FINA0605: Alternative Investments Semester 2, Office Hours: Tuesday and Thursday, 4:00-6:00 pm

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1 FINA0605: Alternative Investments Semester 2, Instructor: Dr. Clement Wong Office: Room 921, K.K. Leung Building Phone: Office Hours: Tuesday and Thursday, 4:00-6:00 pm Teaching Assistant: Clive Ho Office: Room 1026, KKL Mailbox: Number 18, 9/F, KKL Phone: Office Hours: Tues 1-3; Wed 11:30-12:30pm and 1-3pm; Thurs 10:30-12:30pm and 1-2pm Note: If you need to contact me or TA via , please send your directly from your account to the above addresses. Do not send from within WebCT (we cannot reply by using the REPLY function in webct) Required Textbook: None. But reading materials from multiple sources will be provided in class. Reference books: CAIA Level I: An Introduction to Core Topics in Alternative Investments, John Wiley & Sons CAIA Level IIa: Advanced Core Topics in Alternative Investments, John Wiley & Sons CAIA Level IIb: Current and Integrated Topics 2011, Institutional Investor Journal. Note: Some of my lecture materials come from the CAIA Level I Handbook and, to a lesser extent, Level IIa. I have ordered 4 copies of the books to be put on reserve in the Main Library. All four copies of Level I and one copy of Level IIa are already on reserve and the other should be ready in a couple of weeks. I do not think you need to buy the Level I Handbook. It is a bit expensive (about HK$375) and will be replaced by a new edition later this year. If you still wish to buy the book, I could ask the bookstore to order for you if you let me know by the end of week 2. Alternatively, you can buy from online bookstores, where used copies might be available. CAIA Level IIb is a new book. It is for your reference only. There are numerous typos in these handbooks. Please refer to the CAIA Study Guides for 2012 (which I have uploaded) for the corrections made. I have also caught other typos myself from those chapters I have read. Please refer to CAIA folder in web-ct. 1

2 Visit the CAIA website for more info about the designation and useful resources about alternative investments. Course Description: Alternative investments are the fastest growing, and probably the least understood, sector of the investment industry. In recent years, we have seen increasing demand for nontraditional investments as institutional and private investors seek absolute-return strategies targeting a positive return in all market environments and maintaining low correlations with traditional asset classes. This has led to the development of the alternative investment industry, which, it is generally accepted, includes private equity and venture capital; asset-backed securities, such as collateralized debt obligations; insurance- and credit-derivative-linked securities; real estate; and skill-based strategies such as hedge funds, managed futures and commodities. Alternative investments are favored mainly because their returns have a low correlation with those of traditional asset classes. Because of this, many institutional investors, including traditionally conservative investors such as pension and endowment funds, and high-net worth individuals make portfolio allocations to alternative investments that are often comparable in size to those they make to the traditional assets classes of stocks and bonds. This course provides a comprehensive overview of alternative investment vehicles. The purpose of the course is to give students a good understanding of the industry knowledge and techniques that should be part of the toolkit of any money managers who advise private and institutional clients on the inclusion of alternative investments in their portfolios. Course intended learning outcomes (CILOs) At the end of this course, students who fulfill the requirements of this course will be able to: CILO 1 CILO 2 CILO 3 CILO 4 CILO 5 characterize the common features of alternative investments and their markets; distinguish among the principal classes of alternative investments; apply valuation techniques to price alternative investments; assess the benefits, such as return enhancement and/or risk diversification, and pitfalls of adding an alternative investment to a reference portfolio; and advise a client on how to incorporate alternative investment in his portfolio according to his investment objectives and risk tolerance. 2

3 Alignment of program ILOs and course ILOs Program ILOs Acquisition and internalization of knowledge of economics & finance Application and integration of knowledge Developing global outlook Mastering communication skills Course ILOs CILO1, CILO2, CILO3, CILO4, CILO5 CILO3, CILO4, CILO5 CILO1 CILO5 Teaching and Learning Activities (TLA) TLA 1 Lecture Instructor will give lectures on major concepts and issues. TLA 2 In-class discussion Students are expected to present their answers and engage in discussion during lecture/tutorial meetings. Most in-depth learning takes place when students actively engage themselves in discussions thought presenting and sharing their ideas TLA 3 Consultation Both the instructor and the teaching assistant will hold weekly consultation hours to answer students questions. Assessment Tasks (AT) Weight AT 1 Assignments 12% AT 2 Midterm examination* 17% AT 3 Class participation 4% AT 3 Group project** 17% AT 4 Final examination 50% Total 100% * Midterm exam will be in class on April 3. ** Detailed information will be provided later. Alignment of Course Intended Learning Outcome and Assessment Tasks CILO 1 AT 1, AT 2, AT 3, AT 4 CILO 2 AT 1, AT 2, AT 3, AT 4 CILO 3 AT 1, AT 2, AT 3, AT 4 CILO 4 AT 1, AT 2, AT 3, AT 4 CILO 5 AT 1, AT 2, AT 3, AT 4 3

4 Standards of Assessment Grade Grade Definition Description A+, A. A- High distinction Strong evidence of superb ability to fulfill the intended learning outcomes of the course at all levels of learning: describe, apply, evaluate, and synthesis. B+, B, B- Distinction Strong evidence of the ability to fulfill the intended learning outcomes of the course at all levels of learning: describe, apply, evaluate, and synthesis. C+, C, C- Credit pass Evidence of adequate ability to fulfill the intended learning outcomes of the course at low levels of learning such as describe and apply but not at high levels of learning such as evaluate and synthesis D+, D Pass Evidence of basic familiarity with the subject. F Fail Little evidence of basic familiarity with the subject. Operation aspects and policies of the course 1. Lecture materials will be posted on Blackboard Web-CT before each class. Please download, print, and bring them to class. 2. Punctuality is highly appreciated. I will start the class right on time at 9:30AM. Please arrive 5 minutes before the class starts. 3. Lecture PPTs are not substitutes for coming to class. It is especially important to attend the lectures because a. the course has no textbook and lecture materials are taken from multiple sources; b. elaborations and examples will be discussed in class only. 4. Examination Policies 4.1 No supplementary midterm examination will be given. 4.2 If you have a legitimate reason for missing the midterm examination, you can request to have the weight of the midterm be added to that of the final examination. Legitimate reasons include sickness, time crash with another exam or personal emergencies. 4.3 In the event of missing the midterm due to illness, the instructor must be informed (via , phone call or voice message) before the examination starts and a letter of certification from a doctor must be provided afterward. 4

5 5. This class has no regular tutorials. But there will be two to three tutorials to discuss assignment answers. 6. Do not abuse the convenience of s. (i) (ii) Do not send to ask about things you are supposed to know (e.g. information in the course syllabus or announcements made) Please check your information first. Do not use s as a substitute for coming in person for consultation during office hours. 7. It is your responsibility to check your regularly for course announcements. 8. Classroom etiquette: Be a considerate person and observe the following good practices: (i) (ii) (iii) Come to class and return from the break on time. In case you are late, minimize disruption to the class by closing the door quietly and sit at the back. While the class is in session, do not talk or whisper with students around you because this will distract the instructor and fellow students sitting near you; turn off your cellular phone; do not eat or drink; feel free to raise your hand if you have any questions; feel free to participate in class discussion. 5

6 Tentative course outline Note: Since this is a new area in Finance, teaching resources are scant, fragmented and usually not well written for beginners and academic people. The reading assignments from CAIA handbooks are for your reference only. Lecture notes and in-class discussion are the definitive reference to the coverage of the course. 1. Introduction What are alternative investments? CAIA Level I, Ch. 1, 2 Alternative investment in portfolio management CAIA Level I, Ch. 3, 4, 5 2. Hedge funds Introduction CAIA Level I, Ch. 10, 11 Hedge fund risk CAIA Level I, Ch. 13, 14 Hedge fund benchmarks and asset allocation CAIA Level I, Ch Private Equity Venture capital CAIA Level I, Ch. 23, 28 Leveraged buyouts CAIA Level I, Ch. 24, 28 Mezzanine debts CAIA Level I, Ch. 25, 28 Distress debts CAIA Level I, Ch. 26, 28 Private equity valuation CAIA Level IIa, Ch. 9, 10 Institutional features of private equity industry CAIA Level I, Ch Commodity and managed futures Introduction to commodity CAIA Level I, Ch. 19 Commodity futures CAIA Level I, Ch Introduction to managed futures CAIA Level I, Ch. 22 Risk and performance of managed futures CAIA Level IIa, Ch. 20, 21 6

7 5. Real Estate Real estate investment trusts and indices CAIA Level I, Ch. 6, 7 CAIA Level IIa, Ch. 24 Real estate investment and asset allocation CAIA Level I, Ch. 8, 9 CAIA Level IIa, Ch. 23, 29 Academic Conduct The University Regulations on academic dishonesty will be strictly enforced! Please check the University Statement on plagiarism on the web: Academic dishonesty is behavior in which a deliberately fraudulent misrepresentation is employed in an attempt to gain undeserved intellectual credit, either for oneself or for another. It includes, but is not necessarily limited to, the following types of cases: a. Plagiarism - The representation of someone else s ideas as if they are one s own. Where the arguments, data, designs, etc., of someone else are being used in a paper, report, oral presentation, or similar academic project, this fact must be made explicitly clear by citing the appropriate references. The references must fully indicate the extent to which any parts of the project are not one s own work. Paraphrasing of someone else's ideas is still using someone else s ideas, and must be acknowledged. b. Unauthorized Collaboration on Out-of-Class Projects - The representation of work as solely one s own when in fact it is the result of a joint effort. Where a candidate for a degree or other award uses the work of another person or persons without due acknowledgement: 1. The relevant Board of Examiners may impose a penalty in relation to the seriousness of the offence; 2. The relevant Board of Examiners may report the candidate to the Senate, where there is prima facie evidence of an intention to deceive and where sanctions beyond those in (1) might be invoked. 7