Alternative Investments
CAIA Level I
3rd Edition
Published on 3. November 2015
Book
Hardback
960 pages
978-1-119-00336-6 (ISBN)
Description
The official CAIA Level 1 curriculum book, updated and expanded to reflect the March 2016 exam
Alternative Investments: CAIA Level I, 3rd Edition is the curriculum book for the Chartered Alternative Investment Analyst (CAIA) Level I professional examination. Covering the fundamentals of the alternative investment space, this book helps you build a foundation in alternative investment markets. You'll look closely at the different types of hedge fund strategies and the range of statistics used to define investment performance as you gain a deep familiarity with alternative investment terms and develop the computational ability to solve investment problems. From strategy characteristics to portfolio management strategies, this book contains the core material you will need to succeed on the CAIA Level I exam. This updated third edition tracks to the latest version of the exam, and is accompanied by the following ancillaries: a workbook, study guide, learning objectives, and an ethics handbook.
Most investment analyst education programs focus primarily on the traditional asset classes, pushing alternative investments to the sidelines. The CAIA designation was developed in response to the tremendous growth of alternative investing, and is the industry's premier educational standard. This book is your official study companion, bringing you fully up to speed on everything you need to know (with the exception of the ethics material covered in a separate handbook).
* Understand the complexities of each alternative asset class
* Learn the quantitative techniques professionals use every day
* Dig into the unique aspects of alternative investments
* Master the core material covered by the CAIA Level I exam
More than 300 financial institutions and hedge funds have committed key executives to the CAIA exam, and this rapidly growing trend speaks to the designation's rising status as a must-have credential for anyone in the alternative investment sphere. Increase your chances of success by getting your information straight from the source in CAIA Level I
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CAIA Association | Mark J. P. Anson | Donald R. Chambers
CAIA Level I
An Introduction to Core Topics in Alternative Investments
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04/2012
2nd Edition
Wiley
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Persons
The CAIA Association (Amherst, MA) is an independent, not-for-profit global organization committed to education and professionalism in the field of alternative investments, established in 2002 by industry leaders under the guidance of the Alternative Investment Management Association (AIMA) and the Center for International Securities and Derivatives Markets (CISDM) with the belief that a strong foundation of knowledge is essential for all professionals. The CAIA Association offers two exams (Level I and Level II) to professional analysts in this growing field so that, upon successful completion, the individuals are designated "Chartered Alternative Investment Analysts" (CAIA). Since only a small number of exam takers pass, this certification has a great deal of prestige in the global community. Members come from over 35 countries on 5 continents.
Donald Chambers (Rochester, NY) is a professor of Finance at RIT.
Keith Black (Amherst, MA) is the Associate Director of Curriculum at CAIA Association. He was an Associate at Ennis Knupp previously, and before that, an Assistant Professor at Illinois Institute of Technology.
Mark Anson (Chicago, IL) is the President and Executive Director of Investment Services at Nuveen Investments. Previously, Mark was the Chief Executive Officer of Hermes Pensions Management Ltd.
Content
Preface xiii
Acknowledgments xvii
About the Authors xix
PART 1 Introduction to Alternative Investments
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 15
1.6 Investments Are Distinguished by Other Factors 18
1.7 Goals of Alternative Investing 18
1.8 Overview of This Book 20
Review Questions 21
CHAPTER 2 The Environment of Alternative Investments 23
2.1 The Participants 23
2.2 Financial Markets 30
2.3 Regulatory Environment 32
2.4 Liquid Alternative Investments 37
2.5 Taxation 40
Review Questions 43
CHAPTER 3 Quantitative Foundations 45
3.1 Return and Rate Mathematics 45
3.2 Returns Based on Notional Principal 47
3.3 Internal Rate of Return 50
3.4 Problems with Internal Rate of Return 54
3.5 Distribution of Cash Waterfall 60
Review Questions 69
CHAPTER 4 Statistical Foundations 71
4.1 Return Distributions 71
4.2 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis 74
4.3 Covariance, Correlation, Beta, and Autocorrelation 79
4.4 Interpreting Standard Deviation and Variance 88
4.5 Testing for Normality 95
4.6 Time-Series Return Volatility Models 98
Review Questions 100
CHAPTER 5 Measures of Risk and Performance 101
5.1 Measures of Risk 101
5.2 Estimating Value at Risk (VaR) 105
5.3 Ratio-Based Performance Measures 111
5.4 Risk-Adjusted Return Measures 117
Review Questions 120
CHAPTER 6 Foundations of Financial Economics 121
6.1 Informational Market Efficiency 121
6.2 Single-Factor and Ex Ante Asset Pricing 124
6.3 Multifactor and Empirical Models 129
6.4 Arbitrage-Free Models 135
6.5 The Term Structure of Forward Contracts 142
6.6 Option Exposures 147
6.7 Option Pricing Models 153
6.8 Option Sensitivities 155
Review Questions 157
CHAPTER 7 Benchmarking and Performance Attribution 159
7.1 Benchmarking 159
7.2 Types of Models 162
7.3 Performance Attribution 165
7.4 Distinctions Regarding Alternative Asset Benchmarking 169
Review Questions 172
CHAPTER 8 Alpha, Beta, and Hypothesis Testing 175
8.1 Overview of Beta and Alpha 175
8.2 Ex Ante versus Ex Post Alpha 177
8.3 Inferring Ex Ante Alpha from Ex Post Alpha 180
8.4 Return Attribution, Alpha, and Beta 182
8.5 Ex Ante Alpha Estimation and Return Persistence 185
8.6 Return Drivers 186
8.7 Using Statistical Methods to Locate Alpha 188
8.8 Sampling and Testing Problems 193
8.9 Statistical Issues in Analyzing Alpha and Beta 197
Review Questions 201
CHAPTER 9 Regression, Multivariate, and Nonlinear Methods 203
9.1 Single-Factor Models and Regression 203
9.2 Multifactor Models and Regression 208
9.3 Three Dynamic Risk Exposure Models 210
9.4 Two Approaches to Modeling Changing Correlation 212
9.5 Four Multifactor Approaches to Understanding Hedge Fund Returns 215
9.6 Evidence on Fund Performance Persistence 219
Review Questions 221
PART 2 Real Assets
CHAPTER 10 Natural Resources and Land 225
10.1 Natural Resources Other Than Land 225
10.2 Land 230
10.3 Timber and Timberland 236
10.4 Farmland 238
10.5 Valuation and Volatility of Real Assets 242
10.6 Historical Risks and Returns 246
Review Questions 249
CHAPTER 11 Commodity Forward Pricing 251
11.1 Forward Contracts versus Futures Contracts 251
11.2 Rolling Contracts 259
11.3 The Term Structure of Forward Prices on Commodities 260
11.4 Backwardation and Contango 266
11.5 Returns on Forward Contracts 270
Review Questions 275
CHAPTER 12 Commodities: Applications and Evidence 277
12.1 Commodity Investing for Diversification 277
12.2 Commodity Investing for Return Enhancement 280
12.3 Investing in Commodities without Futures 282
12.4 Commodity Exposure through Futures Contracts 287
12.5 Commodity Futures Indices 294
12.6 Commodity Risks and Returns 296
12.7 Historical Risks and Returns 298
Review Questions 301
CHAPTER 13 Operationally Intensive Real Assets 303
13.1 Commodity Producers 303
13.2 Liquid Alternative Real Assets 306
13.3 Infrastructure 309
13.4 Intellectual Property 315
Review Questions 319
CHAPTER 14 Liquid and Fixed-Income Real Estate 321
14.1 Real Estate as an Investment 321
14.2 Residential Mortgages 323
14.3 Commercial Mortgages 333
14.4 Mortgage-Backed Securities Market 335
14.5 Liquid Alternatives: Real Estate Investment Trusts 341
14.6 Historical Risks and Returns of Mortgage REITs 342
Review Questions 345
CHAPTER 15 Real Estate Equity Investments 347
15.1 Real Estate Development 347
15.2 Valuation and Risks of Real Estate Equity 351
15.3 Alternative Real Estate Investment Vehicles 358
15.4 Real Estate and Depreciation 364
15.5 Real Estate Equity Risks and Returns 370
15.6 Historical Risks and Returns of Equity REITs 374
Review Questions 377
PART 3 Hedge Funds
CHAPTER 16 Structure of the Hedge Fund Industry 381
16.1 Distinguishing Hedge Funds 381
16.2 Hedge Fund Fees 387
16.3 Hedge Fund Classification 400
16.4 Hedge Fund Returns and Asset Allocation 402
16.5 Evaluating a Hedge Fund Investment Program 407
16.6 Do Hedge Funds Adversely Affect the Financial Markets? 410
16.7 Hedge Fund Indices 412
16.8 Conclusion 420
Review Questions 420
CHAPTER 17 Macro and Managed Futures Funds 423
17.1 Major Distinctions between Strategies 423
17.2 Global Macro 425
17.3 Returns of Macro Investing 429
17.4 Managed Futures 431
17.5 Systematic Trading 435
17.6 Systematic Trading Strategies 438
17.7 Evidence on Managed Futures Returns 448
17.8 Analysis of Historical Returns Conclusion 455
Review Questions 457
CHAPTER 18 Event-Driven Hedge Funds 459
18.1 The Sources of Most Event Strategy Returns 459
18.2 Activist Investing 462
18.3 Merger Arbitrage 473
18.4 Distressed Securities Funds 482
18.5 Event-Driven Multistrategy Funds 495
Review Questions 498
CHAPTER 19 Relative Value Hedge Funds 499
19.1 Overview of Relative Value Strategies 499
19.2 Convertible Bond Arbitrage 500
19.3 Volatility Arbitrage 518
19.4 Fixed-Income Arbitrage 532
19.5 Relative Value Multistrategy Funds 543
Review Questions 546
CHAPTER 20 Equity Hedge Funds 547
20.1 Sources of Return 548
20.2 Market Anomalies 552
20.3 The Fundamental Law of Active Management 558
20.4 Implementing Anomaly Strategies 561
20.5 The Three Equity Strategies 565
20.6 Equity Hedge Fund Risks 577
Review Questions 580
CHAPTER 21 Funds of Hedge Funds 583
21.1 Overview of Funds of Hedge Funds 583
21.2 Investing in Multistrategy Funds 592
21.3 Investing in Funds of Hedge Funds 594
21.4 Investing in Portfolios of Single Hedge Funds 598
21.5 Multialternatives and Other Hedge Fund Liquid Alternatives 598
21.6 Historical Returns of Funds of Funds 604
Review Questions 608
PART 4 Private Equity
CHAPTER 22 Introduction to Private Equity 613
22.1 Private Equity Terminology and Background 613
22.2 Private Equity as Equity Securities 616
22.3 Private Equity as Debt Securities 620
22.4 Private Equity Liquid Alternatives 625
22.5 Trends and Innovations in Private Equity 630
Review Questions 635
CHAPTER 23 Equity Types of Private Equity 637
23.1 Contrasts between Venture Capital and Buyouts 637
23.2 The Underlying Businesses of Venture Capital 638
23.3 Venture Capital Funds 639
23.4 The Dynamics of Venture Capital 642
23.5 Venture Capital Risks and Returns 648
23.6 Types of Buyouts 652
23.7 Leveraged Buyout Details 655
Review Questions 665
CHAPTER 24 Debt Types of Private Equity 667
24.1 Mezzanine Debt 667
24.2 Distressed Debt 675
Review Questions 681
PART 5 Structured Products
CHAPTER 25 Introduction to Structuring 685
25.1 Overview of Financial Structuring 685
25.2 Major Types of Structuring 686
25.3 The Primary Economic Role of Structuring 687
25.4 Collateralized Mortgage Obligations 689
25.5 Structural Model Approach to Credit Risk 697
25.6 Introduction to Collateralized Debt Obligations 703
Review Questions 707
CHAPTER 26 Credit Risk and Credit Derivatives 709
26.1 An Overview of Credit Risk 709
26.2 Reduced-Form Modeling of Credit Risk 710
26.3 Credit Derivatives Markets 717
26.4 Credit Default Swaps 720
26.5 Other Credit Derivatives 728
26.6 CDS Index Products 731
26.7 Five Key Risks of Credit Derivatives 732
Review Questions 734
CHAPTER 27 CDO Structuring of Credit Risk 737
27.1 Overview of CDO Variations 737
27.2 Balance Sheet CDOs and Arbitrage CDOs 740
27.3 Mechanics of and Motivations for an Arbitrage CDO 742
27.4 Cash-Funded CDOs versus Synthetic CDOs 744
27.5 Cash Flow CDOs versus Market Value CDOs 748
27.6 Credit Enhancements 749
27.7 Developments in CDOs 751
27.8 Risks of CDOs 752
Review Questions 757
CHAPTER 28 Equity-Linked Structured Products 759
28.1 Structured Products and Six Types of Wrappers 759
28.2 Four Potential Tax Effects of Wrappers 760
28.3 Structured Products with Exotic Option Features 763
28.4 Global Structured Product Cases 770
28.5 Structured Product Pricing 775
28.6 Motivations of Structured Products 778
Review Questions 780
PART 6 Risk Management and Portfolio Management
CHAPTER 29 Cases in Tail Events 783
29.1 Problems Driven by Market Losses 783
29.2 Trading Technology and Financial Crises 790
29.3 Failures Driven by Fraud 792
29.4 Four Major Lessons from Cases in Tail Events 799
Review Questions 799
CHAPTER 30 Investment Process, Operations, and Risk 801
30.1 Investment Strategy and Process 801
30.2 Investment Process and Market Risk 803
30.3 The Three Internal Fund Activities 805
30.4 Operational Risk 806
30.5 Controlling Operational Risk 808
30.6 Controlling Risk of Portfolios with Options 812
Review Questions 814
CHAPTER 31 Due Diligence of Fund Managers 815
31.1 Due Diligence Evidence and Organization 815
31.2 Screening with Three Fundamental Questions 816
31.3 Structural Review 820
31.4 Strategic Review 824
31.5 Administrative Review 827
31.6 Performance Review 829
31.7 Portfolio Risk Review 835
31.8 Legal Review 838
31.9 Reference Review 841
31.10 Evidence on Operational Risk 842
Review Questions 843
CHAPTER 32 Portfolio Management, Alpha, and Beta 845
32.1 Alpha and Smart Beta 845
32.2 The Estimation of Alpha and Beta 846
32.3 The Separation of Alpha and Beta 847
32.4 Portable Alpha 848
32.5 Alpha, Beta, and Portfolio Allocation 853
Review Questions 858
APPENDIX
Data Sources 859
Computations and Explanations 867
Index 875