Alternative Investments and Strategies

414 Pages·2010·3.24 MB·English

by  Rudiger Kiesel

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World Scientific
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Published by
World Scientific Publishing Co. Pte. Ltd.
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Library of Congress Cataloging-in-Publication Data
Alternative investments and strategies / edited by Rüdiger Kiesel, Matthias Scherer & Rudi Zagst.
p. cm.
ISBN-13: 978-9814280105
ISBN-10: 9814280100
1. Investments--Moral and ethical aspects. 2. Portfolio management--Moral and ethical aspects.
I. Kiesel, Rüdiger, 1962– II. Scherer, Matthias. III. Zagst, Rudi, 1961–
HG4515.13.A498 2010
332.6--dc22
2010013167
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Copyright © 2010 by World Scientific Publishing Co. Pte. Ltd.
All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means,
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Printed in Singapore.
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PREFACE
Assetallocationinvestigatestheoptimaldivisionofaportfolioamongdifferentasset
classes. Standard theory involves the optimal mix of risky stocks, bonds, and cash
togetherwithvarioussubdivisionsoftheseassetclasses.Underlyingthisistheinsight
thatdiversificationallowsforachievingabalancebetweenriskandreturn:byusing
differenttypesofinvestment,lossesmaybelimitedandreturnsaremadelessvolatile
withoutlosingtoomuchpotentialgain.
These insights are made precise using the benchmark theory of mathematical
finance,theBlack-Scholes-Mertontheory,basedonBrownianmotionasthedriving
noiseprocessforriskyassetprices.Here,thedistributionsoffinancialreturnsofthe
riskyassetsinaportfolioaremultivariatenormal,thusrelatingtothestandardmean-
varianceportfoliotheoryofMarkowitzwithitsrisk-returnparadigmasabove.
Recent years have seen many empirical studies shedding doubt on the Black-
Scholes-Merton model, and motivating various alternative modeling approaches,
whichwereabletoreproducethestylizedfactsofassetreturns(suchasheavytailsand
volatilityclustering)muchbetter.Also,variousnewassetclassesandspecificfinancial
toolsforachievingbetterdiversificationhavebeencreatedandenteredtheinvestment
universe.
Thisbookcombinesacademicresearchandpracticalexpertiseonthesenew(often
calledalternative)assetsandtradingstrategiesinauniqueway.Weincludetheprac-
titioners’viewpoint on new asset classes as well as academic research on modeling
approaches,fornewassetclasses.Inparticular,alternativeassetclassessuchaspower
forwardcontracts,forwardfreightagreements,andinvestmentinphotovoltaicfacil-
ities are discussed in detail, both on a stand-alone basis and with a view to their
effectsondiversificationincombinationwithclassicalasset.Wealsoanalysecredit-
relatedportfolioinstrumentsandtheireffectinachievinganoptimalassetallocation.
Inthiscontext,wehighlightaspectsoffinancialstructureswhichmaysometimesbe
neglected, such as default risk of issuer in case of certificates or the role that model
v
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vi Preface
risk plays within asset allocation problems.This leads naturally to the use of robust
assetallocationstrategies.
Extendingtheclassicalmean-varianceportfoliosetting,weincludedynamicport-
foliostrategiesandillustratedifferentportfolioprotectionstrategies.Inparticular,we
comparethebenefitsofsuchstrategiesandinvestigateconditionsunderwhichCon-
stantProportionPortfolioInsurance(CPPI)maybepreferedtoOption-BasedPortfolio
Insurance(OBPI)andviceversa.Wealsocontributetotheunderstandingofgaprisk
byanalyzingthisriskforCPPIandConstantProportionDebtObligations(CPDO)in
a sophisticated modeling framework. Such analyses are supplemented and extended
byaninvestigationoftheoptimalityofhedgingapproachessuchasvariance-optimal
hedgingandsemistaticvariantsofclassicalhedgingstrategies.
Manyofthearticlescanserveasguidesfortheimplementationofvariousmodels.
In addition, we also present state-of-the-art models and explain modern tools from
financialmathematics,suchasMarkov-Switchingmodels,time-changedLévymodels,
variantsoflognormalapproximations,andcopulastructures.
Thisbookscombinesauniquemixofauthors.Alsomanyofourstudentsimproved
theoutcomeoftheprojectwithcriticalandinsightfulcomments.Particularthanksgoes
toGeorgGrüll,PeterHieber,JuliaKraus,MatthiasLutz,Jan-FrederikMai,Kathrin
Maul,KevinMetka,DanielaNeykova,JohannesRauch,AndreasRupp,DanielaSelch,
andChristoferVogt.
R.Kiesel,M.Scherer,andR.Zagst
May13,2010 10:6 WSPC/SPI-B913 b913-fm FA
CONTENTS
Preface v
PartI. AlternativeInvestments
Chapter1. SociallyResponsibleInvestments 3
SvenHroß,ChristoferVogtandRudiZagst
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 RecentResearchonSRI . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 HowSustainableisSustainability? . . . . . . . . . . . . . . . . . . . . . 6
1.3.1 DescriptionoftheDataset . . . . . . . . . . . . . . . . . . . . . 6
1.3.2 IntroductiontoMarkovTransitionMatrices . . . . . . . . . . . . 6
1.3.3 ResultsofMarkovTransitionMatrices . . . . . . . . . . . . . . 7
1.4 SRIinPortfolioContext . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.4.1 DescriptionoftheDatasetandStatisticalProperties . . . . . . . 8
1.4.2 Markov-SwitchingModel . . . . . . . . . . . . . . . . . . . . . 11
1.4.3 FittingtheModelParameters . . . . . . . . . . . . . . . . . . . 11
1.4.4 SimulationofReturns . . . . . . . . . . . . . . . . . . . . . . . 13
1.4.5 PortfolioOptimizationModels . . . . . . . . . . . . . . . . . . 13
1.4.6 DefinitionofInvestorTypes . . . . . . . . . . . . . . . . . . . . 15
1.4.7 OptimalPortfolios . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Chapter2. ListedPrivateEquityinaPortfolioContext 21
PhilippAigner,GeorgBeyschlag,TimFriederich,
MarkusKalepkyandRudiZagst
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.2 DefiningPrivateEquityCategories. . . . . . . . . . . . . . . . . . . . . 23
2.2.1 FinancingStages . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.2.2 DivestmentStrategies . . . . . . . . . . . . . . . . . . . . . . . 24
vii
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viii Contents
2.2.3 TypeofFinancing . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.2.4 ClassificationofPrivateEquityFundInvestments . . . . . . . . 26
2.2.4.1 Venturecapitalfunds . . . . . . . . . . . . . . . . . . . 26
2.2.4.2 Buyoutfunds . . . . . . . . . . . . . . . . . . . . . . . 27
2.2.4.3 Leveragedbuyouts(LBO) . . . . . . . . . . . . . . . . 27
2.3 InvestmentPossibilities—OneAsset,ManyClasses . . . . . . . . . . . 28
2.3.1 DirectInvestments . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.3.2 PrivateEquityFunds . . . . . . . . . . . . . . . . . . . . . . . . 29
2.3.2.1 Keyplayers . . . . . . . . . . . . . . . . . . . . . . . 29
2.3.3 CashFlowStructureofaPrivateEquityFund . . . . . . . . . . . 31
2.3.4 Fund-of-Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.3.4.1 Structureofaprivateequityfund-of-funds . . . . . . . 32
2.3.4.2 Advantages . . . . . . . . . . . . . . . . . . . . . . . . 32
2.3.4.3 Disadvantages . . . . . . . . . . . . . . . . . . . . . . 33
2.3.5 PubliclyTradedPrivateEquity . . . . . . . . . . . . . . . . . . 33
2.3.6 SecondaryTransactions . . . . . . . . . . . . . . . . . . . . . . 34
2.3.6.1 Typesofsecondarytransactions . . . . . . . . . . . . . 34
2.3.6.2 Buyer’smotivation . . . . . . . . . . . . . . . . . . . . 35
2.4 PrivateEquityasAlternativeAssetClass
inanInvestmentPortfolio . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.4.1 CharacteristicsofLPEReturnSeries . . . . . . . . . . . . . . . 36
2.4.2 ModelingReturnSerieswithMarkov-SwitchingProcesses. . . . 37
2.4.2.1 Markov–Switchingmodels . . . . . . . . . . . . . . . 37
2.4.2.2 Fittingtheparameters . . . . . . . . . . . . . . . . . . 39
2.4.2.3 Simulationofreturnpaths . . . . . . . . . . . . . . . . 40
2.4.3 ListedPrivateEquityinAssetAllocation . . . . . . . . . . . . . 40
2.4.3.1 Performancemeasurement . . . . . . . . . . . . . . . . 40
2.4.3.2 Portfoliooptimizationframeworks . . . . . . . . . . . 42
2.4.3.3 Definitionofinvestortypes . . . . . . . . . . . . . . . 43
2.4.3.4 Optimizationofportfolios . . . . . . . . . . . . . . . . 44
2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Chapter3. AlternativeRealAssetsinaPortfolioContext 51
WolfgangMader,SvenTreuandSebastianWillutzky
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3.2 OverviewonAlternativeRealAssets . . . . . . . . . . . . . . . . . . . . 52
3.3 ModelingPhotovoltaicInvestments . . . . . . . . . . . . . . . . . . . . 53
3.3.1 GeneralApproach . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.3.2 DefinitionoftheInvestmentProject . . . . . . . . . . . . . . . . 54
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Contents ix
3.3.3 ModelingofRiskFactors . . . . . . . . . . . . . . . . . . . . . 56
3.3.3.1 Economicfactors . . . . . . . . . . . . . . . . . . . . 56
3.3.3.2 Non-economicfactors . . . . . . . . . . . . . . . . . . 57
3.3.3.3 Historicalanalysisofmonthlyglobalirradiance . . . . 58
3.3.3.4 MonteCarloanalysisofyearlyglobalirradiance . . . . 61
3.4 PhotovoltaicInvestmentsinaPortfolioContext . . . . . . . . . . . . . . 63
3.4.1 SettingthePortfolioContext. . . . . . . . . . . . . . . . . . . . 63
3.4.2 IncludingPhotovoltaicInvestmentsinaPortfolio . . . . . . . . . 64
3.4.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Chapter4. TheFreightMarketandItsDerivatives 71
RüdigerKieselandPatrickScherer
4.1 Introduction:theFreightMarket . . . . . . . . . . . . . . . . . . . . . . 72
4.1.1 Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4.1.2 Cargo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4.1.3 Routes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.2 FreightRates:WhatDrivestheMarket? . . . . . . . . . . . . . . . . . . 74
4.2.1 DemandforShippingCapacity . . . . . . . . . . . . . . . . . . 75
4.2.2 SupplyofShippingCapacity . . . . . . . . . . . . . . . . . . . 76
4.2.3 Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.3 FreightDerivatives:HedgingorSpeculating? . . . . . . . . . . . . . . . 77
4.3.1 ForwardFreightAgreement . . . . . . . . . . . . . . . . . . . . 77
4.3.2 FreightFutures . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
4.4 ExplanatoryVariables . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
4.4.1 ExplanatoryPower . . . . . . . . . . . . . . . . . . . . . . . . . 80
4.4.2 GrangerCausality . . . . . . . . . . . . . . . . . . . . . . . . . 82
4.4.3 SelectionAlgorithm“TopFive” . . . . . . . . . . . . . . . . . . 83
4.4.4 Cointegration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.5 PredictingFreightSpotandFuturesRates . . . . . . . . . . . . . . . . . 86
4.6 TheBacktestingAlgorithm . . . . . . . . . . . . . . . . . . . . . . . . . 88
4.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Chapter5. OnForwardPriceModelinginPowerMarkets 93
FredEspenBenth
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.2 HJMApproachtoPowerForwardPricing . . . . . . . . . . . . . . . . . 95
5.3 PowerForwardsandApproximationbyGeometric
BrownianMotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98