskipping} = PV[(1 + r)^{n1}(1 - t)][(1 + r)^{n2}(1 - t)]$

$FV_{skipping} = PV[(1 + r)^{N}(1 - T_e)]$

where $N = n_1 + n_2$

• spouse exemption

• valuation discounts

trust

• revocable (归委托人，可撤销)/ irrevocable (所有权归受益人)

• fixed (每年固定) / discretionary (根据实际情况调整)/ spendthrift (设定条件)

life insurance

• tax reduction

• asset protection

tax jurisdiction

• source (资产属地) jurisdiction (territorial tax system)

• residence (属人) jurisdiction

Source tax system: A jurisdiction that imposes tax on an individual’s income that is sourced in the jurisdiction.

Residence tax system: A jurisdiction that imposes a tax on an individual’s income based on residency whereby all income (domestic and foreign sourced) is subject to taxation.

double taxation

• residence-residence conflict, 看人的居住时间

• source-source conflict

• residence-source conflict: 先交source国, residence国提供税收优惠

  • credit method(complete): max(source, residence)

  • exemption method(complete): 只交source

  • deduction method(partial): T_source + (1 - T_source) * T_residence

concentrated single-asset positions

types of concentrated asset

• public stock

• private equity

• commercial or real estate

investment risks

• systematic risk

• company-specific risk

• property-specific risk: the non-systematic risk taht is specific to woning a particular piece of real estate

basic

• common objectives

  • risk reduction

  • cash flow needs should be identified, liquidity

  • maximize after-tax return

• specific objectives and constraints

  • with respect to concentrated stock position

    • incentive compensation or mandated to hold shares

    • maintain effective voting control

    • enchance the current income

  • with respect to privately owned businesses

    • growth phase has just begun

    • maintain total control of the company

    • give senior management and other key employees the opportunity to eventually acquire control of the business

    • plans to pass control of the business to the next generation

  • with respect to real estate

    • maintain control because the property is an essential asset necessary for the successful operation of a business enterprise

    • retain ownership to pass to the next generation

    • benefit from a recent purchase or development through price appreciation

tax and illiquidity

• asset outright will usually trigger an immediate and sometimes significant taxable capital gain for the owner

• generally illiquid

capital market and institutional constraints

• margin lending rules(保证金贷款): 如股权质押

• securities laws and regulations

• contractual restrictions and employer mandates

• capital market limitations

pyschological consideration

• emotional error

  • overconfidence and familarity

  • status quo bias

  • naive extrpolation of past returns

  • endowment effect

  • loyalty effects

• cognitive bias

  • conservatism

  • confirmation

  • illusion of control

  • anchoring and adjustment

  • availability heuristic

goal-based decision process

• personal risk bucket: prevent poverty

• market risk bucket: maintain current standard of living

• aspirational risk bucket: improve lifestyle

asset location and transfer

• asset location: the type of account an asset is held within taxbale or tax deferred

• wealth transfer

  • estate tax freeze: voting preferred shares / non-voting common shares, 刻意估低价值

concentrated wealth decision making: a five-step process

1. identify and establish objectives and constraints

2. identify tools/ strategies that can satisfy these objectives

3. compare tax advantages and disadvantages

4. compare non-tax advantages and disadvantages

5. formulate and document an overall strategy

techniques to manage risk of concentrated position

• outright sale: 直接卖

• monetization strategies(货币化): 股权质押

  • equity derivatives to hedge value:

    • exchange-traded options

    • OTC derivatives

      • options

      • forwards

      • swaps

  • borrowing to monetize the position

    • margin loans

    • recourse and non-recourse debt

    • fixed- and floating-rate debt

    • loans embedded within a derivative

  • other monetization

    • short sales against box

    • restricted stock sales

    • public capital market-absed transactions

      • debt exchangeable for common offerings

    • rule 10b5-1plans and blind trusts (U.S.)

    • exchange funds (U.S.)

• hedging the value of the concentrated asset

  • protective puts

  • a pair of puts

  • knock-out puts

  • cashless collars

  • prepaid variable forwards (PVF) = short forward + loan

  • choosing the best hedging strategy

  • mismatch in character (tax mismatch)

  • yield enhancement: write covered call

  • other tool:

    • index tracking with active tax mangement, 买个指数

    • a completeness portfolio, 和原来股票互补

  • cross hedge, 交叉对冲，用其他类似的衍生品对冲

  • an exchange fund, 同其他股票成为一个pool，交换股票份额

privat held business

characteristic of privately held business

• considerable concentration risk

• high company specific risks

• illquidity

exit strategies

• IPO

• strategic buyers

• financial buyers, private equity buyers

• leveraged recapitalization: replace equity with senior/ subordinate bond 先一部分收购，后n年另外部分收购

  • staged exit

  • 优点: 增加liquidity; 降低risk; retain incentiveness; tax shield

  • 缺点: lose control

• sale to management or key employees

• sale or gift to family members

• divestiture(剥离不良资产)

• employee stock ownership plan

• personal line of credit secured by company shares

real estate positions

factors determin the attractiveness of the market from the seller's perspective

• current valuation relative to historical levels and future expectations

• tax rate

• condition of the credit markets and lending conditions

• level of interest rate

monetization strategies for real estate owners

• mortgage financing: LTV (loan to value)

• charitably inclined

• sale and leasback (售后回租)

risk management for individuals

life-cycle finance: a concept in finance that recognizes as an investor ages, the fundamental nature of wealth and risk evolves

economic balance sheet: a balance sheet that provides an individual's totla wealth portfolio, supplementing traditional balance sheet assets with human capital and pension wealth, and expanding liabilities to include consumption and bequest goals. holistic balance sheet.

• human capital

$HC_0 = \sum_{t=1}^N \frac{w_t}{(1+r)^t}$

$HC_0 = \sum_{t=1}^N \frac{p(s_t) w_t (1 + g_t)}{(1 + r_f + y)^t}$

where $p(s_t)$ is the probability of surviving to a given year

• financial capital

  • personal assets: real estate and colletibles considered a "mixed" assets

  • investment assets

    • marketable

    • non-marketable

      • employer pension plans(vested)

    $mNPV_0 = \sum_{t=1}^N \frac{p(s_t) b_t}{(1 + r)^t}$

    • government pensions

net worth

• net worth: 金融资产和负债

• net wealth: economic net worth，还要考虑未来现金流

net wealth = net worth + PV of future earnings + PV of pension benefit(unvested) - PV of future consumption - PV of bequest

the risk management strategy for individuals

1. specify the objective

2. identify risks

3. evaluate risks and select appropriate methods to manage the risks

   • risk avoidance

   • risk reduction

   • risk transfer

   • risk retention

4. monitor outcomes and risk exposures and make appropriate adjustments in methods

implementation of risk management

	risk management techniques
loss characteristics	high frequency	low frequency
high severity	risk avoidance	risk transfer
low severity	risk reduction	risk retention

• risk avoidance: 不要游泳

• risk transfer: 用保险

individual risk exposure

another classification

• earning risk (insure with disability insurance), regular job, negatively affect human and financial capital

• premature death risk, 可重复投保, risk of an individual dying earlier than anticipated; mortality risk

• longevity risk (insure with annuities), risk associaged with living to an advanced age in retirement; the risk of outliving one's financial resources

• property risk (insure with property insurance), possibility that a person's property may be damaged. destroyed, stolen, or lost

• liability risk (insure with liability insurance)

• health risk (insure with health insurance)

life insurance_

life insurance: protects against the loss of human capital for those who depend on an individual's future earnings.

• life related

  • 死亡险:

    • term life/whole life

    • participate/ non participate: 分红不分红

  • annuity:

    • immediate/deferred

    • fixed/variable

  • universal, 万能险，保障+投资

• non-life

use of life insurance

• hedge against the risk of premature death

• importance estate-planning tool

• a tax-sheltered savings instrument

the basic elements of a life insurance policy

• term

• amount of benefits

• limitations under which the death benefit could be withheld (e.g., suicide within two years)

• contestability period: 调查期

• identity of the insured (被保人)

• policy owner (投保人)

• beneficiary (受益人)

• premium schedule 保费

• coverage 保额

• elimination/waiting

• non-forfeiture clause: 不丧失现金价值

• guaranteed insurability: 保证续保条款

gross premium = net premium + expense + projected profit

annuity

• immediate annuity

• deferred annuity

• advanced life deferred annuities: 高龄递延年金

• mortality credits: 活得长的收益

• payout methods: joint life(家庭成员), period-certain annuity(固定年限), life annuity with period certain(确保支付的最少年份), and life annuity with refund(确保所支付保费总额，不计时间价值)

other types of insurance

• disability income insurance:

  • wavier of premium: 失去能力时，投保人免缴保费