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

by Unknown

• ISBN13: 9781118250969
• ISBN10: 1118250966
• Edition: 2nd
• Format: Hardcover
• Copyright: 2012-04-24
• Publisher: Wiley

Summary

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

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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