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Alternative Investments: CAIA Level I, 3rd Edition

Book 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.

    Table of Contents

    1. Preface
      1. Foundation
      2. Benefits
      3. The CAIA Programs and the CAIA Alternative Investment Analyst Series
    2. Acknowledgments
    3. About the Authors
    4. PART 1 Introduction to Alternative Investments
      1. CHAPTER 1 What Is an Alternative Investment?
        1. 1.1 Alternative Investments by Exclusion
        2. 1.2 Alternative Investments by Inclusion
        3. 1.3 Structures among Alternative Investments
        4. 1.4 Investments Are Distinguished by Return Characteristics
        5. 1.5 Investments Are Distinguished by Methods of Analysis
        6. 1.6 Investments Are Distinguished by Other Factors
        7. 1.7 Goals of Alternative Investing
        8. 1.8 Overview of This Book
        9. Review Questions
      2. CHAPTER 2 The Environment of Alternative Investments
        1. 2.1 The Participants
        2. 2.2 Financial Markets
        3. 2.3 Regulatory Environment
        4. 2.4 Liquid Alternative Investments
        5. 2.5 Taxation
        6. Review Questions
        7. Notes
      3. CHAPTER 3 Quantitative Foundations
        1. 3.1 Return and Rate Mathematics
        2. 3.2 Returns Based on Notional Principal
        3. 3.3 Internal Rate of Return
        4. 3.4 Problems with Internal Rate of Return
        5. 3.5 Distribution of Cash Waterfall
        6. Review Questions
      4. CHAPTER 4 Statistical Foundations
        1. 4.1 Return Distributions
        2. 4.2 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis
        3. 4.3 Covariance, Correlation, Beta, and Autocorrelation
        4. 4.4 Interpreting Standard Deviation and Variance
        5. 4.5 Testing for Normality
        6. 4.6 Time-Series Return Volatility Models
        7. Review Questions
      5. CHAPTER 5 Measures of Risk and Performance
        1. 5.1 Measures of Risk
        2. 5.2 Estimating Value at Risk (VaR)
        3. 5.3 Ratio-Based Performance Measures
        4. 5.4 Risk-Adjusted Return Measures
        5. Review Questions
        6. Note
      6. CHAPTER 6 Foundations of Financial Economics
        1. 6.1 Informational Market Efficiency
        2. 6.2 Single-Factor and Ex Ante Asset Pricing
        3. 6.3 Multifactor and Empirical Models
        4. 6.4 Arbitrage-Free Models
        5. 6.5 The Term Structure of Forward Contracts
        6. 6.6 Option Exposures
        7. 6.7 Option Pricing Models
        8. 6.8 Option Sensitivities
        9. Review Questions
        10. Notes
      7. CHAPTER 7 Benchmarking and Performance Attribution
        1. 7.1 Benchmarking
        2. 7.2 Types of Models
        3. 7.3 Performance Attribution
        4. 7.4 Distinctions Regarding Alternative Asset Benchmarking
        5. Review Questions
        6. Notes
      8. CHAPTER 8 Alpha, Beta, and Hypothesis Testing
        1. 8.1 Overview of Beta and Alpha
        2. 8.2 Ex Ante versus Ex Post Alpha
        3. 8.3 Inferring Ex Ante Alpha from Ex Post Alpha
        4. 8.4 Return Attribution, Alpha, and Beta
        5. 8.5 Ex Ante Alpha Estimation and Return Persistence
        6. 8.6 Return Drivers
        7. 8.7 Using Statistical Methods to Locate Alpha
        8. 8.8 Sampling and Testing Problems
        9. 8.9 Statistical Issues in Analyzing Alpha and Beta
        10. Review Questions
        11. Notes
      9. CHAPTER 9 Regression, Multivariate, and Nonlinear Methods
        1. 9.1 Single-Factor Models and Regression
        2. 9.2 Multifactor Models and Regression
        3. 9.3 Three Dynamic Risk Exposure Models
        4. 9.4 Two Approaches to Modeling Changing Correlation
        5. 9.5 Four Multifactor Approaches to Understanding Hedge Fund Returns
        6. 9.6 Evidence on Fund Performance Persistence
        7. Review Questions
        8. Notes
    5. PART 2 Real Assets
      1. CHAPTER 10 Natural Resources and Land
        1. 10.1 Natural Resources Other Than Land
        2. 10.2 Land
        3. 10.3 Timber and Timberland
        4. 10.4 Farmland
        5. 10.5 Valuation and Volatility of Real Assets
        6. 10.6 Historical Risks and Returns
        7. Review Questions
        8. Notes
      2. CHAPTER 11 Commodity Forward Pricing
        1. 11.1 Forward Contracts versus Futures Contracts
        2. 11.2 Rolling Contracts
        3. 11.3 The Term Structure of Forward Prices on Commodities
        4. 11.4 Backwardation and Contango
        5. 11.5 Returns on Forward Contracts
        6. Review Questions
      3. CHAPTER 12 Commodities: Applications and Evidence
        1. 12.1 Commodity Investing for Diversification
        2. 12.2 Commodity Investing for Return Enhancement
        3. 12.3 Investing in Commodities without Futures
        4. 12.4 Commodity Exposure through Futures Contracts
        5. 12.5 Commodity Futures Indices
        6. 12.6 Commodity Risks and Returns
        7. 12.7 Historical Risks and Returns
        8. Review Questions
      4. CHAPTER 13 Operationally Intensive Real Assets
        1. 13.1 Commodity Producers
        2. 13.2 Liquid Alternative Real Assets
        3. 13.3 Infrastructure
        4. 13.4 Intellectual Property
        5. Review Questions
        6. Notes
      5. CHAPTER 14 Liquid and Fixed-Income Real Estate
        1. 14.1 Real Estate as an Investment
        2. 14.2 Residential Mortgages
        3. 14.3 Commercial Mortgages
        4. 14.4 Mortgage-Backed Securities Market
        5. 14.5 Liquid Alternatives: Real Estate Investment Trusts
        6. 14.6 Historical Risks and Returns of Mortgage REITs
        7. Review Questions
        8. Notes
      6. CHAPTER 15 Real Estate Equity Investments
        1. 15.1 Real Estate Development
        2. 15.2 Valuation and Risks of Real Estate Equity
        3. 15.3 Alternative Real Estate Investment Vehicles
        4. 15.4 Real Estate and Depreciation
        5. 15.5 Real Estate Equity Risks and Returns
        6. 15.6 Historical Risks and Returns of Equity REITs
        7. Review Questions
    6. PART 3 Hedge Funds
      1. CHAPTER 16 Structure of the Hedge Fund Industry
        1. 16.1 Distinguishing Hedge Funds
        2. 16.2 Hedge Fund Fees
        3. 16.3 Hedge Fund Classification
        4. 16.4 Hedge Fund Returns and Asset Allocation
        5. 16.5 Evaluating a Hedge Fund Investment Program
        6. 16.6 Do Hedge Funds Adversely Affect the Financial Markets?
        7. 16.7 Hedge Fund Indices
        8. 16.8 Conclusion
        9. Review Questions
        10. Notes
      2. CHAPTER 17 Macro and Managed Futures Funds
        1. 17.1 Major Distinctions between Strategies
        2. 17.2 Global Macro
        3. 17.3 Returns of Macro Investing
        4. 17.4 Managed Futures
        5. 17.5 Systematic Trading
        6. 17.6 Systematic Trading Strategies
        7. 17.7 Evidence on Managed Futures Returns
        8. 17.8 Analysis of Historical Returns Conclusion
        9. Review Questions
        10. Notes
      3. CHAPTER 18 Event-Driven Hedge Funds
        1. 18.1 The Sources of Most Event Strategy Returns
        2. 18.2 Activist Investing
        3. 18.3 Merger Arbitrage
        4. 18.4 Distressed Securities Funds
        5. 18.5 Event-Driven Multistrategy Funds
        6. Review Questions
        7. Notes
      4. CHAPTER 19 Relative Value Hedge Funds
        1. 19.1 Overview of Relative Value Strategies
        2. 19.2 Convertible Bond Arbitrage
        3. 19.3 Volatility Arbitrage
        4. 19.4 Fixed-Income Arbitrage
        5. 19.5 Relative Value Multistrategy Funds
        6. Review Questions
        7. Notes
      5. CHAPTER 20 Equity Hedge Funds
        1. 20.1 Sources of Return
        2. 20.2 Market Anomalies
        3. 20.3 The Fundamental Law of Active Management
        4. 20.4 Implementing Anomaly Strategies
        5. 20.5 The Three Equity Strategies
        6. 20.6 Equity Hedge Fund Risks
        7. Review Questions
        8. Notes
      6. CHAPTER 21 Funds of Hedge Funds
        1. 21.1 Overview of Funds of Hedge Funds
        2. 21.2 Investing in Multistrategy Funds
        3. 21.3 Investing in Funds of Hedge Funds
        4. 21.4 Investing in Portfolios of Single Hedge Funds
        5. 21.5 Multialternatives and Other Hedge Fund Liquid Alternatives
        6. 21.6 Historical Returns of Funds of Funds
        7. Review Questions
        8. Notes
    7. PART 4 Private Equity
      1. CHAPTER 22 Introduction to Private Equity
        1. 22.1 Private Equity Terminology and Background
        2. 22.2 Private Equity as Equity Securities
        3. 22.3 Private Equity as Debt Securities
        4. 22.4 Private Equity Liquid Alternatives
        5. 22.5 Trends and Innovations in Private Equity
        6. Review Questions
        7. Notes
      2. CHAPTER 23 Equity Types of Private Equity
        1. 23.1 Contrasts between Venture Capital and Buyouts
        2. 23.2 The Underlying Businesses of Venture Capital
        3. 23.3 Venture Capital Funds
        4. 23.4 The Dynamics of Venture Capital
        5. 23.5 Venture Capital Risks and Returns
        6. 23.6 Types of Buyouts
        7. 23.7 Leveraged Buyout Details
        8. Review Questions
      3. CHAPTER 24 Debt Types of Private Equity
        1. 24.1 Mezzanine Debt
        2. 24.2 Distressed Debt
        3. Review Questions
    8. PART 5 Structured Products
      1. CHAPTER 25 Introduction to Structuring
        1. 25.1 Overview of Financial Structuring
        2. 25.2 Major Types of Structuring
        3. 25.3 The Primary Economic Role of Structuring
        4. 25.4 Collateralized Mortgage Obligations
        5. 25.5 Structural Model Approach to Credit Risk
        6. 25.6 Introduction to Collateralized Debt Obligations
        7. Review Questions
        8. Note
      2. CHAPTER 26 Credit Risk and Credit Derivatives
        1. 26.1 An Overview of Credit Risk
        2. 26.2 Reduced-Form Modeling of Credit Risk
        3. 26.3 Credit Derivatives Markets
        4. 26.4 Credit Default Swaps
        5. 26.5 Other Credit Derivatives
        6. 26.6 CDS Index Products
        7. 26.7 Five Key Risks of Credit Derivatives
        8. Review Questions
        9. Notes
      3. CHAPTER 27 CDO Structuring of Credit Risk
        1. 27.1 Overview of CDO Variations
        2. 27.2 Balance Sheet CDOs and Arbitrage CDOs
        3. 27.3 Mechanics of and Motivations for an Arbitrage CDO
        4. 27.4 Cash-Funded CDOs versus Synthetic CDOs
        5. 27.5 Cash Flow CDOs versus Market Value CDOs
        6. 27.6 Credit Enhancements
        7. 27.7 Developments in CDOs
        8. 27.8 Risks of CDOs
        9. Review Questions
      4. CHAPTER 28 Equity-Linked Structured Products
        1. 28.1 Structured Products and Six Types of Wrappers
        2. 28.2 Four Potential Tax Effects of Wrappers
        3. 28.3 Structured Products with Exotic Option Features
        4. 28.4 Global Structured Product Cases
        5. 28.5 Structured Product Pricing
        6. 28.6 Motivations of Structured Products
        7. Review Questions
        8. Notes
    9. PART 6 Risk Management and Portfolio Management
      1. CHAPTER 29 Cases in Tail Events
        1. 29.1 Problems Driven by Market Losses
        2. 29.2 Trading Technology and Financial Crises
        3. 29.3 Failures Driven by Fraud
        4. 29.4 Four Major Lessons from Cases in Tail Events
        5. Review Questions
        6. Notes
      2. CHAPTER 30 Investment Process, Operations, and Risk
        1. 30.1 Investment Strategy and Process
        2. 30.2 Investment Process and Market Risk
        3. 30.3 The Three Internal Fund Activities
        4. 30.4 Operational Risk
        5. 30.5 Controlling Operational Risk
        6. 30.6 Controlling Risk of Portfolios with Options
        7. Review Questions
        8. Note
      3. CHAPTER 31 Due Diligence of Fund Managers
        1. 31.1 Due Diligence Evidence and Organization
        2. 31.2 Screening with Three Fundamental Questions
        3. 31.3 Structural Review
        4. 31.4 Strategic Review
        5. 31.5 Administrative Review
        6. 31.6 Performance Review
        7. 31.7 Portfolio Risk Review
        8. 31.8 Legal Review
        9. 31.9 Reference Review
        10. 31.10 Evidence on Operational Risk
        11. Review Questions
        12. Notes
      4. CHAPTER 32 Portfolio Management, Alpha, and Beta
        1. 32.1 Alpha and Smart Beta
        2. 32.2 The Estimation of Alpha and Beta
        3. 32.3 The Separation of Alpha and Beta
        4. 32.4 Portable Alpha
        5. 32.5 Alpha, Beta, and Portfolio Allocation
        6. Review Questions
        7. Note
    10. APPENDIX Data Sources
      1. Computations and Explanations
    11. Index
    12. EULA