CHAPTER 1 Introduction Outline of This Book Studying for the CAIA Level II Examination 3

Transcription

1 Contents Preface Acknowledgments About the Authors xv xxi xxv CHAPTER 1 Introduction Outline of This Book Studying for the CAIA Level II Examination 3 PART ONE Asset Allocation and Portfolio Management CHAPTER 2 The Endowment Model Defining Endowments and Foundations Intergenerational Equity, Inflation, and Spending Challenges The Endowment Model Why Might Large Endowments Outperform? Conclusion 19 CHAPTER 3 Risk Management for Endowment and Foundation Portfolios Spending Rates and Inflation Liquidity Issues Rebalancing and Tactical Asset Allocation Tail Risk Conclusion 32 CHAPTER 4 Pension Fund Portfolio Management Defined Benefit Plans Governmental Social Security Plans Defined Contribution Plans 43

2 PART TWO Private Equity CHAPTER 5 Private Equity Market Landscape Main Strategies Main Differences between Venture Capital and Buyout Private Equity Funds as Intermediaries Private Equity Funds of Funds as Intermediaries Private Equity Funds of Funds Value-Added The Relationship Life Cycle between Limited and General Partners The J-Curve Conclusion 64 CHAPTER 6 Private Equity Fund Structure Key Features Conflicts of Interest Finding the Balance 77 CHAPTER 7 The Investment Process Process Description Risk Management 85 CHAPTER 8 Private Equity Portfolio Design Three Approaches to Private Equity Portfolio Design Risk-Return Management Approaches The Risk Profile of Private Equity Assets 99 CHAPTER 9 Fund Manager Selection Process Determination of the Wish List of Fund Characteristics Deal Sourcing Due Diligence: Importance and Limitations Decision and Commitment 116 CHAPTER 10 Measuring Performance and Benchmarking in the Private Equity World Individual Funds Portfolio of Funds 129 CHAPTER 11 Monitoring Private Equity Fund Investments Approach to Monitoring The Monitoring Objectives 136

3 11.3 Information Gathering in the Monitoring Process Actions Resulting from Monitoring 142 CHAPTER 12 Private Equity Fund Valuation Net Asset Value (NAV) Internal Rate of Return (IRR) Economic Value Approach 149 CHAPTER 13 Private Equity Fund Discount Rates The Capital Asset Pricing Model (CAPM) Private Equity Fund Betas 153 CHAPTER 14 The Management of Liquidity Private Equity Cash Flow Schedules Sources of Liquidity Investment Strategies for Undrawn Capital Cash Flow Projections Overcommitment Conclusion 177 PART THREE Real Assets CHAPTER 15 Real Estate as an Investment Attributes of Real Estate Asset Allocation Categories of Real Estate Return Drivers of Real Estate 189 CHAPTER 16 Unsmoothing of Appraisal-Based Returns Smoothed Pricing Models of Price and Return Smoothing Unsmoothing a Price or Return Series An Illustration of Unsmoothing 201 CHAPTER 17 Core, Value-Added, and Opportunistic Real Estate Defining the Three NCREIF Real Estate Styles Differentiating Styles with Attributes Purposes of Real Estate Style Analysis 210

4 17.4 Real Estate Style Boxes Cap Rates and Expected Returns Developing Risk and Return Expectations with Styles 215 CHAPTER 18 Real Estate Indices The Mechanics of Appraisal-Based Indices Non-Appraisal-Based Indices Description of Major Real Estate Indices 226 CHAPTER 19 Public versus Private Real Estate Risks Market-Based versus Appraisal-Based Returns Arbitrage, Liquidity, and Segmentation Public Real Estate Products 244 CHAPTER 20 Portfolio Allocation within Real Estate Income Taxation Leverage Agency Relationships Information Asymmetries Liquidity and Transaction Costs Cross-Border Real Estate Investment Summary and Conclusions 255 CHAPTER 21 Farmland and Timber Investments Global Demand for Agricultural Products Accessing Agricultural Returns Understanding the Returns to Farmland Commodity Price Volatility and Its Implication for Farmland-Based Investment Strategies Global Investing in Timberland Key Points and Summary Conclusions 277 CHAPTER 22 Investing in Intellectual Property Characteristics of Intellectual Property Film Production and Distribution Art as an Investment Asset R&D and Patents Conclusion 298

5 PART FOUR Commodities CHAPTER 23 Key Concepts in Commodity Market Analysis Introduction Real Assets and Financial Assets The Role of Investors in Commodity Markets Convenience Yield Cost of Carry Theories of Commodity Forward Curves 305 CHAPTER 24 Role of Commodities in Asset Allocation Introduction Review of Major Articles and Studies Sources of Return to Futures-Based Commodity Investment The Statistical Properties of Commodity Prices Asset Allocation 324 CHAPTER 25 Methods of Delivering Commodity Alpha Introduction Directional Strategies Relative Value Strategies Commodity-Based Equity and Debt Strategies Fundamental Analysis for Directional and Relative Value Strategies Looking Forward 341 CHAPTER 26 Methods of Delivering Commodity Beta: Indices, Swaps, Notes, and Hedge Funds Introduction Direct Physical Ownership of Commodities Indirect Ownership of Commodities Leveraged and Option-Based Structures Commodity Indices Compared to Securities Indices Sources of Commodity Index Returns Issues in Commodity Index Design Performance Enhancements of Enhanced Commodity Indices A Primer on Commodity Index Calculation: Spot, Roll, Excess, and Total Returns 359

6 CHAPTER 27 Macroeconomic Determinants of Commodity Futures Returns Commodities as an Inflation Hedge Commodities and Exchange Rates Commodities and the Business Cycle Conclusion 378 CHAPTER 28 Effective Risk Management Strategies for Commodity Portfolios Marking the Net Asset Value Measuring Event Risks Stress Testing Using Value at Risk Measuring Liquidity Risks Performance Attribution Mitigating Operational Risks Conclusion 387 PART FIVE Hedge Funds and Managed Futures CHAPTER 29 Structure of the Managed Futures Industry Investing in CTAs and CPOs Industry Regulation Benefits of CTAs Margin Requirements Understanding Returns Foreign Currency Exposure Collateral Income and Segregation Issues Margin-to-Equity Ratios Conclusion 403 CHAPTER 30 Managed Futures: Strategies and Sources of Return Investment Strategies Economics of Commodity Futures Markets Efficient Market Hypothesis and Returns to CTAs Profitability of Momentum-Based and Other Trend-Following Strategies Empirical Evidence on Technical Trading Rules Conclusion 425 CHAPTER 31 Risk and Performance Analysis in Managed Futures Strategies Risk Measurement Historical Performance of CTAs 435

7 31.3 Research on Performance and Benefits of Managed Futures Benchmarking of CTAs Alpha-Beta Separation Using Passive Indices Performance of CTAs during Periods of Financial Stress Conclusion 452 CHAPTER 32 Structuring Investments in CTAs* Sourcing Managers Issues in Structuring a CTA Investment Program How Many Managers Should One Choose? CTA Funds and Multi-CTA Funds Managed Accounts Platforms Comparison of Approaches to Structuring a CTA Investment Quantitative Analysis of Managers Investment and Operational Due Diligence Processes Cost of Active Management Conclusion 472 CHAPTER 33 Hedge Fund Replication Introduction An Overview of Replication Products Potential Benefits of Replication Products The Case for Hedge Fund Replication Unique Benefits of Replication Products Factor-Based Approach to Replication Payoff-Distribution Approach Bottom-Up or Algorithmic Approach Conclusion 493 CHAPTER 34 Convertible Arbitrage Evolution of the Convertible Arbitrage Strategy Terminology Valuation of Convertible Securities The Greeks An Arbitrage Situation Convertible Arbitrage in Practice: Stripping and Swapping Leverage and Convertible Arbitrage Appendix 518 CHAPTER 35 Global Macro and Currency Strategies Introduction to the Macro Strategies Directional Currency Trades 524

8 35.3 The Case of Emerging Markets Four Models for Currency Trading A More Complex Trade: Contingent Yield Curve Steepening Risk Management and Portfolio Construction 536 CHAPTER 36 Fundamental Equity Hedge Fund Strategies Variations within Equity Long/Short Funds Background of the Long/Short Equity Hedge Fund Mechanics of the Strategy Managerial Expertise and Sources of Returns Long/Short Return Attribution 550 CHAPTER 37 Quantitative Equity Hedge Fund Strategies Variations of Quantitative Strategies Background on Quantitative Strategies Mechanics of Quantitative Strategies Sources of Returns A Stylized Quantitative Equity Strategy The Great Quant Meltdown of August CHAPTER 38 Funds of Hedge Funds Approaches for Accessing Hedge Funds Characteristics of Funds of Hedge Funds Fund of Funds Performance Fund of Funds Portfolio Construction Manager Selection Risk Management Due Diligence Issues Arising in the Context of Funds of Funds Benefits Offered by Funds of Funds Disadvantages of Funds of Funds Funds of Funds versus Individual Hedge Funds Hedge Fund Indices 597 CHAPTER 39 Regulation and Compliance A Succinct History of Hedge Fund Regulation in the United States Registration and Regulation in the United States Various Reporting Requirements for Hedge Funds The Global Regulatory Environment for Hedge Funds 614

9 CHAPTER 40 Operational Due Diligence Operational Due Diligence Strategy-Specific Due Diligence 630 References 645 Index 000