Alternative Investments: CAIA Level I

957 Pages·2015·5.25 MB·English

by  Donald R. Chambers

Alternative
Investments
The Wiley Finance series contains books written specifically for finance and invest-
ment professionals as well as sophisticated individual investors and their financial
advisors. Book topics range from portfolio management to e-commerce, risk man-
agement,financialengineering,valuationandfinancialinstrumentanalysis,aswellas
muchmore.Foralistofavailabletitles,visitourwebsiteatwww.WileyFinance.com.
Foundedin1807,JohnWiley&Sonsistheoldestindependentpublishingcom-
pany in the United States. With offices in North America, Europe, Australia and
Asia,Wileyisgloballycommittedtodevelopingandmarketingprintandelectronic
products and services for our customers’ professional and personal knowledge and
understanding.
Alternative
Investments
CAIA Level I
Third Edition
Donald R. Chambers
Mark J.P. Anson
Keith H. Black
Hossein Kazemi
Coverimage:©GettyImages
Coverdesign:ZoeDesignWorks
Copyright©2009,2012,2015byTheCAIAAssociation.Allrightsreserved.
Thesecondeditionofthisbookwaspublishedin2012underthetitleCAIALevelI:AnIntroductionto
CoreTopicsinAlternativeInvestments.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyform
orbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptas
permittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,withouteithertheprior
writtenpermissionofthePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeeto
theCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,[phone],fax
[phone],orontheWebatwww.copyright.com.RequeststothePublisherforpermissionshould
beaddressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ
07030,[phone],fax[phone],oronlineatwww.wiley.com/go/permissions.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsin
preparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyor
completenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesof
merchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedorextendedbysales
representativesorwrittensalesmaterials.Theadviceandstrategiescontainedhereinmaynotbesuitable
foryoursituation.Youshouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernor
authorshallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnotlimited
tospecial,incidental,consequential,orotherdamages.
Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactour
CustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat
[phone],orfax(317)572-4002.
Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Somematerial
includedwithstandardprintversionsofthisbookmaynotbeincludedine-booksorin
print-on-demand.IfthisbookreferstomediasuchasaCDorDVDthatisnotincludedintheversion
youpurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com.Formoreinformation
aboutWileyproducts,visitwww.wiley.com.
LibraryofCongressCataloging-in-PublicationData:
Chambers,DonaldR.
[CAIAlevelI]
Alternativeinvestments:CAIAlevelI/DonaldR.Chambers,MarkJ.P.AnsonwithKeithH.Black,
HosseinKazemi.–ThirdEdition.
pagescm.–(Wileyfinance)
RevisededitionofCAIAlevelI,2012.
Includesbibliographicalreferencesandindex.
ISBN978-1-119-00336-6(hardback);ISBN978-1-119-00338-0(ePDF);ISBN978-1-119-00337-3
(ePub) 1.Investments. 2.Securities. 3.Portfoliomanagement. I.Anson,MarkJonathanPaul.
II.Black,KeithH. III.Anson,MarkJonathanPaul.CAIAlevelI. IV.CAIAAssociation.
V.Title. VI.Title:CAIAlevelone.
HG4521.C451232015
332.63–dc23 2015028407
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
Contents
Preface xiii
Acknowledgments xvii
AbouttheAuthors xix
PART1
IntroductiontoAlternativeInvestments
CHAPTER1
WhatIsanAlternativeInvestment? 3
1.1 AlternativeInvestmentsbyExclusion 3
1.2 AlternativeInvestmentsbyInclusion 4
1.3 StructuresamongAlternativeInvestments 8
1.4 InvestmentsAreDistinguishedbyReturnCharacteristics 12
1.5 InvestmentsAreDistinguishedbyMethodsofAnalysis 15
1.6 InvestmentsAreDistinguishedbyOtherFactors 18
1.7 GoalsofAlternativeInvesting 18
1.8 OverviewofThisBook 20
ReviewQuestions 21
CHAPTER2
TheEnvironmentofAlternativeInvestments 23
2.1 TheParticipants 23
2.2 FinancialMarkets 30
2.3 RegulatoryEnvironment 32
2.4 LiquidAlternativeInvestments 37
2.5 Taxation 40
ReviewQuestions 43
CHAPTER3
QuantitativeFoundations 45
3.1 ReturnandRateMathematics 45
3.2 ReturnsBasedonNotionalPrincipal 47
3.3 InternalRateofReturn 50
3.4 ProblemswithInternalRateofReturn 54
3.5 DistributionofCashWaterfall 60
ReviewQuestions 69
v
vi CONTENTS
CHAPTER4
StatisticalFoundations 71
4.1 ReturnDistributions 71
4.2 MomentsoftheDistribution:Mean,Variance,Skewness,and
Kurtosis 74
4.3 Covariance,Correlation,Beta,andAutocorrelation 79
4.4 InterpretingStandardDeviationandVariance 88
4.5 TestingforNormality 95
4.6 Time-SeriesReturnVolatilityModels 98
ReviewQuestions 100
CHAPTER5
MeasuresofRiskandPerformance 101
5.1 MeasuresofRisk 101
5.2 EstimatingValueatRisk(VaR) 105
5.3 Ratio-BasedPerformanceMeasures 111
5.4 Risk-AdjustedReturnMeasures 117
ReviewQuestions 120
CHAPTER6
FoundationsofFinancialEconomics 121
6.1 InformationalMarketEfficiency 121
6.2 Single-FactorandExAnteAssetPricing 124
6.3 MultifactorandEmpiricalModels 129
6.4 Arbitrage-FreeModels 135
6.5 TheTermStructureofForwardContracts 142
6.6 OptionExposures 147
6.7 OptionPricingModels 153
6.8 OptionSensitivities 155
ReviewQuestions 157
CHAPTER7
BenchmarkingandPerformanceAttribution 159
7.1 Benchmarking 159
7.2 TypesofModels 162
7.3 PerformanceAttribution 165
7.4 DistinctionsRegardingAlternativeAssetBenchmarking 169
ReviewQuestions 172
CHAPTER8
Alpha,Beta,andHypothesisTesting 175
8.1 OverviewofBetaandAlpha 175
8.2 ExAnteversusExPostAlpha 177
8.3 InferringExAnteAlphafromExPostAlpha 180
8.4 ReturnAttribution,Alpha,andBeta 182
8.5 ExAnteAlphaEstimationandReturnPersistence 185
8.6 ReturnDrivers 186
Contents vii
8.7 UsingStatisticalMethodstoLocateAlpha 188
8.8 SamplingandTestingProblems 193
8.9 StatisticalIssuesinAnalyzingAlphaandBeta 197
ReviewQuestions 201
CHAPTER9
Regression,Multivariate,andNonlinearMethods 203
9.1 Single-FactorModelsandRegression 203
9.2 MultifactorModelsandRegression 208
9.3 ThreeDynamicRiskExposureModels 210
9.4 TwoApproachestoModelingChangingCorrelation 212
9.5 FourMultifactorApproachestoUnderstandingHedgeFundReturns 215
9.6 EvidenceonFundPerformancePersistence 219
ReviewQuestions 221
PART2
RealAssets
CHAPTER10
NaturalResourcesandLand 225
10.1 NaturalResourcesOtherThanLand 225
10.2 Land 230
10.3 TimberandTimberland 236
10.4 Farmland 238
10.5 ValuationandVolatilityofRealAssets 242
10.6 HistoricalRisksandReturns 246
ReviewQuestions 249
CHAPTER11
CommodityForwardPricing 251
11.1 ForwardContractsversusFuturesContracts 251
11.2 RollingContracts 259
11.3 TheTermStructureofForwardPricesonCommodities 260
11.4 BackwardationandContango 266
11.5 ReturnsonForwardContracts 270
ReviewQuestions 275
CHAPTER12
Commodities:ApplicationsandEvidence 277
12.1 CommodityInvestingforDiversification 277
12.2 CommodityInvestingforReturnEnhancement 280
12.3 InvestinginCommoditieswithoutFutures 282
12.4 CommodityExposurethroughFuturesContracts 287
12.5 CommodityFuturesIndices 294
12.6 CommodityRisksandReturns 296
12.7 HistoricalRisksandReturns 298
ReviewQuestions 301
viii CONTENTS
CHAPTER13
OperationallyIntensiveRealAssets 303
13.1 CommodityProducers 303
13.2 LiquidAlternativeRealAssets 306
13.3 Infrastructure 309
13.4 IntellectualProperty 315
ReviewQuestions 319
CHAPTER14
LiquidandFixed-IncomeRealEstate 321
14.1 RealEstateasanInvestment 321
14.2 ResidentialMortgages 323
14.3 CommercialMortgages 333
14.4 Mortgage-BackedSecuritiesMarket 335
14.5 LiquidAlternatives:RealEstateInvestmentTrusts 341
14.6 HistoricalRisksandReturnsofMortgageREITs 342
ReviewQuestions 345
CHAPTER15
RealEstateEquityInvestments 347
15.1 RealEstateDevelopment 347
15.2 ValuationandRisksofRealEstateEquity 351
15.3 AlternativeRealEstateInvestmentVehicles 358
15.4 RealEstateandDepreciation 364
15.5 RealEstateEquityRisksandReturns 370
15.6 HistoricalRisksandReturnsofEquityREITs 374
ReviewQuestions 377
PART3
HedgeFunds
CHAPTER16
StructureoftheHedgeFundIndustry 381
16.1 DistinguishingHedgeFunds 381
16.2 HedgeFundFees 387
16.3 HedgeFundClassification 400
16.4 HedgeFundReturnsandAssetAllocation 402
16.5 EvaluatingaHedgeFundInvestmentProgram 407
16.6 DoHedgeFundsAdverselyAffecttheFinancialMarkets? 410
16.7 HedgeFundIndices 412
16.8 Conclusion 420
ReviewQuestions 420
CHAPTER17
MacroandManagedFuturesFunds 423
17.1 MajorDistinctionsbetweenStrategies 423
17.2 GlobalMacro 425