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CAIA Level I : An Introduction to Core Topics in Alternative Investments

by Unknown
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  • Edition: 2nd
  • Format: Hardcover
  • Copyright: 2012-04-24
  • Publisher: Wiley
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CAIA Association has developed two examinations that are used to certify Chartered Alternative Investment Analysts. The Level I curriculum builds a foundation in both traditional and alternative investment markets--for example, the range of statistics that are used to define investment performance as well as the many types of hedge fund strategies. The readings for the Level II exam focus on the same strategies, but change the context to one of risk management and portfolio optimization. Level I CAIA exam takers have to work through an outline of terms, be able to identify and describe aspects of financial markets, develop reasoning skills, and in some cases make computations necessary to solve business problems.

Author Biography

The CAIA Association is an independent, not-for-profit, global organization committed to education and professionalism in the field of alternative investments. It offers two exams (Level I and Level II) to financial professionals in this growing field. Upon successful completion, individuals are designated Chartered Alternative Investment Analyst (CAIA) Charter Holders. The CAIA Association has members from over seventy-five countries on six continents.

Mark J. P. Anson, PhD, CAIA, is a Managing Partner at Oak Hill Investment Management, LP. Dr. Anson previously served as President and Executive Director of Investment Services at Nuveen Investments, Chief Executive Officer at Hermes Pension Management Limited, and Chief Investment Officer at California Public Employees' Retirement System. He has published over 100 research articles in professional journals, has won two Best Paper Awards, is the author of six financial textbooks, and sits on the editorial boards of several financial journals.

Donald R. Chambers, PhD, CAIA, is the Associate Director of the Level 1 Curriculum at the CAIA Association and is the Walter E. Hanson/KPMG Professor of Finance at Lafayette College in Easton, Pennsylvania. Dr. Chambers previously served as the Director of Alternative Investments at Karpus Investment Management.

Keith H. Black, PhD, CAIA, is the Associate Director of the Level II Curriculum at the CAIA Association. He was previously an Associate at Ennis Knupp and, before that, an Assistant Professor at Illinois Institute of Technology.

Hossein Kazemi, PhD, CAIA, is a Cofounder of and the Program Director for the CAIA Association. Dr. Kazemi is a Professor of Finance at the University of Massachusetts Amherst, an Associate Director of the Center for International Securities and Derivatives Markets, and an Associate Editor of the Journal of Alternative Investments.

Table of Contents

Prefacep. xiii
Introduction to Alternative Investmentsp. 1
What Is an Alternative Investment?p. 3
Alternative Investments by Exclusionp. 3
Alternative Investments by Inclusionp. 4
Structures among Alternative Investmentsp. 8
Investments Are Distinguished by Return Characteristicsp. 12
Investments Are Distinguished by Methods of Analysisp. 14
Goals of Alternative Investingp. 17
Overview of This Bookp. 19
The Environment of Alternative Investmentsp. 21
The Participantsp. 21
Financial Marketsp. 28
Regulationsp. 30
Taxationp. 38
Statistical Foundationsp. 41
Frequency and Probability Distributionsp. 41
Compounding Multiple Time Period Returnsp. 44
Return Distributions and Autocorrelationp. 48
Moments of the Distribution: Mean, Variance, Skewness, and Kurtosisp. 50
Computing Sample Statisticsp. 54
More on Standard Deviation and Variancep. 59
Testing for Normalityp. 64
Other Measures of Riskp. 66
Estimating Value at Risk (VaR)p. 70
Time Series Return Volatility Modelsp. 75
Conclusionp. 77
Risk, Return, and Benchmarkingp. 79
Benchmarkingp. 79
Asset Pricing Modelsp. 82
Three Methods of Modelsp. 82
Cross-Sectional versus Time-Series Modelsp. 85
Single-Factor and Ex Ante Asset Pricingp. 87
Empirical Analyses with the CAPMp. 90
Multifactor Modelsp. 96
Alternative Asset Benchmarkingp. 103
Conclusionp. 107
Correlation, Alternative Returns, and Performance Measurementp. 109
Correlationp. 109
Internal Rate of Returnp. 118
Problems with IRRp. 122
Returns Based on Notional Principalp. 129
Distribution of Cash Waterfallp. 132
Performance Measuresp. 139
Alpha and Betap. 147
Overview of Beta and Alphap. 147
Ex Ante versus Ex Post Alphap. 149
Inferring Ex Ante Alpha from Ex Post Alphap. 155
Return Attributionp. 158
Ex Ante Alpha Estimation and Persistencep. 163
Return Driversp. 164
Summary of Alpha and Beta Analysisp. 168
Hypothesis Testing in Alternative Investmentsp. 169
Four Steps of Hypothesis Testingp. 170
A Test Assuming Normalityp. 173
Tests with Inferential Statisticsp. 176
Sampling and Testing Problemsp. 181
Cumulative Returns and Performancep. 185
Statistical Issues in Analyzing Alpha and Betap. 189
Summary of Alpha and Beta Estimationp. 196
Conclusionp. 198
Real Assetsp. 201
Land, Infrastructure, and Intangible Real Assetsp. 203
Landp. 203
Timber and Timberlandp. 208
Farmlandp. 210
Infrastructurep. 214
Intellectual Propertyp. 220
Valuation and Volatilityp. 224
Historical Risks and Returnsp. 228
Real Estate Fixed-Income Investmentsp. 233
Residential Mortgagesp. 233
Commercial Mortgagesp. 241
Mortgage-Backed Securities Marketp. 244
Collateralized Mortgage Obligationsp. 249
Real Estate Investment Trustsp. 255
Risks and Returns of Mortgage REITsp. 256
Real Estate Equity Investmentsp. 261
Real Estate Developmentp. 261
Valuation and Risks of Real Estate Equityp. 264
Alternative Real Estate Investment Vehiclesp. 272
Real Estate and Depreciationp. 278
Real Estate Equity Risks and Returnsp. 283
Risks and Returns of Equity REITsp. 288
Hedge Fundsp. 293
Introduction to Hedge Fundsp. 295
Distinguishing Hedge Fundsp. 295
Hedge Fund Typesp. 302
Hedge Fund Feesp. 304
Conclusionp. 315
Hedge Fund Returns and Asset Allocationp. 317
Describing the Hedge Fund Universep. 317
Mean, Variance, Skewness, and Kurtosis of Strategiesp. 319
Categorizing Hedge Fund Strategiesp. 321
Should Hedge Funds Be Part of an Investment Program?p. 328
Do Hedge Funds Undermine the Financial Markets?p. 333
Hedge Fund Indicesp. 335
Conclusionp. 344
Macro and Managed Futures Fundsp. 345
Major Distinctions between Strategiesp. 345
Global Macrop. 347
Returns of Macro Investingp. 351
Managed Futuresp. 354
Systematic Tradingp. 357
Systematic Trading Stylesp. 359
Prior Empirical Researchp. 369
Conclusionp. 376
Analysis of Historical Returns Conclusionp. 376
Event-Driven Hedge Fundsp. 381
The Sources of Most Event Strategy Returnsp. 381
Activist Investingp. 384
Merger Arbitragep. 397
Distressed Securities Fundsp. 405
Event-Driven Multistrategy Fundsp. 412
Relative Value Hedge Fundsp. 417
Convertible Bond Arbitragep. 418
Volatility Arbitragep. 433
Fixed-Income Arbitragep. 447
Relative Value Multistrategy Fundsp. 459
Equity Hedge Fundsp. 461
Sources of Returnp. 462
Market Anomaliesp. 466
The Fundamental Law of Active Managementp. 47
Implementing Anomaly Strategiesp. 475
The Three Equity Strategiesp. 480
Conclusionp. 493
Funds of Hedge Fundsp. 495
Benefits and Costs of Diversificationp. 495
Investing in Multistrategy Fundsp. 502
Investing in Funds of Hedge Fundsp. 505
Fund of Funds Historical Returnsp. 508
Conclusionp. 520
Commoditiesp. 523
Commodity Futures Pricingp. 525
Forward and Futures Contractsp. 525
Rolling Contractsp. 530
The Term Structure of Forward Pricesp. 531
Backwardation and Contangop. 542
Returns on Futures Contractsp. 545
Commodities: Applications and Evidencep. 551
Commodity Investing for Diversificationp. 551
Commodity Investing for Return Enhancementp. 555
Investing in Commodities without Futuresp. 557
Commodity Exposure through Futures Contractsp. 562
Three Fallacies of Roll Returnp. 568
Commodity Futures Indicesp. 570
Commodity Risks and Returnsp. 572
Historical Risks and Returnsp. 574
Private Equityp. 579
Introduction to Private Equityp. 581
Private Equity Terminology and Backgroundp. 581
Private Equity as Equity Securitiesp. 584
Private Equity as Debt Securitiesp. 587
Trends and Innovations in Private Equityp. 592
Equity Types of Private Equityp. 599
Venture Capital versus LBOsp. 599
The Underlying Businesses of Venture Capitalp. 600
Venture Capital Fundsp. 601
Venture Capital Risks and Returnsp. 609
Leveraged Buyouts (LBOs)p. 613
Leveraged Buyout Risks and Returnsp. 623
Debt Types of Private Equityp. 625
Mezzanine Debtp. 625
Distressed Debtp. 632
Risks of Distressed Debt Investingp. 637
Structured Productsp. 639
Credit Risk and the Structuring of Cash Flowsp. 641
An Overview of Credit Riskp. 641
Modeling Credit Riskp. 644
Structural Model Approach to Credit Riskp. 646
Reduced-Form Model Approach to Credit Riskp. 655
Structuring Using Collateralized Debt Obligationsp. 663
Conclusionp. 666
Credit Derivativesp. 667
Credit Derivative Marketsp. 667
Credit Default Swapsp. 669
Other Credit Derivativesp. 678
Risks of Credit Derivativesp. 680
Conclusionp. 683
Collateralized Debt Obligationsp. 685
Introduction to Collateralized Debt Obligationsp. 685
Balance Sheet CDOs versus Arbitrage CDOsp. 688
Cash-Funded CDOs versus Synthetic CDOsp. 692
Cash Flow CDOs versus Market Value CDOsp. 695
Credit Risk and Enhancementsp. 696
New Developments in CDOsp. 699
Risks of CDOsp. 703
Risk Management and Portfolio Managementp. 709
Lessons from Hedge Fund Failuresp. 711
Problems Driven by Market Lossesp. 711
Failures Driven by Fraudp. 721
Conclusionp. 727
Risk Analysisp. 729
Investment Strategy Risksp. 729
Market Riskp. 730
Operational Riskp. 732
Investment Process Riskp. 734
Controlling Operational Riskp. 736
Aggregating the Risks of a Fundp. 740
Portfolios with Optionsp. 742
Conclusionp. 745
Due Diligence of Fund Managersp. 747
Screening with Three Fundamental Questionsp. 748
Structural Reviewp. 752
Strategic Reviewp. 756
Administrative Reviewp. 760
Performance Reviewp. 761
Portfolio Risk Reviewp. 767
Legal Reviewp. 770
Reference Checksp. 773
Measuring Operational Riskp. 774
Regression, Multivariate, and Nonlinear Methodsp. 777
Single-Factor Models and Regressionp. 777
Multiple-Factor Models and Regressionp. 781
Nonlinear Returnsp. 783
Changing Correlationp. 785
Applications of Multifactor Modelsp. 787
Hedge Fund Performance Persistencep. 791
Portfolio Optimization and Risk Parityp. 795
Mean-Variance Portfolio Optimizationp. 795
Complications to Mean-Variance Optimizationp. 803
Risk Budgetingp. 807
Risk Parityp. 810
Portfolio Management, Alpha, and Betap. 819
The Estimation of Alpha and Betap. 819
The Separation of Alpha and Betap. 821
Portable Alphap. 822
Alpha, Beta, and Portfolio Allocationp. 827
Conclusionp. 831
Appendix: Data Sourcesp. 833
Indexp. 849
Table of Contents provided by Ingram. All Rights Reserved.

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