{"id":702,"date":"2019-09-15T17:32:00","date_gmt":"2019-09-15T17:32:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=702"},"modified":"2025-05-29T13:57:58","modified_gmt":"2025-05-29T13:57:58","slug":"issues-valuating-calculating-returns-hedge-funds","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/","title":{"rendered":"Valuating and Calculating Returns on Alternative Investments"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Introduction to Alternative Investments (2021 Level I CFA\u00ae Exam \u2013 Reading 50)\",\n  \"description\": \"This session on alternative investments compares them to traditional investments like stocks and bonds. It covers categories such as hedge funds, private equity, real estate, and commodities, highlighting their unique characteristics, benefits, and risks. Emphasis is placed on due diligence, valuation challenges, and diversification in portfolio management.\",\n  \"uploadDate\": \"2020-01-02T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/mbgLBrNuD1U\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=mbgLBrNuD1U\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/mbgLBrNuD1U\",\n  \"duration\": \"PT24M25S\"\n}\n<\/script>\n\n\n\n<p>[vsw id=&#8221;mbgLBrNuD1U&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;]<\/p>\n<h2>Hedge Funds<\/h2>\n<p>Valuating and calculating returns for hedge funds include issues such as the difference between fund performance and investor performance (net-of-fees, redemption issues). The use of high leverage in hedge funds can amplify gains and losses. Investors must, therefore, be careful when assessing the risk-reward of a fund. Other issues include the effect of redemptions on fund performance.<\/p>\n<p>A valuation can be difficult if many assets are not openly traded, but most funds use \u201caverage quotes\u201d to value the portfolio.<\/p>\n<p><!--more--><\/p>\n<h2>Private Equity Funds<\/h2>\n<p>For private equity funds, valuation is typically done at the portfolio company (acquired firm) level. Discount cash flow models (DCF) are common. This notwithstanding, some investors will also look at comparables (market approach) or the asset approach (assets \u2013 debt = equity).<\/p>\n<p>Calculating returns are highly dependent on the exit strategy and the cash flow generated by the portfolio company.&nbsp; Often the bulk of the returns come at the exit stage. Nevertheless, some LBOs are cash-generating for the investors.<\/p>\n<h2>Real Estate<\/h2>\n<p>Real estate valuation can be tricky. For this reason, professional appraisers often price assets based on three main approaches: comparable sales, the income approach (income\/expected return = asset value), or replacement cost. Cap rates are the expected returns for a given asset and are usually known in a given market and asset class. Assessment of returns from real estate typically involves looking at rental rates, cap rates, vacancy rates, and specific factors relevant to the properties (legacy issues, quality of construction).<\/p>\n<p>Valuing REITs means determining the net asset value (NAV) or a discount model of income and expenses.<\/p>\n<h2>Commodities<\/h2>\n<p>Commodities valuation and returns vary depending on the type of securities used. Futures are priced according to the following model: futures price = spot price (1 + r) + storage costs \u2013 convenience yield. Convenience yield refers to the benefit of holding an asset for sale and taking advantage of volatility in the market (sell high), and using it on demand if necessary.<\/p>\n<p>Many commodities are openly traded in public markets, but valuation depends on quality, quantity, grade, location of delivery, time of delivery, and many other factors. In addition, storage costs are often significant, and depending on the specific market for a commodity, the convenience yield may be larger or smaller than the storage costs for a given period.<\/p>\n<h2>Infrastructure<\/h2>\n<p>Infrastructure valuation relies on knowledge of regulatory risk, construction risk, reliability of cash flows (tolls, utilities prices). Returns are often reliable, but heavy regulation on profits and service quality can hurt.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>Which of the following statements is<em> inaccurate<\/em>?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Alternative investments track markets with a high degree of correlation.<\/li>\n<li data-tadv-p=\"keep\">Real estate valuation relies on three factors: cost, market, and income.<\/li>\n<li data-tadv-p=\"keep\">Discount cash flow modelling is a common valuation tool for private equity investors.<\/li>\n<\/ol>\n<h3 data-tadv-p=\"keep\">Solution<\/h3>\n<p>The correct answer is A.<\/p>\n<p>Alternative investments typically do not track the movements of the markets.&nbsp; They offer hedging opportunities for investors.<\/p>\n<p>Options B and C are accurate statements.<\/p>\n<\/blockquote>\n<p><em>Reading 50 LOS 50e: <\/em><\/p>\n<p><em>describe issues in valuing and calculating returns on hedge funds, private equity, real estate, commodities, and infrastructure<\/em><\/p>\n<div class=\"notes_inv\">\n<hr>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/learning-sessions-curriculum-alternative-investments\/\"><em>Alternative Investments &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>[vsw id=&#8221;mbgLBrNuD1U&#8221; source=&#8221;youtube&#8221; width=&#8221;611&#8243; height=&#8221;344&#8243; autoplay=&#8221;no&#8221;] Hedge Funds Valuating and calculating returns for hedge funds include issues such as the difference between fund performance and investor performance (net-of-fees, redemption issues). The use of high leverage in hedge funds can amplify&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[11],"tags":[],"class_list":["post-702","post","type-post","status-publish","format-standard","hentry","category-alternative-investments","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Valuating &amp; Calculating Returns on Hedge Funds | CFA\u00ae Notes<\/title>\n<meta name=\"description\" content=\"Learn to value and calculate returns for hedge funds, including issues like fund vs. investor performance. CFA\u00ae Level 1 study notes on alternative investments.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Valuating &amp; Calculating Returns on Hedge Funds | CFA\u00ae Notes\" \/>\n<meta property=\"og:description\" content=\"Learn to value and calculate returns for hedge funds, including issues like fund vs. investor performance. CFA\u00ae Level 1 study notes on alternative investments.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-15T17:32:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-05-29T13:57:58+00:00\" \/>\n<meta name=\"author\" content=\"Mathieu Valois-Chenier\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Mathieu Valois-Chenier\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/\"},\"author\":{\"name\":\"Mathieu Valois-Chenier\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/722a72bd4761f2b514d3eaa19a9c78a7\"},\"headline\":\"Valuating and Calculating Returns on Alternative Investments\",\"datePublished\":\"2019-09-15T17:32:00+00:00\",\"dateModified\":\"2025-05-29T13:57:58+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/\"},\"wordCount\":525,\"articleSection\":[\"Alternative Investments\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/\",\"name\":\"Valuating & Calculating Returns on Hedge Funds | CFA\u00ae Notes\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2019-09-15T17:32:00+00:00\",\"dateModified\":\"2025-05-29T13:57:58+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/722a72bd4761f2b514d3eaa19a9c78a7\"},\"description\":\"Learn to value and calculate returns for hedge funds, including issues like fund vs. investor performance. CFA\u00ae Level 1 study notes on alternative investments.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Valuating and Calculating Returns on Alternative Investments\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/722a72bd4761f2b514d3eaa19a9c78a7\",\"name\":\"Mathieu Valois-Chenier\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/person-flat-150x150.png\",\"contentUrl\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/person-flat-150x150.png\",\"caption\":\"Mathieu Valois-Chenier\"},\"sameAs\":[\"https:\/\/analystprep.com\"],\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/matt\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Valuating & Calculating Returns on Hedge Funds | CFA\u00ae Notes","description":"Learn to value and calculate returns for hedge funds, including issues like fund vs. investor performance. CFA\u00ae Level 1 study notes on alternative investments.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/","og_locale":"en_US","og_type":"article","og_title":"Valuating & Calculating Returns on Hedge Funds | CFA\u00ae Notes","og_description":"Learn to value and calculate returns for hedge funds, including issues like fund vs. investor performance. CFA\u00ae Level 1 study notes on alternative investments.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-09-15T17:32:00+00:00","article_modified_time":"2025-05-29T13:57:58+00:00","author":"Mathieu Valois-Chenier","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Mathieu Valois-Chenier","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/"},"author":{"name":"Mathieu Valois-Chenier","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/722a72bd4761f2b514d3eaa19a9c78a7"},"headline":"Valuating and Calculating Returns on Alternative Investments","datePublished":"2019-09-15T17:32:00+00:00","dateModified":"2025-05-29T13:57:58+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/"},"wordCount":525,"articleSection":["Alternative Investments"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/","name":"Valuating & Calculating Returns on Hedge Funds | CFA\u00ae Notes","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-09-15T17:32:00+00:00","dateModified":"2025-05-29T13:57:58+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/722a72bd4761f2b514d3eaa19a9c78a7"},"description":"Learn to value and calculate returns for hedge funds, including issues like fund vs. investor performance. CFA\u00ae Level 1 study notes on alternative investments.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/alternative-investments\/issues-valuating-calculating-returns-hedge-funds\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Valuating and Calculating Returns on Alternative Investments"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/722a72bd4761f2b514d3eaa19a9c78a7","name":"Mathieu Valois-Chenier","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/person-flat-150x150.png","contentUrl":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/person-flat-150x150.png","caption":"Mathieu Valois-Chenier"},"sameAs":["https:\/\/analystprep.com"],"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/matt\/"}]}},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/702","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=702"}],"version-history":[{"count":22,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/702\/revisions"}],"predecessor-version":[{"id":56285,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/702\/revisions\/56285"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=702"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=702"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=702"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}