Alternative Investments: CAIA Level II

1106 Pages·2016·6.49 MB·English

Alternative
Investments
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Alternative
Investments
CAIA Level II
Third Edition
HOSSEIN B. KAZEMI
KEITH H. BLACK
DONALD R. CHAMBERS
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PublishedsimultaneouslyinCanada.
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10 9 8 7 6 5 4 3 2 1
Contents
Preface xvii
Acknowledgments xxi
AbouttheAuthors xxiii
PART1
AssetAllocationandInstitutionalInvestors
CHAPTER1
AssetAllocationProcessesandtheMean-VarianceModel 3
1.1 ImportanceofAssetAllocation 3
1.2 TheFiveStepsoftheAssetAllocationProcess 6
1.3 AssetOwners 7
1.4 ObjectivesandConstraints 9
1.5 InvestmentPolicyObjectives 9
1.6 InvestmentPolicyConstraints 17
1.7 PreparinganInvestmentPolicyStatement 18
1.8 Implementation 22
1.9 Conclusion 33
Notes 34
References 34
CHAPTER2
TacticalAssetAllocation,Mean-VarianceExtensions,RiskBudgeting,Risk
Parity,andFactorInvesting 35
2.1 TacticalAssetAllocation 35
2.2 ExtensionstotheMean-VarianceApproach 45
2.3 RiskBudgeting 50
2.4 RiskParity 55
2.5 FactorInvesting 62
2.6 Conclusion 68
Notes 69
References 69
CHAPTER3
TheEndowmentModel 71
3.1 DefiningEndowmentsandFoundations 71
v
vi CONTENTS
3.2 IntergenerationalEquity,Inflation,andSpendingChallenges 74
3.3 TheEndowmentModel 76
3.4 WhyMightLargeEndowmentsOutperform? 78
3.5 RisksoftheEndowmentModel 84
3.6 Conclusion 96
Note 96
References 96
CHAPTER4
PensionFundPortfolioManagement 99
4.1 Development,Motivations,andTypesofPensionPlans 99
4.2 RiskToleranceandAssetAllocation 101
4.3 DefinedBenefitPlans 105
4.4 GovernmentalSocialSecurityPlans 113
4.5 ContrastingDefinedBenefitandContributionPlans 114
4.6 AnnuitiesforRetirementIncome 117
4.7 Conclusion 122
Notes 122
References 122
CHAPTER5
SovereignWealthFunds 125
5.1 SourcesofSovereignWealth 125
5.2 FourTypesofSovereignWealthFunds 128
5.3 EstablishmentandManagementofSovereignWealthFunds 131
5.4 EmergenceofSovereignWealthFunds 134
5.5 GovernanceandPoliticalRisksofSWFs 136
5.6 AnalysisofThreeSovereignWealthFunds 138
5.7 Conclusion 141
Notes 142
References 142
CHAPTER6
TheFamilyOfficeModel 145
6.1 IdentifyingFamilyOffices 145
6.2 Goals,Benefits,andBusinessModelsofFamilyOffices 145
6.3 FamilyOfficeGoalsbyGenerations 150
6.4 MacroeconomicExposuresofFamilyOffices 155
6.5 IncomeTaxesofFamilyOffices 157
6.6 LifestyleAssetsofFamilyOffices 160
6.7 FamilyOfficeGovernance 164
6.8 Charity,Philanthropy,andImpactInvesting 167
6.9 TenCompetitiveAdvantagesofFamilyOffices 170
6.10 Conclusion 172
Notes 172
References 173
Contents vii
PART2
PrivateEquity
CHAPTER7
PrivateEquityMarketStructure 177
7.1 MainStrategiesofPrivateEquityInvestment 177
7.2 MainDifferencesbetweenVentureCapitalandBuyout 178
7.3 PEFundsasIntermediaries 181
7.4 PEFundsofFundsasIntermediaries 184
7.5 TheRelationshipLifeCyclebetweenLPsandGPs 187
7.6 LimitedPartnershipKeyFeatures 190
7.7 Co-Investments 198
7.8 Conclusion 202
Notes 202
References 203
CHAPTER8
PrivateEquityBenchmarking 205
8.1 TheValuationofPEAssets 206
8.2 MeasuringPerformanceofPEFunds 206
8.3 BenchmarkTypes 212
8.4 Asset-BasedBenchmarks 213
8.5 PeerGroups 215
8.6 WhatIsanAppropriateBenchmark? 218
8.7 ExampleforBenchmarkingPEFunds 220
8.8 PortfolioofPEFunds 226
8.9 Conclusion 231
Notes 232
References 232
CHAPTER9
FundManagerSelectionandMonitoring 235
9.1 PerformancePersistence 235
9.2 ManagerSelectionandDealSourcing 241
9.3 Decision-MakingandCommitment 244
9.4 PrinciplesofFundMonitoring 245
9.5 MonitoringObjectives 246
9.6 InformationGatheringandMonitoring 248
9.7 ActionsResultingfromMonitoring 251
9.8 TheSecondaryMarket 253
9.9 Conclusion 259
Notes 260
References 262
CHAPTER10
PrivateEquityOperationalDueDiligence 265
10.1 TheScopeandImportanceofOperationalDueDiligence 265
viii CONTENTS
10.2 EightCoreElementsoftheOperationalDueDiligenceProcess 268
10.3 PrivateEquityOperationalDueDiligenceDocumentCollection
Process 269
10.4 AnalyzingPrivateEquityLegalDocumentationduring
OperationalDueDiligence 272
10.5 OperationalDueDiligencebeyondLegalDocumentAnalysis 278
10.6 On-SiteManagerVisits 282
10.7 EvaluatingMetaRisk 284
10.8 FundServiceProviderReviewandConfirmation 285
10.9 OngoingPrivateEquityMonitoringConsiderations 286
10.10 Conclusion 287
Notes 288
ReferencesandFurtherReadings 288
CHAPTER11
PrivateEquityInvestmentProcessandPortfolioManagement 289
11.1 InvestmentProcess 290
11.2 PrivateEquityPortfolio:Design 293
11.3 PrivateEquityPortfolio:Construction 297
11.4 Risk-ReturnManagement 300
11.5 Conclusion 306
Notes 307
References 308
CHAPTER12
MeasuringPrivateEquityRisk 309
12.1 FourSignificantRisksofPrivateEquity 309
12.2 ModelingPrivateEquity 311
12.3 WhatIstheValueofaPrivateEquityAsset? 313
12.4 ApplyingtheVaRConcepttoPrivateEquity 315
12.5 CalculatingVaRBasedonCashFlowatRisk 315
12.6 Conclusion 320
Notes 321
References 321
CHAPTER13
TheManagementofLiquidity 323
13.1 IdentifyingIlliquidityandManagingCashFlows 323
13.2 PrivateEquityCashFlowSchedules 327
13.3 FiveSourcesofLiquidity 328
13.4 InvestmentStrategiesforUndrawnCapital 330
13.5 ModelingCashFlowProjections 330
13.6 ThreeApproachestoFormingModelProjections 331
13.7 Overcommitment 337
13.8 Conclusion 339
Notes 340
References 340