CAIA Level I
An Introduction to Core Topics in Alternative Investments, Print + eBook
2nd Edition
Published on 3. August 2012
Book
Hardback
1796 pages
978-1-118-42816-0 (ISBN)
Description
The official study text for the Level I Chartered Alternative Investment Analyst (CAIA) exam The Chartered Alternative Investment Analyst (CAIA) designation is the financial industry's first and only globally recognized program that prepares professionals to deal with the ever-growing field of alternative investments. The second edition of CAIA Level I: An Introduction to Core Topics in Alternative Investments contains comprehensive insights on the alternative investment issues a potential Level I candidate would need to know about as they prepare for the exam.
The information found here will help you build a solid foundation in alternative investment markets-with coverage of everything from the characteristics of various strategies within each alternative asset class to portfolio management concepts central to alternative investments.
Uses investment analytics to examine each alternative asset class
Examines quantitative techniques used by investment professionals
Addresses the unique attributes associated with the alternative investment space
Offers an online study guide outlining learning objectives and keywords
This book is a must-have resource for anyone contemplating taking the CAIA Level I exam. So if you're ready to take your first step toward the CAIA charter, take the time to understand the insights offered here.
The information found here will help you build a solid foundation in alternative investment markets-with coverage of everything from the characteristics of various strategies within each alternative asset class to portfolio management concepts central to alternative investments.
Uses investment analytics to examine each alternative asset class
Examines quantitative techniques used by investment professionals
Addresses the unique attributes associated with the alternative investment space
Offers an online study guide outlining learning objectives and keywords
This book is a must-have resource for anyone contemplating taking the CAIA Level I exam. So if you're ready to take your first step toward the CAIA charter, take the time to understand the insights offered here.
More details
Series
Edition
2nd edition
Language
English
Place of publication
New York
United States
Target group
Professional and scholarly
Dimensions
Height: 262 mm
Width: 187 mm
Thickness: 46 mm
Weight
1715 gr
ISBN-13
978-1-118-42816-0 (9781118428160)
Copyright in bibliographic data and cover images is held by Nielsen Book Services Limited or by the publishers or by their respective licensors: all rights reserved.
Schweitzer Classification
Persons
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.
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.
Content
Preface xiii Acknowledgments xvii
About the Authors xxi
PART ONE Introduction to Alternative Investments 1
CHAPTER 1 What Is an Alternative Investment? 3
1.1 Alternative Investments by Exclusion 3
1.2 Alternative Investments by Inclusion 4
1.3 Structures among Alternative Investments 8
1.4 Investments Are Distinguished by Return Characteristics 12
1.5 Investments Are Distinguished by Methods of Analysis 14
1.6 Goals of Alternative Investing 17
1.7 Overview of This Book 19
CHAPTER 2 The Environment of Alternative Investments 21
2.1 The Participants 21
2.2 Financial Markets 28
2.3 Regulations 30
2.4 Taxation 38
CHAPTER 3 Statistical Foundations 41
3.1 Frequency and Probability Distributions 41
3.2 Compounding Multiple Time Period Returns 44
3.3 Return Distributions and Autocorrelation 48
3.4 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis 50
3.5 Computing Sample Statistics 54
3.6 More on Standard Deviation and Variance 59
3.7 Testing for Normality 64
3.8 Other Measures of Risk 66
3.9 Estimating Value at Risk (VaR) 70
3.10 Time Series Return Volatility Models 75
3.11 Conclusion 77
CHAPTER 4 Risk, Return, and Benchmarking 79
4.1 Benchmarking 79
4.2 Asset Pricing Models 82
4.3 Three Methods of Models 82
4.4 Cross-Sectional versus Time-Series Models 85
4.5 Single-Factor and Ex Ante Asset Pricing 87
4.6 Empirical Analyses with the CAPM 90
4.7 Multifactor Models 96
4.8 Alternative Asset Benchmarking 103
4.9 Conclusion 107
CHAPTER 5 Correlation, Alternative Returns, and Performance Measurement 109
5.1 Correlation 109
5.2 Internal Rate of Return 118
5.3 Problems with IRR 122
5.4 Returns Based on Notional Principal 129
5.5 Distribution of Cash Waterfall 132
5.6 Performance Measures 139
CHAPTER 6 Alpha and Beta 147
6.1 Overview of Beta and Alpha 147
6.2 Ex Ante versus Ex Post Alpha 149
6.3 Inferring Ex Ante Alpha from Ex Post Alpha 155
6.4 Return Attribution 158
6.5 Ex Ante Alpha Estimation and Persistence 163
6.6 Return Drivers 164
6.7 Summary of Alpha and Beta Analysis 168
CHAPTER 7 Hypothesis Testing in Alternative Investments 169
7.1 Four Steps of Hypothesis Testing 170
7.2 A Test Assuming Normality 173
7.3 Tests with Inferential Statistics 176
7.4 Sampling and Testing Problems 181
7.5 Cumulative Returns and Performance 185
7.6 Statistical Issues in Analyzing Alpha and Beta 189
7.7 Summary of Alpha and Beta Estimation 196
7.8 Conclusion 198
PART TWO Real Assets 201
CHAPTER 8 Land, Infrastructure, and Intangible Real Assets 203
8.1 Land 203
8.2 Timber and Timberland 208
8.3 Farmland 210
8.4 Infrastructure 214
8.5 Intellectual Property 220
8.6 Valuation and Volatility 224
8.7 Historical Risks and Returns 228
CHAPTER 9 Real Estate Fixed-Income Investments 233
9.1 Residential Mortgages 233
9.2 Commercial Mortgages 241
9.3 Mortgage-Backed Securities Market 244
9.4 Collateralized Mortgage Obligations 249
9.5 Real Estate Investment Trusts 255
9.6 Risks and Returns of Mortgage REITs 256
CHAPTER 10 Real Estate Equity Investments 261
10.1 Real Estate Development 261
10.2 Valuation and Risks of Real Estate Equity 264
10.3 Alternative Real Estate Investment Vehicles 272
10.4 Real Estate and Depreciation 278
10.5 Real Estate Equity Risks and Returns 283
10.6 Risks and Returns of Equity REITs 288
PART THREE Hedge Funds 293
CHAPTER 11 Introduction to Hedge Funds 295
11.1 Distinguishing Hedge Funds 295
11.2 Hedge Fund Types 302
11.3 Hedge Fund Fees 304
11.4 Conclusion 315
CHAPTER 12 Hedge Fund Returns and Asset Allocation 317
12.1 Describing the Hedge Fund Universe 317
12.2 Mean, Variance, Skewness, and Kurtosis of Strategies 319
12.3 Categorizing Hedge Fund Strategies 321
12.4 Should Hedge Funds Be Part of an Investment Program? 328
12.5 Do Hedge Funds Undermine the Financial Markets? 333
12.6 Hedge Fund Indices 335
12.7 Conclusion 344
CHAPTER 13 Macro and Managed Futures Funds 345
13.1 Major Distinctions between Strategies 345
13.2 Global Macro 347
13.3 Returns of Macro Investing 351
13.4 Managed Futures 354
13.5 Systematic Trading 357
13.6 Systematic Trading Styles 359
13.7 Prior Empirical Research 369
13.8 Conclusion 376
13.9 Analysis of Historical Returns Conclusion 376
CHAPTER 14 Event-Driven Hedge Funds 381
14.1 The Sources of Most Event Strategy Returns 381
14.2 Activist Investing 384
14.3 Merger Arbitrage 397
14.4 Distressed Securities Funds 405
14.5 Event-Driven Multistrategy Funds 412
CHAPTER 15 Relative Value Hedge Funds 417
15.1 Convertible Bond Arbitrage 418
15.2 Volatility Arbitrage 433
15.3 Fixed-Income Arbitrage 447
15.4 Relative Value Multistrategy Funds 459
CHAPTER 16 Equity Hedge Funds 461
16.1 Sources of Return 462
16.2 Market Anomalies 466
16.3 The Fundamental Law of Active Management 472
16.4 Implementing Anomaly Strategies 475
16.5 The Three Equity Strategies 480
16.6 Conclusion 493
CHAPTER 17 Funds of Hedge Funds 495
17.1 Benefits and Costs of Diversification 495
17.2 Investing in Multistrategy Funds 502
17.3 Investing in Funds of Hedge Funds 505
17.4 Fund of Funds Historical Returns 508
17.5 Conclusion 520
PART FOUR Commodities 523
CHAPTER 18 Commodity Futures Pricing 525
18.1 Forward and Futures Contracts 525
18.2 Rolling Contracts 530
18.3 The Term Structure of Forward Prices 531
18.4 Backwardation and Contango 542
18.5 Returns on Futures Contracts 545
CHAPTER 19 Commodities: Applications and Evidence 551
19.1 Commodity Investing for Diversification 551
19.2 Commodity Investing for Return Enhancement 555
19.3 Investing in Commodities without Futures 557
19.4 Commodity Exposure through Futures Contracts 562
19.5 Three Fallacies of Roll Return 568
19.6 Commodity Futures Indices 570
19.7 Commodity Risks and Returns 572
19.8 Historical Risks and Returns 574
PART FIVE Private Equity 579
CHAPTER 20 Introduction to Private Equity 581
20.1 Private Equity Terminology and Background 581
20.2 Private Equity as Equity Securities 584
20.3 Private Equity as Debt Securities 587
20.4 Trends and Innovations in Private Equity 592
CHAPTER 21 Equity Types of Private Equity 599
21.1 Venture Capital versus LBOs 599
21.2 The Underlying Businesses of Venture Capital 600
21.3 Venture Capital Funds 601
21.4 Venture Capital Risks and Returns 609
21.5 Leveraged Buyouts (LBOs) 613
21.6 Leveraged Buyout Risks and Returns 623
CHAPTER 22 Debt Types of Private Equity 625
22.1 Mezzanine Debt 625
22.2 Distressed Debt 632
22.3 Risks of Distressed Debt Investing 637
PART SIX Structured Products 639
CHAPTER 23 Credit Risk and the Structuring of Cash Flows 641
23.1 An Overview of Credit Risk 641
23.2 Modeling Credit Risk 644
23.3 Structural Model Approach to Credit Risk 646
23.4 Reduced-Form Model Approach to Credit Risk 655
23.5 Structuring Using Collateralized Debt Obligations 663
23.6 Conclusion 666
CHAPTER 24 Credit Derivatives 667
24.1 Credit Derivative Markets 667
24.2 Credit Default Swaps 669
24.3 Other Credit Derivatives 678
24.4 Risks of Credit Derivatives 680
24.5 Conclusion 683
CHAPTER 25 Collateralized Debt Obligations 685
25.1 Introduction to Collateralized Debt Obligations 685
25.2 Balance Sheet CDOs versus Arbitrage CDOs 688
25.3 Cash-Funded CDOs versus Synthetic CDOs 692
25.4 Cash Flow CDOs versus Market Value CDOs 695
25.5 Credit Risk and Enhancements 696
25.6 New Developments in CDOs 699
25.7 Risks of CDOs 703
PART SEVEN Risk Management and Portfolio Management 709
CHAPTER 26 Lessons from Hedge Fund Failures 711
26.1 Problems Driven by Market Losses 711
26.2 Failures Driven by Fraud 721
26.3 Conclusion 727
CHAPTER 27 Risk Analysis 729
27.1 Investment Strategy Risks 729
27.2 Market Risk 730
27.3 Operational Risk 732
27.4 Investment Process Risk 734
27.5 Controlling Operational Risk 736
27.6 Aggregating the Risks of a Fund 740
27.7 Portfolios with Options 742
27.8 Conclusion 745
CHAPTER 28 Due Diligence of Fund Managers 747
28.1 Screening with Three Fundamental Questions 748
28.2 Structural Review 752
28.3 Strategic Review 756
28.4 Administrative Review 760
28.5 Performance Review 761
28.6 Portfolio Risk Review 767
28.7 Legal Review 770
28.8 Reference Checks 773
28.9 Measuring Operational Risk 774
CHAPTER 29 Regression, Multivariate, and Nonlinear Methods 777
29.1 Single-Factor Models and Regression 777
29.2 Multiple-Factor Models and Regression 781
29.3 Nonlinear Returns 783
29.4 Changing Correlation 785
29.5 Applications of Multifactor Models 787
29.6 Hedge Fund Performance Persistence 791
CHAPTER 30 Portfolio Optimization and Risk Parity 795
30.1 Mean-Variance Portfolio Optimization 795
30.2 Complications to Mean-Variance Optimization 803
30.3 Risk Budgeting 807
30.4 Risk Parity 810
CHAPTER 31 Portfolio Management, Alpha, and Beta 819
31.1 The Estimation of Alpha and Beta 819
31.2 The Separation of Alpha and Beta 821
31.3 Portable Alpha 822
31.4 Alpha, Beta, and Portfolio Allocation 827
31.5 Conclusion 831
APPENDIX Data Sources 833
Index 849
About the Authors xxi
PART ONE Introduction to Alternative Investments 1
CHAPTER 1 What Is an Alternative Investment? 3
1.1 Alternative Investments by Exclusion 3
1.2 Alternative Investments by Inclusion 4
1.3 Structures among Alternative Investments 8
1.4 Investments Are Distinguished by Return Characteristics 12
1.5 Investments Are Distinguished by Methods of Analysis 14
1.6 Goals of Alternative Investing 17
1.7 Overview of This Book 19
CHAPTER 2 The Environment of Alternative Investments 21
2.1 The Participants 21
2.2 Financial Markets 28
2.3 Regulations 30
2.4 Taxation 38
CHAPTER 3 Statistical Foundations 41
3.1 Frequency and Probability Distributions 41
3.2 Compounding Multiple Time Period Returns 44
3.3 Return Distributions and Autocorrelation 48
3.4 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis 50
3.5 Computing Sample Statistics 54
3.6 More on Standard Deviation and Variance 59
3.7 Testing for Normality 64
3.8 Other Measures of Risk 66
3.9 Estimating Value at Risk (VaR) 70
3.10 Time Series Return Volatility Models 75
3.11 Conclusion 77
CHAPTER 4 Risk, Return, and Benchmarking 79
4.1 Benchmarking 79
4.2 Asset Pricing Models 82
4.3 Three Methods of Models 82
4.4 Cross-Sectional versus Time-Series Models 85
4.5 Single-Factor and Ex Ante Asset Pricing 87
4.6 Empirical Analyses with the CAPM 90
4.7 Multifactor Models 96
4.8 Alternative Asset Benchmarking 103
4.9 Conclusion 107
CHAPTER 5 Correlation, Alternative Returns, and Performance Measurement 109
5.1 Correlation 109
5.2 Internal Rate of Return 118
5.3 Problems with IRR 122
5.4 Returns Based on Notional Principal 129
5.5 Distribution of Cash Waterfall 132
5.6 Performance Measures 139
CHAPTER 6 Alpha and Beta 147
6.1 Overview of Beta and Alpha 147
6.2 Ex Ante versus Ex Post Alpha 149
6.3 Inferring Ex Ante Alpha from Ex Post Alpha 155
6.4 Return Attribution 158
6.5 Ex Ante Alpha Estimation and Persistence 163
6.6 Return Drivers 164
6.7 Summary of Alpha and Beta Analysis 168
CHAPTER 7 Hypothesis Testing in Alternative Investments 169
7.1 Four Steps of Hypothesis Testing 170
7.2 A Test Assuming Normality 173
7.3 Tests with Inferential Statistics 176
7.4 Sampling and Testing Problems 181
7.5 Cumulative Returns and Performance 185
7.6 Statistical Issues in Analyzing Alpha and Beta 189
7.7 Summary of Alpha and Beta Estimation 196
7.8 Conclusion 198
PART TWO Real Assets 201
CHAPTER 8 Land, Infrastructure, and Intangible Real Assets 203
8.1 Land 203
8.2 Timber and Timberland 208
8.3 Farmland 210
8.4 Infrastructure 214
8.5 Intellectual Property 220
8.6 Valuation and Volatility 224
8.7 Historical Risks and Returns 228
CHAPTER 9 Real Estate Fixed-Income Investments 233
9.1 Residential Mortgages 233
9.2 Commercial Mortgages 241
9.3 Mortgage-Backed Securities Market 244
9.4 Collateralized Mortgage Obligations 249
9.5 Real Estate Investment Trusts 255
9.6 Risks and Returns of Mortgage REITs 256
CHAPTER 10 Real Estate Equity Investments 261
10.1 Real Estate Development 261
10.2 Valuation and Risks of Real Estate Equity 264
10.3 Alternative Real Estate Investment Vehicles 272
10.4 Real Estate and Depreciation 278
10.5 Real Estate Equity Risks and Returns 283
10.6 Risks and Returns of Equity REITs 288
PART THREE Hedge Funds 293
CHAPTER 11 Introduction to Hedge Funds 295
11.1 Distinguishing Hedge Funds 295
11.2 Hedge Fund Types 302
11.3 Hedge Fund Fees 304
11.4 Conclusion 315
CHAPTER 12 Hedge Fund Returns and Asset Allocation 317
12.1 Describing the Hedge Fund Universe 317
12.2 Mean, Variance, Skewness, and Kurtosis of Strategies 319
12.3 Categorizing Hedge Fund Strategies 321
12.4 Should Hedge Funds Be Part of an Investment Program? 328
12.5 Do Hedge Funds Undermine the Financial Markets? 333
12.6 Hedge Fund Indices 335
12.7 Conclusion 344
CHAPTER 13 Macro and Managed Futures Funds 345
13.1 Major Distinctions between Strategies 345
13.2 Global Macro 347
13.3 Returns of Macro Investing 351
13.4 Managed Futures 354
13.5 Systematic Trading 357
13.6 Systematic Trading Styles 359
13.7 Prior Empirical Research 369
13.8 Conclusion 376
13.9 Analysis of Historical Returns Conclusion 376
CHAPTER 14 Event-Driven Hedge Funds 381
14.1 The Sources of Most Event Strategy Returns 381
14.2 Activist Investing 384
14.3 Merger Arbitrage 397
14.4 Distressed Securities Funds 405
14.5 Event-Driven Multistrategy Funds 412
CHAPTER 15 Relative Value Hedge Funds 417
15.1 Convertible Bond Arbitrage 418
15.2 Volatility Arbitrage 433
15.3 Fixed-Income Arbitrage 447
15.4 Relative Value Multistrategy Funds 459
CHAPTER 16 Equity Hedge Funds 461
16.1 Sources of Return 462
16.2 Market Anomalies 466
16.3 The Fundamental Law of Active Management 472
16.4 Implementing Anomaly Strategies 475
16.5 The Three Equity Strategies 480
16.6 Conclusion 493
CHAPTER 17 Funds of Hedge Funds 495
17.1 Benefits and Costs of Diversification 495
17.2 Investing in Multistrategy Funds 502
17.3 Investing in Funds of Hedge Funds 505
17.4 Fund of Funds Historical Returns 508
17.5 Conclusion 520
PART FOUR Commodities 523
CHAPTER 18 Commodity Futures Pricing 525
18.1 Forward and Futures Contracts 525
18.2 Rolling Contracts 530
18.3 The Term Structure of Forward Prices 531
18.4 Backwardation and Contango 542
18.5 Returns on Futures Contracts 545
CHAPTER 19 Commodities: Applications and Evidence 551
19.1 Commodity Investing for Diversification 551
19.2 Commodity Investing for Return Enhancement 555
19.3 Investing in Commodities without Futures 557
19.4 Commodity Exposure through Futures Contracts 562
19.5 Three Fallacies of Roll Return 568
19.6 Commodity Futures Indices 570
19.7 Commodity Risks and Returns 572
19.8 Historical Risks and Returns 574
PART FIVE Private Equity 579
CHAPTER 20 Introduction to Private Equity 581
20.1 Private Equity Terminology and Background 581
20.2 Private Equity as Equity Securities 584
20.3 Private Equity as Debt Securities 587
20.4 Trends and Innovations in Private Equity 592
CHAPTER 21 Equity Types of Private Equity 599
21.1 Venture Capital versus LBOs 599
21.2 The Underlying Businesses of Venture Capital 600
21.3 Venture Capital Funds 601
21.4 Venture Capital Risks and Returns 609
21.5 Leveraged Buyouts (LBOs) 613
21.6 Leveraged Buyout Risks and Returns 623
CHAPTER 22 Debt Types of Private Equity 625
22.1 Mezzanine Debt 625
22.2 Distressed Debt 632
22.3 Risks of Distressed Debt Investing 637
PART SIX Structured Products 639
CHAPTER 23 Credit Risk and the Structuring of Cash Flows 641
23.1 An Overview of Credit Risk 641
23.2 Modeling Credit Risk 644
23.3 Structural Model Approach to Credit Risk 646
23.4 Reduced-Form Model Approach to Credit Risk 655
23.5 Structuring Using Collateralized Debt Obligations 663
23.6 Conclusion 666
CHAPTER 24 Credit Derivatives 667
24.1 Credit Derivative Markets 667
24.2 Credit Default Swaps 669
24.3 Other Credit Derivatives 678
24.4 Risks of Credit Derivatives 680
24.5 Conclusion 683
CHAPTER 25 Collateralized Debt Obligations 685
25.1 Introduction to Collateralized Debt Obligations 685
25.2 Balance Sheet CDOs versus Arbitrage CDOs 688
25.3 Cash-Funded CDOs versus Synthetic CDOs 692
25.4 Cash Flow CDOs versus Market Value CDOs 695
25.5 Credit Risk and Enhancements 696
25.6 New Developments in CDOs 699
25.7 Risks of CDOs 703
PART SEVEN Risk Management and Portfolio Management 709
CHAPTER 26 Lessons from Hedge Fund Failures 711
26.1 Problems Driven by Market Losses 711
26.2 Failures Driven by Fraud 721
26.3 Conclusion 727
CHAPTER 27 Risk Analysis 729
27.1 Investment Strategy Risks 729
27.2 Market Risk 730
27.3 Operational Risk 732
27.4 Investment Process Risk 734
27.5 Controlling Operational Risk 736
27.6 Aggregating the Risks of a Fund 740
27.7 Portfolios with Options 742
27.8 Conclusion 745
CHAPTER 28 Due Diligence of Fund Managers 747
28.1 Screening with Three Fundamental Questions 748
28.2 Structural Review 752
28.3 Strategic Review 756
28.4 Administrative Review 760
28.5 Performance Review 761
28.6 Portfolio Risk Review 767
28.7 Legal Review 770
28.8 Reference Checks 773
28.9 Measuring Operational Risk 774
CHAPTER 29 Regression, Multivariate, and Nonlinear Methods 777
29.1 Single-Factor Models and Regression 777
29.2 Multiple-Factor Models and Regression 781
29.3 Nonlinear Returns 783
29.4 Changing Correlation 785
29.5 Applications of Multifactor Models 787
29.6 Hedge Fund Performance Persistence 791
CHAPTER 30 Portfolio Optimization and Risk Parity 795
30.1 Mean-Variance Portfolio Optimization 795
30.2 Complications to Mean-Variance Optimization 803
30.3 Risk Budgeting 807
30.4 Risk Parity 810
CHAPTER 31 Portfolio Management, Alpha, and Beta 819
31.1 The Estimation of Alpha and Beta 819
31.2 The Separation of Alpha and Beta 821
31.3 Portable Alpha 822
31.4 Alpha, Beta, and Portfolio Allocation 827
31.5 Conclusion 831
APPENDIX Data Sources 833
Index 849