Preface | p. xiii |

Introduction to Alternative Investments | p. 1 |

What Is an Alternative Investment? | p. 3 |

Alternative Investments by Exclusion | p. 3 |

Alternative Investments by Inclusion | p. 4 |

Structures among Alternative Investments | p. 8 |

Investments Are Distinguished by Return Characteristics | p. 12 |

Investments Are Distinguished by Methods of Analysis | p. 14 |

Goals of Alternative Investing | p. 17 |

Overview of This Book | p. 19 |

The Environment of Alternative Investments | p. 21 |

The Participants | p. 21 |

Financial Markets | p. 28 |

Regulations | p. 30 |

Taxation | p. 38 |

Statistical Foundations | p. 41 |

Frequency and Probability Distributions | p. 41 |

Compounding Multiple Time Period Returns | p. 44 |

Return Distributions and Autocorrelation | p. 48 |

Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis | p. 50 |

Computing Sample Statistics | p. 54 |

More on Standard Deviation and Variance | p. 59 |

Testing for Normality | p. 64 |

Other Measures of Risk | p. 66 |

Estimating Value at Risk (VaR) | p. 70 |

Time Series Return Volatility Models | p. 75 |

Conclusion | p. 77 |

Risk, Return, and Benchmarking | p. 79 |

Benchmarking | p. 79 |

Asset Pricing Models | p. 82 |

Three Methods of Models | p. 82 |

Cross-Sectional versus Time-Series Models | p. 85 |

Single-Factor and Ex Ante Asset Pricing | p. 87 |

Empirical Analyses with the CAPM | p. 90 |

Multifactor Models | p. 96 |

Alternative Asset Benchmarking | p. 103 |

Conclusion | p. 107 |

Correlation, Alternative Returns, and Performance Measurement | p. 109 |

Correlation | p. 109 |

Internal Rate of Return | p. 118 |

Problems with IRR | p. 122 |

Returns Based on Notional Principal | p. 129 |

Distribution of Cash Waterfall | p. 132 |

Performance Measures | p. 139 |

Alpha and Beta | p. 147 |

Overview of Beta and Alpha | p. 147 |

Ex Ante versus Ex Post Alpha | p. 149 |

Inferring Ex Ante Alpha from Ex Post Alpha | p. 155 |

Return Attribution | p. 158 |

Ex Ante Alpha Estimation and Persistence | p. 163 |

Return Drivers | p. 164 |

Summary of Alpha and Beta Analysis | p. 168 |

Hypothesis Testing in Alternative Investments | p. 169 |

Four Steps of Hypothesis Testing | p. 170 |

A Test Assuming Normality | p. 173 |

Tests with Inferential Statistics | p. 176 |

Sampling and Testing Problems | p. 181 |

Cumulative Returns and Performance | p. 185 |

Statistical Issues in Analyzing Alpha and Beta | p. 189 |

Summary of Alpha and Beta Estimation | p. 196 |

Conclusion | p. 198 |

Real Assets | p. 201 |

Land, Infrastructure, and Intangible Real Assets | p. 203 |

Land | p. 203 |

Timber and Timberland | p. 208 |

Farmland | p. 210 |

Infrastructure | p. 214 |

Intellectual Property | p. 220 |

Valuation and Volatility | p. 224 |

Historical Risks and Returns | p. 228 |

Real Estate Fixed-Income Investments | p. 233 |

Residential Mortgages | p. 233 |

Commercial Mortgages | p. 241 |

Mortgage-Backed Securities Market | p. 244 |

Collateralized Mortgage Obligations | p. 249 |

Real Estate Investment Trusts | p. 255 |

Risks and Returns of Mortgage REITs | p. 256 |

Real Estate Equity Investments | p. 261 |

Real Estate Development | p. 261 |

Valuation and Risks of Real Estate Equity | p. 264 |

Alternative Real Estate Investment Vehicles | p. 272 |

Real Estate and Depreciation | p. 278 |

Real Estate Equity Risks and Returns | p. 283 |

Risks and Returns of Equity REITs | p. 288 |

Hedge Funds | p. 293 |

Introduction to Hedge Funds | p. 295 |

Distinguishing Hedge Funds | p. 295 |

Hedge Fund Types | p. 302 |

Hedge Fund Fees | p. 304 |

Conclusion | p. 315 |

Hedge Fund Returns and Asset Allocation | p. 317 |

Describing the Hedge Fund Universe | p. 317 |

Mean, Variance, Skewness, and Kurtosis of Strategies | p. 319 |

Categorizing Hedge Fund Strategies | p. 321 |

Should Hedge Funds Be Part of an Investment Program? | p. 328 |

Do Hedge Funds Undermine the Financial Markets? | p. 333 |

Hedge Fund Indices | p. 335 |

Conclusion | p. 344 |

Macro and Managed Futures Funds | p. 345 |

Major Distinctions between Strategies | p. 345 |

Global Macro | p. 347 |

Returns of Macro Investing | p. 351 |

Managed Futures | p. 354 |

Systematic Trading | p. 357 |

Systematic Trading Styles | p. 359 |

Prior Empirical Research | p. 369 |

Conclusion | p. 376 |

Analysis of Historical Returns Conclusion | p. 376 |

Event-Driven Hedge Funds | p. 381 |

The Sources of Most Event Strategy Returns | p. 381 |

Activist Investing | p. 384 |

Merger Arbitrage | p. 397 |

Distressed Securities Funds | p. 405 |

Event-Driven Multistrategy Funds | p. 412 |

Relative Value Hedge Funds | p. 417 |

Convertible Bond Arbitrage | p. 418 |

Volatility Arbitrage | p. 433 |

Fixed-Income Arbitrage | p. 447 |

Relative Value Multistrategy Funds | p. 459 |

Equity Hedge Funds | p. 461 |

Sources of Return | p. 462 |

Market Anomalies | p. 466 |

The Fundamental Law of Active Management | p. 47 |

Implementing Anomaly Strategies | p. 475 |

The Three Equity Strategies | p. 480 |

Conclusion | p. 493 |

Funds of Hedge Funds | p. 495 |

Benefits and Costs of Diversification | p. 495 |

Investing in Multistrategy Funds | p. 502 |

Investing in Funds of Hedge Funds | p. 505 |

Fund of Funds Historical Returns | p. 508 |

Conclusion | p. 520 |

Commodities | p. 523 |

Commodity Futures Pricing | p. 525 |

Forward and Futures Contracts | p. 525 |

Rolling Contracts | p. 530 |

The Term Structure of Forward Prices | p. 531 |

Backwardation and Contango | p. 542 |

Returns on Futures Contracts | p. 545 |

Commodities: Applications and Evidence | p. 551 |

Commodity Investing for Diversification | p. 551 |

Commodity Investing for Return Enhancement | p. 555 |

Investing in Commodities without Futures | p. 557 |

Commodity Exposure through Futures Contracts | p. 562 |

Three Fallacies of Roll Return | p. 568 |

Commodity Futures Indices | p. 570 |

Commodity Risks and Returns | p. 572 |

Historical Risks and Returns | p. 574 |

Private Equity | p. 579 |

Introduction to Private Equity | p. 581 |

Private Equity Terminology and Background | p. 581 |

Private Equity as Equity Securities | p. 584 |

Private Equity as Debt Securities | p. 587 |

Trends and Innovations in Private Equity | p. 592 |

Equity Types of Private Equity | p. 599 |

Venture Capital versus LBOs | p. 599 |

The Underlying Businesses of Venture Capital | p. 600 |

Venture Capital Funds | p. 601 |

Venture Capital Risks and Returns | p. 609 |

Leveraged Buyouts (LBOs) | p. 613 |

Leveraged Buyout Risks and Returns | p. 623 |

Debt Types of Private Equity | p. 625 |

Mezzanine Debt | p. 625 |

Distressed Debt | p. 632 |

Risks of Distressed Debt Investing | p. 637 |

Structured Products | p. 639 |

Credit Risk and the Structuring of Cash Flows | p. 641 |

An Overview of Credit Risk | p. 641 |

Modeling Credit Risk | p. 644 |

Structural Model Approach to Credit Risk | p. 646 |

Reduced-Form Model Approach to Credit Risk | p. 655 |

Structuring Using Collateralized Debt Obligations | p. 663 |

Conclusion | p. 666 |

Credit Derivatives | p. 667 |

Credit Derivative Markets | p. 667 |

Credit Default Swaps | p. 669 |

Other Credit Derivatives | p. 678 |

Risks of Credit Derivatives | p. 680 |

Conclusion | p. 683 |

Collateralized Debt Obligations | p. 685 |

Introduction to Collateralized Debt Obligations | p. 685 |

Balance Sheet CDOs versus Arbitrage CDOs | p. 688 |

Cash-Funded CDOs versus Synthetic CDOs | p. 692 |

Cash Flow CDOs versus Market Value CDOs | p. 695 |

Credit Risk and Enhancements | p. 696 |

New Developments in CDOs | p. 699 |

Risks of CDOs | p. 703 |

Risk Management and Portfolio Management | p. 709 |

Lessons from Hedge Fund Failures | p. 711 |

Problems Driven by Market Losses | p. 711 |

Failures Driven by Fraud | p. 721 |

Conclusion | p. 727 |

Risk Analysis | p. 729 |

Investment Strategy Risks | p. 729 |

Market Risk | p. 730 |

Operational Risk | p. 732 |

Investment Process Risk | p. 734 |

Controlling Operational Risk | p. 736 |

Aggregating the Risks of a Fund | p. 740 |

Portfolios with Options | p. 742 |

Conclusion | p. 745 |

Due Diligence of Fund Managers | p. 747 |

Screening with Three Fundamental Questions | p. 748 |

Structural Review | p. 752 |

Strategic Review | p. 756 |

Administrative Review | p. 760 |

Performance Review | p. 761 |

Portfolio Risk Review | p. 767 |

Legal Review | p. 770 |

Reference Checks | p. 773 |

Measuring Operational Risk | p. 774 |

Regression, Multivariate, and Nonlinear Methods | p. 777 |

Single-Factor Models and Regression | p. 777 |

Multiple-Factor Models and Regression | p. 781 |

Nonlinear Returns | p. 783 |

Changing Correlation | p. 785 |

Applications of Multifactor Models | p. 787 |

Hedge Fund Performance Persistence | p. 791 |

Portfolio Optimization and Risk Parity | p. 795 |

Mean-Variance Portfolio Optimization | p. 795 |

Complications to Mean-Variance Optimization | p. 803 |

Risk Budgeting | p. 807 |

Risk Parity | p. 810 |

Portfolio Management, Alpha, and Beta | p. 819 |

The Estimation of Alpha and Beta | p. 819 |

The Separation of Alpha and Beta | p. 821 |

Portable Alpha | p. 822 |

Alpha, Beta, and Portfolio Allocation | p. 827 |

Conclusion | p. 831 |

Appendix: Data Sources | p. 833 |

Index | p. 849 |

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