Alternative investment case: What is your solution?

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-What would be your advise on this case?
-How would you construct the portfolio?
-What would be the considerations that should be mentioned?
-Can she invest in a hedge fund? I guess her money is not enough for that, right?
-Can she invest in PE funds?

I was given this assignment by an asset management firm and I am really interested in your porposals!

The case:

Anna Penes is a middle-aged consulting engineer, who has just inherited $1,000,000. She has no experience in investing, so she asks you to advice her on how to invest this amount. She read about ALTERNATIVE INVESTMENTS in the newspapers, and is ESPECIALLY excited about THIS ASSET CLASS. Please construct a portfolio for her, describing all additional conditions and considerations that you assume.

Anyone who is willing to share an insightful solution, with detailed explanation, is subject of some monetary reward :-).

Thank you for the help!

Comments (15)

 
Jun 12, 2008 - 12:40pm

I'll take a stab:

Do we know anything else about her? Is this inheritance all money for investing? Assuming it is, and that she already lives comfortably with her income, then let's look at what you can do:

While she may be looking at risky asset classes, there is still room for diversification. So, a good start might be to construct a efficient frontier, based on different mixes of, let's say, PE, VC, and HF. Of course, with these classes, you're faced with a big problem in constructing the portfolio for diversification within the class: no data. I know Bloomberg posts historical returns of hedge funds, but otherwise information is hard to come by.

 
Jun 12, 2008 - 1:23pm

Alphaholic, thank you for your reply. We do not know anything else other than what the case states. I believe the aim of the case is to measure whether you (as a matter of fact,I :-) ) can give an informative proposal on these asset classes. I think assuming she wants to invest all is OK. Now my Q is still this. Is this money enough to invest in VC, PE or HF? Is there a way to invest indirectly? I mean through a fund of funds maybe. Do you need to lock up less capital there?

Also assume, that the person is in Central Europe. What does does that add to the situation?

What proportion would yout put in HF/PE/VC? You can also add some conventional asset classes too.

You can be very creative here, I think! You can assume, whatever you want! Just be creative!

Thanks for all the help!

 
Jun 12, 2008 - 5:02pm

I have a feeling they are expecting you to touch on the following

risk - middle age signifies medium risk approach as they are coming close to retirement

liquidity - semi liguid asset can take a significant proportion of the $1m. So something along the lines of 50% semi-liquid, 25% illiquid and 20% liquid assets and 5% cash

returns - due to mid level risk approach this will be reflected in expected returns

opacity - including "opague" assets like Real Estate would benefit the client as they will be able to understand such strategies compared to PE/VC

 
Jun 12, 2008 - 5:50pm

jayroc2k - thank you for the great answer!!!

Can you list some examples?
liquid-->???
semi-liquid-->???
illiquid-->???

Are gov. bonds considered to be semi-liquid?
What are VC and PE funds? I mean how liquid are they? Considering she is not a direct investor in these funds.

HOW COULD OUR CHARACTER PUT MONEY INTO A PE/VC FUND? IS THE SOLUTION FUND OF FUNDS???

 
Jun 12, 2008 - 8:12pm

Curious...shouldn't you be researching this yourself?

Fund of Funds allow you to chop your investment, but they suck in many ways too. They take a significant cut ABOVE what the HF/PE funds that are in their portfolio take. Think about that: The HF/PE take a 20/2 cut, and then, let's say the FoF takes a 10-20/2 cut again. That's a big wet bite outa' the investor's ass.

Government bonds: Tbills and Tbonds are considered liquid. Some TIPS issues and STRIPS are less liquid.

 
Jun 17, 2008 - 4:40pm

try reading up on investopedia.com and wikkipedia, most terms are explained there.

High Yield bonds are a characteristic of their credit quality (low), risk (higher) and yield (high), liquidity is not ussually considered in the definition of High Yield bonds

illiquid or semi-liquid assets are Real Estate, CDO/ABS tranches, investements in small cap share or VC where the return depend on the ability of the VC to turn about the startup company on its books into an IPO or anything you can't sell on a whim

the list goes on....

 
Jun 19, 2008 - 2:50pm

VC / PE generally require large contributions ($500K+, according to CFA texts) so they are inappropriate for this client. Her job title implies that she is making some okay dough, and being middle-aged, (without more knowledge), we can guess that she has no immediate needs for the portfolio. I would characterize her risk tolerance as above average, due to time horizon (middle age implies 10+ years till retiremnet), wealth level ($1M portfolio + good job) and (I assume) minimal liquidity needs. I would take a fairly aggresive strategy 60% global equity, 10% Hedge fund(s), 20% fixed income, the other 10% some mix of REITS / Commodities. The FI portion should include some highly liquid securities, as well as some inflation indexed bonds. The equities should have a capital gain orientation, due to cap gains/ dividend tax structures. Note that i say PE is inappropriate because it would result in an overly concentrated portfolio, not because of risk. I'd also recommend investor education. She sounds like someone who fell ass-backward into money, knows nothing about risk/return, and is itching to get into PE / HFs.

 
Jun 19, 2008 - 2:50pm

VC / PE generally require large contributions ($500K+, according to CFA texts) so they are inappropriate for this client. Her job title implies that she is making some okay dough, and being middle-aged, (without more knowledge), we can guess that she has no immediate needs for the portfolio. I would characterize her risk tolerance as above average, due to time horizon (middle age implies 10+ years till retiremnet), wealth level ($1M portfolio + good job) and (I assume) minimal liquidity needs. I would take a fairly aggresive strategy 60% global equity, 10% Hedge fund(s), 20% fixed income, the other 10% some mix of REITS / Commodities. The FI portion should include some highly liquid securities, as well as some inflation indexed bonds. The equities should have a capital gain orientation, due to cap gains/ dividend tax structures. Note that i say PE is inappropriate because it would result in an overly concentrated portfolio, not because of risk. I'd also recommend investor education. She sounds like someone who fell ass-backward into money, knows nothing about risk/return, and is itching to get into PE / HFs.

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