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CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

Book Description

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 II CAIA exam takers have to work through the following agenda:

  • asset allocation & portfolio oversight

  • style analysis

  • risk management

  • alternative asset securitization

  • secondary market creation

  • performance and style attribution

  • indexation and benchmarking

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Preface
    1. TEN YEARS OF CAIA AND ALTERNATIVE INVESTMENTS
    2. THE HISTORY OF CAIA
    3. BENEFITS OF THE CAIA PROGRAM
    4. STUDYING FOR THE CAIA EXAMS
  6. Acknowledgments
  7. About the Authors
  8. Chapter 1: Introduction
    1. 1.1 OUTLINE OF THIS BOOK
    2. 1.2 STUDYING FOR THE CAIA LEVEL II EXAMINATION
  9. PART One: Asset Allocation and Portfolio Management
    1. Chapter 2: The Endowment Model
      1. 2.1 DEFINING ENDOWMENTS AND FOUNDATIONS
      2. 2.2 INTERGENERATIONAL EQUITY, INFLATION, AND SPENDING CHALLENGES
      3. 2.3 THE ENDOWMENT MODEL
      4. 2.4 WHY MIGHT LARGE ENDOWMENTS OUTPERFORM?
      5. 2.5 CONCLUSION
    2. Chapter 3: Risk Management for Endowment and Foundation Portfolios
      1. 3.1 SPENDING RATES AND INFLATION
      2. 3.2 LIQUIDITY ISSUES
      3. 3.3 REBALANCING AND TACTICAL ASSET ALLOCATION
      4. 3.4 TAIL RISK
      5. 3.5 CONCLUSION
    3. Chapter 4: Pension Fund Portfolio Management
      1. 4.1 DEFINED BENEFIT PLANS
      2. 4.2 GOVERNMENTAL SOCIAL SECURITY PLANS
      3. 4.3 DEFINED CONTRIBUTION PLANS
  10. PART Two: Private Equity
    1. Chapter 5: Private Equity Market Landscape
      1. 5.1 MAIN STRATEGIES
      2. 5.2 MAIN DIFFERENCES BETWEEN VENTURE CAPITAL AND BUYOUT
      3. 5.3 PRIVATE EQUITY FUNDS AS INTERMEDIARIES
      4. 5.4 PRIVATE EQUITY FUNDS OF FUNDS AS INTERMEDIARIES
      5. 5.5 PRIVATE EQUITY FUNDS OF FUNDS VALUE-ADDED
      6. 5.6 THE RELATIONSHIP LIFE CYCLE BETWEEN LIMITED AND GENERAL PARTNERS
      7. 5.7 THE J-CURVE
      8. 5.8 CONCLUSION
    2. Chapter 6: Private Equity Fund Structure*
      1. 6.1 KEY FEATURES
      2. 6.2 CONFLICTS OF INTEREST
      3. 6.3 FINDING THE BALANCE
    3. Chapter 7: The Investment Process
      1. 7.1 PROCESS DESCRIPTION
      2. 7.2 RISK MANAGEMENT
    4. Chapter 8: Private Equity Portfolio Design
      1. 8.1 THREE APPROACHES TO PRIVATE EQUITY PORTFOLIO DESIGN
      2. 8.2 RISK-RETURN MANAGEMENT APPROACHES
      3. 8.3 THE RISK PROFILE OF PRIVATE EQUITY ASSETS
    5. Chapter 9: Fund Manager Selection Process
      1. 9.1 DETERMINATION OF THE WISH LIST OF FUND CHARACTERISTICS
      2. 9.2 DEAL SOURCING
      3. 9.3 DUE DILIGENCE: IMPORTANCE AND LIMITATIONS
      4. 9.4 DECISION AND COMMITMENT
    6. Chapter 10: Measuring Performance and Benchmarking in the Private Equity World
      1. 10.1 INDIVIDUAL FUNDS
      2. 10.2 PORTFOLIO OF FUNDS
    7. Chapter 11: Monitoring Private Equity Fund Investments
      1. 11.1 APPROACH TO MONITORING
      2. 11.2 THE MONITORING OBJECTIVES
      3. 11.3 INFORMATION GATHERING IN THE MONITORING PROCESS
      4. 11.4 ACTIONS RESULTING FROM MONITORING
    8. Chapter 12: Private Equity Fund Valuation
      1. 12.1 NET ASSET VALUE (NAV)
      2. 12.2 INTERNAL RATE OF RETURN (IRR)
      3. 12.3 ECONOMIC VALUE APPROACH
    9. Chapter 13: Private Equity Fund Discount Rates
      1. 13.1 THE CAPITAL ASSET PRICING MODEL (CAPM)
      2. 13.2 PRIVATE EQUITY FUND BETAS
    10. Chapter 14: The Management of Liquidity
      1. 14.1 PRIVATE EQUITY CASH FLOW SCHEDULES
      2. 14.2 SOURCES OF LIQUIDITY
      3. 14.3 INVESTMENT STRATEGIES FOR UNDRAWN CAPITAL
      4. 14.4 CASH FLOW PROJECTIONS
      5. 14.5 OVERCOMMITMENT
      6. 14.6 CONCLUSION
  11. PART Three: Real Assets
    1. Chapter 15: Real Estate as an Investment
      1. 15.1 ATTRIBUTES OF REAL ESTATE
      2. 15.2 ASSET ALLOCATION
      3. 15.3 CATEGORIES OF REAL ESTATE
      4. 15.4 RETURN DRIVERS OF REAL ESTATE
    2. Chapter 16: Unsmoothing of Appraisal-Based Returns
      1. 16.1 SMOOTHED PRICING
      2. 16.2 MODELS OF PRICE AND RETURN SMOOTHING
      3. 16.3 UNSMOOTHING A PRICE OR RETURN SERIES
      4. 16.4 AN ILLUSTRATION OF UNSMOOTHING
    3. Chapter 17: Core, Value-Added, and Opportunistic Real Estate
      1. 17.1 DEFINING THE THREE NCREIF REAL ESTATE STYLES
      2. 17.2 DIFFERENTIATING STYLES WITH ATTRIBUTES
      3. 17.3 PURPOSES OF REAL ESTATE STYLE ANALYSIS
      4. 17.4 REAL ESTATE STYLE BOXES
      5. 17.5 CAP RATES AND EXPECTED RETURNS
      6. 17.6 DEVELOPING RISK AND RETURN EXPECTATIONS WITH STYLES
    4. Chapter 18: Real Estate Indices
      1. 18.1 THE MECHANICS OF APPRAISAL-BASED INDICES
      2. 18.2 NON-APPRAISAL-BASED INDICES
      3. 18.3 DESCRIPTION OF MAJOR REAL ESTATE INDICES
    5. Chapter 19: Public versus Private Real Estate Risks
      1. 19.1 MARKET-BASED VERSUS APPRAISAL-BASED RETURNS
      2. 19.2 ARBITRAGE, LIQUIDITY, AND SEGMENTATION
      3. 19.3 PUBLIC REAL ESTATE PRODUCTS
    6. Chapter 20: Portfolio Allocation within Real Estate
      1. 20.1 INCOME TAXATION
      2. 20.2 Leverage
      3. 20.3 Agency Relationships
      4. 20.4 Information Asymmetries
      5. 20.5 Liquidity and Transaction Costs
      6. 20.6 Cross-Border Real Estate Investment
      7. 20.7 Summary and Conclusions
    7. Chapter 21: Farmland and Timber Investments*
      1. 21.1 GLOBAL DEMAND FOR AGRICULTURAL PRODUCTS
      2. 21.2 ACCESSING AGRICULTURAL RETURNS
      3. 21.3 UNDERSTANDING THE RETURNS TO FARMLAND
      4. 21.4 COMMODITY PRICE VOLATILITY AND ITS IMPLICATION FOR FARMLAND-BASED INVESTMENT STRATEGIES
      5. 21.5 GLOBAL INVESTING IN TIMBERLAND
      6. 21.6 KEY POINTS AND SUMMARY CONCLUSIONS
    8. Chapter 22: Investing in Intellectual Property*
      1. 22.1 CHARACTERISTICS OF INTELLECTUAL PROPERTY
      2. 22.2 FILM PRODUCTION AND DISTRIBUTION
      3. 22.3 ART AS AN INVESTMENT ASSET
      4. 22.4 R&D AND PATENTS
      5. 22.5 CONCLUSION
  12. Part Four: Commodities
    1. Chapter 23: Key Concepts in Commodity Market Analysis
      1. 23.1 INTRODUCTION
      2. 23.2 REAL ASSETS AND FINANCIAL ASSETS
      3. 23.3 THE ROLE OF INVESTORS IN COMMODITY MARKETS
      4. 23.4 CONVENIENCE YIELD
      5. 23.5 COST OF CARRY
      6. 23.6 THEORIES OF COMMODITY FORWARD CURVES
    2. Chapter 24: Role of Commodities in Asset Allocation
      1. 24.1 INTRODUCTION
      2. 24.2 REVIEW OF MAJOR ARTICLES AND STUDIES
      3. 24.3 SOURCES OF RETURN TO FUTURES-BASED COMMODITY INVESTMENT
      4. 24.4 THE STATISTICAL PROPERTIES OF COMMODITY PRICES
      5. 24.5 ASSET ALLOCATION
    3. Chapter 25: Methods of Delivering Commodity Alpha
      1. 25.1 INTRODUCTION
      2. 25.2 DIRECTIONAL STRATEGIES
      3. 25.3 RELATIVE VALUE STRATEGIES
      4. 25.4 COMMODITY-BASED EQUITY AND DEBT STRATEGIES
      5. 25.5 FUNDAMENTAL ANALYSIS FOR DIRECTIONAL AND RELATIVE VALUE STRATEGIES
      6. 25.6 LOOKING FORWARD
    4. Chapter 26: Methods of Delivering Commodity Beta: Indices, Swaps, Notes, and Hedge Funds
      1. 26.1 INTRODUCTION
      2. 26.2 DIRECT PHYSICAL OWNERSHIP OF COMMODITIES
      3. 26.3 INDIRECT OWNERSHIP OF COMMODITIES
      4. 26.4 LEVERAGED AND OPTION-BASED STRUCTURES
      5. 26.5 COMMODITY INDICES COMPARED TO SECURITIES INDICES
      6. 26.6 SOURCES OF COMMODITY INDEX RETURNS
      7. 26.7 ISSUES IN COMMODITY INDEX DESIGN
      8. 26.8 PERFORMANCE ENHANCEMENTS OF ENHANCED COMMODITY INDICES
      9. 26.9 A PRIMER ON COMMODITY INDEX CALCULATION: SPOT, ROLL, EXCESS, AND TOTAL RETURNS
    5. Chapter 27: Macroeconomic Determinants of Commodity Futures Returns
      1. 27.1 COMMODITIES AS AN INFLATION HEDGE
      2. 27.2 COMMODITIES AND EXCHANGE RATES
      3. 27.3 COMMODITIES AND THE BUSINESS CYCLE
      4. 27.4 CONCLUSION
    6. Chapter 28: Effective Risk Management Strategies for Commodity Portfolios*
      1. 28.1 MARKING THE NET ASSET VALUE
      2. 28.2 MEASURING EVENT RISKS
      3. 28.3 STRESS TESTING USING VALUE AT RISK
      4. 28.4 MEASURING LIQUIDITY RISKS
      5. 28.5 PERFORMANCE ATTRIBUTION
      6. 28.6 MITIGATING OPERATIONAL RISKS
      7. 28.7 CONCLUSION
  13. Part Five: Real Assets
    1. Chapter 29: Structure of the Managed Futures Industry
      1. 29.1 INVESTING IN CTAs AND CPOs
      2. 29.2 INDUSTRY REGULATION
      3. 29.3 BENEFITS OF CTAs
      4. 29.4 MARGIN REQUIREMENTS
      5. 29.5 UNDERSTANDING RETURNS
      6. 29.6 FOREIGN CURRENCY EXPOSURE
      7. 29.7 COLLATERAL INCOME AND SEGREGATION ISSUES
      8. 29.8 MARGIN-TO-EQUITY RATIOS
      9. 29.9 CONCLUSION
    2. Chapter 30: Managed Futures: Strategies and Sources of Return
      1. 30.1 INVESTMENT STRATEGIES
      2. 30.2 ECONOMICS OF COMMODITY FUTURES MARKETS
      3. 30.3 EFFICIENT MARKET HYPOTHESIS AND RETURNS TO CTAs
      4. 30.4 PROFITABILITY OF MOMENTUM-BASED AND OTHER TREND-FOLLOWING STRATEGIES
      5. 30.5 EMPIRICAL EVIDENCE ON TECHNICAL TRADING RULES
      6. 30.6 CONCLUSION
    3. Chapter 31: Risk and Performance Analysis in Managed Futures Strategies
      1. 31.1 RISK MEASUREMENT
      2. 31.2 HISTORICAL PERFORMANCE OF CTAs
      3. 31.3 RESEARCH ON PERFORMANCE AND BENEFITS OF MANAGED FUTURES
      4. 31.4 BENCHMARKING OF CTAs
      5. 31.5 ALPHA-BETA SEPARATION USING PASSIVE INDICES
      6. 31.6 PERFORMANCE OF CTAS DURING PERIODS OF FINANCIAL STRESS
      7. 31.7 CONCLUSION
    4. Chapter 32: Structuring Investments in CTAs*
      1. 32.1 SOURCING MANAGERS
      2. 32.2 ISSUES IN STRUCTURING A CTA INVESTMENT PROGRAM
      3. 32.3 HOW MANY MANAGERS SHOULD ONE CHOOSE?
      4. 32.4 CTA FUNDS AND MULTI-CTA FUNDS
      5. 32.5 MANAGED ACCOUNTS
      6. 32.6 PLATFORMS
      7. 32.7 COMPARISON OF APPROACHES TO STRUCTURING A CTA INVESTMENT
      8. 32.8 QUANTITATIVE ANALYSIS OF MANAGERS
      9. 32.9 INVESTMENT AND OPERATIONAL DUE DILIGENCE PROCESSES
      10. 32.10 COST OF ACTIVE MANAGEMENT
      11. 32.11 CONCLUSION
    5. CHAPTER 33: Hedge Fund Replication
      1. 33.1 INTRODUCTION
      2. 33.2 AN OVERVIEW OF REPLICATION PRODUCTS
      3. 33.3 POTENTIAL BENEFITS OF REPLICATION PRODUCTS
      4. 33.4 THE CASE FOR HEDGE FUND REPLICATION
      5. 33.5 UNIQUE BENEFITS OF REPLICATION PRODUCTS
      6. 33.6 FACTOR-BASED APPROACH TO REPLICATION
      7. 33.7 PAYOFF-DISTRIBUTION APPROACH
      8. 33.8 BOTTOM-UP OR ALGORITHMIC APPROACH
      9. 33.9 CONCLUSION
    6. CHAPTER 34: Convertible Arbitrage
      1. 34.1 EVOLUTION OF THE CONVERTIBLE ARBITRAGE STRATEGY
      2. 34.2 TERMINOLOGY
      3. 34.3 VALUATION OF CONVERTIBLE SECURITIES
      4. 34.4 THE GREEKS
      5. 34.5 AN ARBITRAGE SITUATION
      6. 34.6 CONVERTIBLE ARBITRAGE IN PRACTICE: STRIPPING AND SWAPPING
      7. 34.7 LEVERAGE AND CONVERTIBLE ARBITRAGE
      8. 34.8 APPENDIX
    7. CHAPTER 35: Global Macro and Currency Strategies
      1. 35.1 INTRODUCTION TO THE MACRO STRATEGIES
      2. 35.2 DIRECTIONAL CURRENCY TRADES
      3. 35.3 THE CASE OF EMERGING MARKETS
      4. 35.4 FOUR MODELS FOR CURRENCY TRADING
      5. 35.5 A MORE COMPLEX TRADE: CONTINGENT YIELD CURVE STEEPENING
      6. 35.6 RISK MANAGEMENT AND PORTFOLIO CONSTRUCTION
    8. CHAPTER 36: Fundamental Equity Hedge Fund Strategies
      1. 36.1 VARIATIONS WITHIN EQUITY LONG/SHORT FUNDS
      2. 36.2 BACKGROUND OF THE LONG/SHORT EQUITY HEDGE FUND
      3. 36.3 MECHANICS OF THE STRATEGY
      4. 36.4 MANAGERIAL EXPERTISE AND SOURCES OF RETURNS
      5. 36.5 LONG/SHORT RETURN ATTRIBUTION
    9. CHAPTER 37: Quantitative Equity Hedge Fund Strategies
      1. 37.1 VARIATIONS OF QUANTITATIVE STRATEGIES
      2. 37.2 BACKGROUND ON QUANTITATIVE STRATEGIES
      3. 37.3 MECHANICS OF QUANTITATIVE STRATEGIES
      4. 37.4 SOURCES OF RETURNS
      5. 37.5 A STYLIZED QUANTITATIVE EQUITY STRATEGY
      6. 37.6 THE GREAT QUANT MELTDOWN OF AUGUST 2007
    10. CHAPTER 38: Funds of Hedge Funds
      1. 38.1 APPROACHES FOR ACCESSING HEDGE FUNDS
      2. 38.2 CHARACTERISTICS OF FUNDS OF HEDGE FUNDS
      3. 38.3 FUND OF FUNDS PERFORMANCE
      4. 38.4 FUND OF FUNDS PORTFOLIO CONSTRUCTION
      5. 38.5 MANAGER SELECTION
      6. 38.6 RISK MANAGEMENT
      7. 38.7 DUE DILIGENCE ISSUES ARISING IN THE CONTEXT OF FUNDS OF FUNDS
      8. 38.8 BENEFITS OFFERED BY FUNDS OF FUNDS
      9. 38.9 DISADVANTAGES OF FUNDS OF FUNDS
      10. 38.10 FUNDS OF FUNDS VERSUS INDIVIDUAL HEDGE FUNDS
      11. 38.11 HEDGE FUND INDICES
    11. CHAPTER 39: Regulation and Compliance
      1. 39.1 A SUCCINCT HISTORY OF HEDGE FUND REGULATION IN THE UNITED STATES
      2. 39.2 REGISTRATION AND REGULATION IN THE UNITED STATES
      3. 39.3 VARIOUS REPORTING REQUIREMENTS FOR HEDGE FUNDS
      4. 39.4 THE GLOBAL REGULATORY ENVIRONMENT FOR HEDGE FUNDS
    12. CHAPTER 40: Operational Due Diligence
      1. 40.1 OPERATIONAL DUE DILIGENCE
      2. 40.2 STRATEGY-SPECIFIC DUE DILIGENCE
  14. References
  15. Index