Alternative Investments E-Book

Donald R. Chambers

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Robert W. Kolb Series
• Sprache: Englisch

Seitenzahl: 2058

Veröffentlichungsjahr: 2020

Beschreibung

Alternative Investments: CAIA Level I, 4th Edition is the curriculum book for the Chartered Alternative Investment Analyst (CAIA) Level I professional examination. Covering the fundamentals of the alternative investment space, this book helps you build a foundation in alternative investment markets. You'll look closely at the different types of hedge fund strategies and the range of statistics used to define investment performance as you gain a deep familiarity with alternative investment terms and develop the computational ability to solve investment problems. From strategy characteristics to portfolio management strategies, this book contains the core material you will need to succeed on the CAIA Level I exam. This updated fourth edition tracks to the latest version of the exam and is accompanied by the following ancillaries: a workbook, study guide, learning objectives, and an ethics handbook.

Leseprobe

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Alternative Investments

CAIA Level I

Fourth Edition

Donald R. Chambers

Mark J.P. Anson

Keith H. Black

Hossein B. Kazemi

Cover design: Wiley/ZoeDesignWorks Cover image: © LysenkoAlexander/Getty Images, © Anna_Om/Getty Images

Copyright © 2009, 2012, 2016, 2020 by The CAIA Association. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Names: Chambers, Donald R., author. | Anson, Mark Jonathan Paul, author. |    Black, Keith H., author. | Kazemi, Hossein B., author. CAIA level I. |    CAIA Association. Title: Alternative investments : CAIA level I / Donald R. Chambers, Mark    J.P. Anson, Keith H. Black, Hossein B. Kazemi, CAIA Association. Other titles: CAIA level I | CAIA level one Description: Fourth Edition. | Hoboken : Wiley, 2020. | Series: The Wiley finance |     Revised edition of CAIA level I, [2015] Identifiers: LCCN 2019035282 (print) | LCCN 2019035283 (ebook) |    ISBN 9781119604143 (hardback) | ISBN 9781119604174 (adobe pdf) |    ISBN 9781119604150 (epub) Subjects: LCSH: Investments. | Securities. | Portfolio management. Classification: LCC HG4521 .C45123 2019 (print) | LCC HG4521 (ebook) |    DDC 332.63–dc23 LC record available at https://lccn.loc.gov/2019035282LC ebook record available at https://lccn.loc.gov/2019035283

CONTENTS

Cover

Preface

Foundation

Benefits

The CAIA Programs and the CAIA Alternative Investment Analyst Series

Acknowledgments

About the Authors

PART One: Introduction to Alternative Investments

CHAPTER 1: What Is an Alternative Investment?

1.1 Alternative Investments by Exclusion

1.2 Alternative Investments by Inclusion

1.3 The Blurred Lines Between Traditional and Alternative Investments

1.4 A History of Alternative Investing: The U.S. Case

1.5 Investments are Distinguished by Return Characteristics

1.6 Investments are Distinguished by Methods of Analysis

1.7 Eight Other Characteristics that Distinguish Alternative and Traditional Investments

1.8 Five Goals of Alternative Investing

1.9 Two Pillars of Alternative Investment Management

1.10 Overview of This Book

Review Questions

CHAPTER 2: The Environment of Alternative Investments

2.1 The Participants

2.2 Alternative Investment Structures

2.3 Key Features of Fund Structures

2.4 Financial Markets

2.5 Regulatory Environment

2.6 Liquid Alternative Investments

2.7 Taxation

2.8 Short Selling

Review Questions

Notes

CHAPTER 3: Quantitative Foundations

3.1 Return and Rate Mathematics

3.2 Returns Based on Notional Principal

3.3 Internal Rate of Return

3.4 Problems with Internal Rate of Return

3.5 Other Performance Measures

3.6 Illiquidity, Accounting Conservatism, IRR, and the J-Curve

3.7 Distribution of Cash Waterfall

Review Questions

Note

CHAPTER 4: Statistical Foundations

4.1 Return Distributions

4.2 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis

4.3 Covariance, Correlation, Beta, and Autocorrelation

4.4 Interpreting Standard Deviation and Variance

4.5 Testing for Normality

4.6 Time-Series Return Volatility Models

Review Questions

CHAPTER 5: Foundations of Financial Economics

5.1 Informational Market Efficiency

5.2 The Time Value of Money, Prices, and Rates

5.3 The Three Primary Theories of the Term Structure of Interest Rates

5.4 Forward Interest Rates

5.5 Arbitrage-Free Models

5.6 Binomial Tree Models

5.7 Single-Factor Default–Free Bond Models

5.8 Single-Factor Equity Pricing Models

Review Questions

Note

CHAPTER 6: Derivatives and Risk-Neutral Valuation

6.1 Foundations of Forward Contracts

6.2 Forward Contracts on Rates

6.3 Forward Contracts on Equities

6.4 Forward Contracts on Assets with Benefits and Costs of Carry

6.5 Forward Contracts Versus Futures Contracts

6.6 Managing Long-Term Futures Exposures

6.7 Option Exposures

6.8 Option Pricing Models

6.9 Option Sensitivities

Review Questions

Notes

CHAPTER 7: Measures of Risk and Performance

7.1 Measures of Risk

7.2 Estimating Value at Risk (VaR)

7.3 Benchmarking and Performance Attribution

7.4 Ratio-Based Performance Measures

7.5 Risk-Adjusted Return Measures

Review Questions

Notes

CHAPTER 8: Alpha, Beta, and Hypothesis Testing

8.1 Overview of Beta and Alpha

8.2 Ex Ante Versus Ex Post Alpha

8.3 Single-Factor Models and Regression

8.4 Inferring Ex Ante Alpha From Ex Post Alpha

8.5 Return Attribution, Alpha, and Beta

8.6 Ex Ante Alpha Estimation and Return Persistence

8.7 Return Drivers

8.8 Using Statistical Methods to Locate Alpha

8.9 Sampling and Testing Problems

8.10 Statistical Issues in Analyzing Alpha and Beta

Review Questions

Notes

PART Two: Real Assets

CHAPTER 9: Natural Resources and Land

9.1 Natural Resources Other Than Land

9.2 Land

9.3 Timber and Timberland

9.4 Farmland

9.5 Valuation and Volatility of Real Assets

9.6 Pricing and Historic Data Analysis

9.7 Contagion, Price Indices, and Biases

9.8 Key Observations Regarding Historical Returns of Timberland

9.9 Key Observations Regarding Historical Returns of Farmland

Review Questions

Notes

CHAPTER 10: Commodities

10.1 Investing in Commodities Without Futures

10.2 The Term Structure of Forward Prices on Commodities

10.3 Rolling of Forward and Futures Contracts

10.4 Normal Backwardation and Normal Contango

10.5 Commodity Exposure and Diversification

10.6 Expected Returns on Commodities

10.7 Commodity Futures Indices

10.8 Commodity Risk Attributes

10.9 Observations Based on Historical Returns

Review Questions

Notes

CHAPTER 11: Other Real Assets

11.1 Commodity Producers

11.2 Liquid Alternative Real Assets

11.3 Infrastructure

11.4 Intellectual Property Overview

11.5 Cash Flows of Intellectual Property

11.6 Visual Works of Art and Historical Performance Data

11.7 R&D and Patents as Unbundled Intellectual Property

11.8 Intellectual Property Conclusions

Review Questions

Notes

References

CHAPTER 12: Real Estate Assets and Debt

12.1 Categories of Real Estate

12.2 Advantages, Disadvantages, and Styles of Real Estate Investments

12.3 Real Estate Style Boxes

12.4 Residential Mortgages

12.5 Commercial Mortgages

12.6 Mortgage-Backed Securities Market

12.7 Liquid Alternatives: Real Estate Investment Trusts

12.8 Key Observations Regarding Historical Returns of Mortgage Reits

Review Questions

Notes

CHAPTER 13: Real Estate Equity

13.1 Real Estate Development

13.2 Commercial Real Estate Valuation

13.3 Details of the Income Approach to Real Estate Valuation

13.4 Illustration of the Income Method of Real Estate Valuation

13.5 Alternative Real Estate Investment Vehicles

13.6 Equity Reit Returns

13.7 Key Observations Regarding Historical Risks and Returns of Equity REITs

Review Questions

PART Three: Hedge Funds

CHAPTER 14: Structure of the Hedge Fund Industry

14.1 Distinguishing Hedge Funds

14.2 Hedge Fund Fees

14.3 Hedge Fund Classification

14.4 Hedge Fund Returns and Asset Allocation

14.5 Evaluating a Hedge Fund Investment Program

14.6 Three Research Studies on Whether Hedge Funds Adversely Affect the Financial Markets

14.7 Hedge Fund Indices

14.8 Conclusion

Review Questions

Notes

CHAPTER 15: Macro and Managed Futures Funds

15.1 Macro and Managed Futures Strategies

15.2 Global Macro

15.3 Managed Futures

15.4 Systematic Trading

15.5 Four Core Dimensions of Managed Futures Investment Strategies

15.6 Systematic Futures Portfolio Construction

15.7 Eight Core Benefits of Managed Futures for Investors

15.8 Evidence on Managed Futures Returns

15.9 Benefits of Managed Futures Funds

15.10 Key Observations Regarding Historical Returns of Macro and Systematic Diversified Funds

Review Questions

Notes

CHAPTER 16: Event-Driven Hedge Funds

16.1 The Sources of Most Event Strategy Returns

16.2 Activist Investing

16.3 Merger Arbitrage

16.4 Distressed Securities Funds

16.5 Event-Driven Multistrategy Funds

Review Questions

Notes

CHAPTER 17: Relative Value Hedge Funds

17.1 Overview of Relative Value Strategies

17.2 Convertible Bond Arbitrage

17.3 Volatility Arbitrage

17.4 Fixed-Income Arbitrage

17.5 Relative Value Multistrategy Funds

Review Questions

Notes

CHAPTER 18: Equity Hedge Funds

18.1 Commonalities of Equity Hedge Funds

18.2 Sources of Return

18.3 Market Anomalies

18.4 Implementing Anomaly Strategies

18.5 The Three Equity Strategies

18.6 Equity Hedge Fund Risks

Review Questions

Notes

CHAPTER 19: Funds of Hedge Funds

19.1 Overview of Funds of Hedge Funds

19.2 Investing in Multistrategy Funds

19.3 Investing in Funds of Hedge Funds

19.4 Investing in Portfolios of Single Hedge Funds

19.5 Multialternatives and Other Hedge Fund Liquid Alternatives

19.6 Key Observations Regarding Historical Returns of Funds of Funds

Review Questions

Notes

PART Four: Private Securities

CHAPTER 20: Private Equity Assets

20.1 Introduction to Private Equity Terms and Background

20.2 Overview of Three Forms of Pre-IPO Private Equity Investing

20.3 Venture Capital

20.4 Venture Capital as a Compound Option

20.5 Growth Equity

20.6 Buyouts and Leveraged Buyouts

20.7 Buyouts of Private Companies

20.8 Leveraged Buyouts (LBOs)

20.9 Merchant Banking

20.10 Dynamics of Private Equity Opportunities

Review Questions

Notes

CHAPTER 21: Private Equity Funds

21.1 Overview of Private Equity Funds

21.2 Private Equity Funds as Intermediaries

21.3 The LP and GP Relationship Life Cycle

21.4 Private Equity Fund Fees and Terms

21.5 Key Determinants of Venture Capital Fund Risks and Returns

21.6 Roles and Three Key Distinctions of Venture Capital and Buyout Managers

21.7 Leveraged Buyout Funds

21.8 Private Equity Liquid Alternatives

21.9 Private Equity Funds of Funds

21.10 Private Investments in Public Equity

21.11 Private Equity Secondary Markets and Structures

Review Questions

Notes

CHAPTER 22: Private Credit and Distressed Debt

22.1 Types of Fund Private Credit Vehicles

22.2 Fixed-Income Analysis

22.3 Credit Risk Analysis and the Bankruptcy Process

22.4 Leveraged Loans

22.5 Direct Lending

22.6 Mezzanine Debt

22.7 Distressed Debt

22.8 Private Credit Performance and Diversification

Review Questions

Note

References

PART Five: Structured Products

CHAPTER 23: Introduction to Structuring

23.1 Overview of Financial Structuring

23.2 Major Types of Structuring

23.3 The Primary Economic Role of Structuring

23.4 Collateralized Mortgage Obligations

23.5 Structural Model Approach to Credit Risk

23.6 Interest Rate Options

23.7 Introduction to Collateralized Debt Obligations

Review Questions

Note

CHAPTER 24: Credit Risk and Credit Derivatives

24.1 An Overview of Credit Risk

24.2 Reduced-Form Modeling of Credit Risk

24.3 Credit Derivatives Markets

24.4 Interest Rate Swaps

24.5 Credit Default Swaps

24.6 Other Credit Derivatives

24.7 CDS Index Products

24.8 Five Key Risks of Credit Derivatives

Review Questions

Notes

CHAPTER 25: CDO Structuring of Credit Risk

25.1 Overview of CDO Variations

25.2 Balance Sheet CDOs and Arbitrage CDOs

25.3 Mechanics of and Motivations for an Arbitrage CDO

25.4 Cash-Funded CDOs Versus Synthetic CDOs

25.5 Cash Flow CDOs Versus Market Value CDOs

25.6 Credit Enhancements

25.7 Other Types of CDOs

25.8 Risks of CDOs

Review Questions

CHAPTER 26: Equity-Linked Structured Products

26.1 Structured Products and Six Types of Wrappers

26.2 Four Potential Tax Effects of Wrappers

26.3 Structured Products with Exotic Option Features

26.4 Popular Structured Product Types

26.5 The EUSIPA Classification

26.6 Global Structured Product Cases

26.7 Structured Product Valuation

26.8 Motivations Of Structured Products

Review Questions

Notes

Index

End User License Agreement

List of Illustrations

Chapter 1

Exhibit 1.1 Major Alternative Asset Categories (percentages approximate), 2017 

Exhibit 1.2 The Blurred Lines Between Traditional and Alternative Assets

Exhibit 1.3 Popular Institutional Quality Assets, 1890–Present

Exhibit 1.4 A 2×2 Framework of Alternative Assets

Chapter 2

Exhibit 2.1 Structure of a Limited Partnership Investment Vehicle

Exhibit 2.2 Typical Master/Feeder Hedge Fund Structure 

Chapter 3

Exhibit 3.1 The Solution to IRR in a Simplified Investment

Exhibit 3.2 Complex Cash Flow Pattern Examples

Exhibit 3.3 Cash Flows of Hypothetical Derivative Contract

Exhibit 3.4 An Example of Multiple IRRs

Exhibit 3.5 Cash Flows for Private Equity Investment

Exhibit 3.6 Modified IRR Example

Exhibit 3.7 Simplified PMEs for Two Funds with Two Cash Flows

Exhibit 3.8 J-Curve of Interim IRRs

Chapter 4

Exhibit 4.1 Skewness and Kurtosis

Exhibit 4.2 Covariance, Correlations, and Beta

Exhibit 4.3 Diversification between Two Assets

Exhibit 4.4 Confidence Intervals for the Normal Distribution Using Standard Deviation

Chapter 5

Exhibit 5.1 Value of a Zero-Coupon Bond

Exhibit 5.2 The Term Structure of Spot Interest Rates

Exhibit 5.3 Incremental Cash Flows of Moving from a One-Year Bond to a Two-Year Bond

Exhibit 5.4 The Term Structure of Single-Period Implied Forward Rates

Exhibit 5.5 A Two-Step Binomial Tree for a Stock Price (

S

)

Exhibit 5.6 Binomial Trees for Stock and Call Option with $9 Strike

Chapter 6

Exhibit 6.1 The Term Structure of Forward Contracts on an Equity Index

Exhibit 6.2 Forward Term Structures

Exhibit 6.3 Benefits and Costs of Direct Ownership

Exhibit 6.4 Term Structure of Natural Gas Futures Closing Prices

Exhibit 6.5 Riding and Rolling of Forward and Futures Contracts

Exhibit 6.6 Diagrams of Underlying Assets and Simple Option Combinations

Exhibit 6.7 Diagrams of Options Spreads and Combinations

Chapter 7

Exhibit 7.1 Example of the Distribution of a $100,000 VaR for a Portfolio Based on a Confid...

Exhibit 7.2 Sample Computations of M

2

Chapter 8

Exhibit 8.1 Errors in Hypothesis Testing

Chapter 9

Exhibit 9.1 Receivables and Deliverables in Exchange Option

Exhibit 9.2 Natural Resource Development as a Call Option

Exhibit 9.3 Returns Based on Market Price

Exhibit 9.4 Farmland

Exhibit 9.5 Market Prices and Appraisals Spanning the Financial Crisis

Exhibit 9.6 Statistical Summary of Returns

Chapter 10

Exhibit 10.1 Cost of Carry

Exhibit 10.2 Term Structure of Forward Prices: Contango, Flat, and Backwardation

Exhibit 10.3 Corn Futures Prices

Exhibit 10.4 Crude Oil Futures Curve

Exhibit 10.5 Statistical Summary of Returns

Chapter 11

Exhibit 11.1 Return Correlations of Oil Operating Firms to Oil (USO) and Equities (SPY)

Exhibit 11.2 Summary of Three Forms of Ownership

Exhibit 11.3 Infrastructure Investment Universe

Exhibit 11.4 Risk Profile of Infrastructure Investment Development Stages

Exhibit 11.5 Types of Infrastructure Investments

Exhibit 11.6 Infrastructure versus Other Asset Classes

Exhibit 11.7 Characteristics Associated with Infrastructure and Other Asset Categories

Exhibit 11.8 Schedule of Film Exhibition Venues

Exhibit 11.9 Estimated Returns to Art from Various Studies

Chapter 12

Exhibit 12.1 The Underlying Eight Attributes of the Three Real Estate Styles

Exhibit 12.2 Real Estate Portfolio Style Definitions

Exhibit 12.3 Equity and Fixed-Income Style Boxes

Exhibit 12.4 Real Estate Style Boxes

Exhibit 12.5 Amortization Schedule for a Fixed-Rate (6% per year), Constant Payment ($644.30...

Exhibit 12.6 Amortization Schedule for a Variable-Rate, Variable Payment, Fully Amortized 25...

Exhibit 12.7 PSA Benchmark Pattern

Exhibit 12.8 Statistical Summary of Returns

Chapter 13

Exhibit 13.1 Decision Tree for the Sports Hotel

Exhibit 13.2A The Sports Hotel Decision Tree with Final Nodes Value

Exhibit 13.2B Sports Hotel Decision Tree with Final Decision Included

Exhibit 13.2C Sports Hotel Decision Tree with Final Decision and New Information Included

Exhibit 13.3 Estimates of Annual Net Operating Income

Exhibit 13.4 Projection of Net Operating Income over Next Four Years

Exhibit 13.5 Statistical Summary of Returns

Chapter 14

Exhibit 14.1 Comparing Mutual Funds and Hedge Funds

Exhibit 14.2 Estimated Number of Funds Launched/Liquidated 

Exhibit 14.3 Distribution of Industry Assets by Firm AUM Tier 

Exhibit 14.4 Fee Calculations with and without Hurdle Rate

Exhibit 14.5 Percentage of NAV Earned by the Hedge Fund before Fees and Distributed to Manag...

Exhibit 14.6 Biases Associated with Hedge Fund Data

Chapter 15

Exhibit 15.1 Simple Moving Average Summary

Exhibit 15.2 Example with Two Moving Averages

Exhibit 15.3 Channel Breakout Strategy Summary

Exhibit 15.4 Relative Strength Index (RSI)

Exhibit 15.5 Relative Strength Index (RSI); Sometimes Termed Relative Strength Indicator

Exhibit 15.6 Relative Value Strategy

Exhibit 15.7 Dimensions of Managed Futures Strategies

Exhibit 15.8 Returns of Various Asset Classes and Hedge Fund Strategies, 2007 to 2009

Exhibit 15.9 Structural Characteristics of Managed Futures Funds, Multi-Managed Futures Fund...

Exhibit 15.10 The Total Futures Price and Spot Price Only Performance for a Representative Pu...

Exhibit 15.11 Statistical Summary of Returns

Chapter 16

Exhibit 16.1 Statistical Summary of Returns

Exhibit 16.2 Statistical Summary of Returns

Exhibit 16.3 Statistical Summary of Returns

Exhibit 16.4 Statistical Summary of Returns

Chapter 17

Exhibit 17.1 Price Behavior of a Convertible Security

Exhibit 17.2 Example of a Delta-Neutral Position in Stocks and Convertible Bonds

Exhibit 17.3 Components of the Return of a Traditional Convertible Arbitrage Strategy

Exhibit 17.4 Delta Hedging a Convertible Bond

Exhibit 17.5 Profit on a Delta-Hedged Position (Long Convertible, Short Stock)

Exhibit 17.6 Summary of Convertible Bond Arbitrage Risks

Exhibit 17.7 Statistical Summary of Returns

Exhibit 17.8 Summary of Volatility Arbitrage Risks

Exhibit 17.9 Statistical Summary of Returns

Exhibit 17.10 Summary of the Five Risks of Fixed-Income Arbitrage Funds

Exhibit 17.11 Statistical Summary of Returns

Exhibit 17.12 Statistical Summary of Returns

Chapter 18

Exhibit 18.1 Expected Return, Tracking Error, and Breadth

Exhibit 18.2 Statistical Summary of Returns

Exhibit 18.3 Statistical Summary of Returns

Exhibit 18.4 Statistical Summary of Returns

Exhibit 18.5 Summary of Equity Hedge Fund Risks

Chapter 19

Exhibit 19.1 Correlation of Returns across Investment Strategies, January 2000 to December 2...

Exhibit 19.2 Estimated Strategy Composition by Assets Under Management, 4Q 2018 

Exhibit 19.3 Hedge Fund Selection

Exhibit 19.4 Minimum Investments Required by Hedge Funds, 4Q 2018 

Exhibit 19.5 Statistical Summary of Returns

Chapter 20

Exhibit 20.1 Major Distinctions between VC, Growth Equity, and Buyouts

Exhibit 20.2 The Life Cycle of a Start-Up Company and the J-Curve

Exhibit 20.3 Global Buyout Deal Values and Counts 

Chapter 21

Exhibit 21.1 Private Equity Investment Process

Exhibit 21.2 Dual Roles and Entities of a Private Equity Firm

Exhibit 21.3 PE Funds Investment Program

Exhibit 21.4 Fund Standard J-Curve

Exhibit 21.5 Fund Manager–Investor Relationship Life Cycle

Exhibit 21.6 GP–LP Relationship Life Cycle Model

Exhibit 21.7 Impact of Catch-Up on NAV Attributed to LPs

Exhibit 21.8 Example of Waterfall Using a Hurdle Rate

Exhibit 21.9 Return Analysis of BDCS, May 2011 to December 2018

Chapter 22

Exhibit 22.1 Leverage and Debt Coverage Ratios Vary by Credit Rating 

Exhibit 22.2 The Cyclicality of Global Default Rates 

Exhibit 22.3 Priority of Claims in the Capital Structure

Exhibit 22.4 Mezzanine Financing and the Cost of Capital

Exhibit 22.5 Deal Multiples and Leverage Multiples Have Been Rising in Large U.S. LBOs

Exhibit 22.6 Comparison of Leveraged Loans, High-Yield Bonds, and Mezzanine Debt

Chapter 23

Exhibit 23.1 Capital Structure as Creating Structured Products

Exhibit 23.2 Simplified CMO Structure

Exhibit 23.3 Stylized Example of $1,620,000 Cash Flow to a Sequential-Pay CMO with Two Tranc...

Exhibit 23.4 Investor Motivations for Structured Products

Exhibit 23.5 Simplified CDO Structure

Chapter 24

Exhibit 24.1 Interest Rate Swap Example

Exhibit 24.2 Fixed and Floating Payments

Exhibit 24.3 Present Values of Fixed and Floating Payments

Exhibit 24.4 Interest Rate Swap Payments after a Change in Three-Month LIBOR

Exhibit 24.5 Present Values of Fixed and Floating Payments

Exhibit 24.6 Credit Default Swap

Exhibit 24.7 Total Return Swap on a Risky Asset

Chapter 25

Exhibit 25.1 Investor Motivations for Structured Products

Exhibit 25.2 A Balance Sheet CDO

Exhibit 25.3 An Arbitrage CDO Structure

Exhibit 25.4 Overview of Collateralized Debt Obligations

Chapter 26

Exhibit 26.1a Equivalence of Two Strategies

Exhibit 26.1b Binary Call Options

Exhibit 26.1c Up-and-In Barrier Call Option

Exhibit 26.2 Barrier Calls and Puts

Exhibit 26.3 Four Capital Protection Structured Products 

Exhibit 26.4 Two Yield Enhancement Structured Products

Exhibit 26.5 Participation Structured Products 

Exhibit 26.6 Leverage Structured Products 

Exhibit 26.7 Investor Motivations for Structured Products

Guide

Cover

Table of Contents

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Preface

Alternative Investments is designed as the primary reading resource for the Level I exam of the Chartered Alternative Investment Analyst (CAIA) Association's Charter program, as well as a textbook for university courses and a resource for alternative investment professionals. This book began three editions ago as a revision of Mark Anson's Handbook of Alternative Assets and represents another milestone in our efforts to continuously improve and update the CAIA curriculum. This edition includes material from a variety of contributors to the third edition of the CAIA Level II textbook. To ensure that the material best reflects up-to-date practices in the area of alternative investments, the CAIA Association invited a group of leading industry professionals to review the series, covering core areas of alternative investments: real assets, hedge funds, private equity/credit, and structured products.

Foundation

Since its inception in 2002, the CAIA Association has strived to be the leader in alternative investment education worldwide, and to be the catalyst for the best education in the field wherever it lies. The CAIA program was established with the help of a core group of faculty and industry experts who were associated with the University of Massachusetts and the Alternative Investment Management Association (AIMA). From the beginning, the Association recognized that a meaningful portion of its curriculum must be devoted to codes of conduct and ethical behavior in the investment profession. To this end, with permission and cooperation of the CFA Institute, we have incorporated its Code of Ethics and the CFA Standards of Practice Handbook into our curriculum. Further, we leverage the experience and contributions of our members and other alternative investment professionals who serve on our board and committees to create and update the CAIA Association program's curriculum and its associated readings.

The quality, rigor, and relevance of our curriculum readings derive from the ideals upon which the CAIA Association was based. The CAIA program offered its first Level I examination in February 2003. Our first class consisted of 43 dedicated investment professionals who passed the Level I and Level II exams and met the other requirements of membership. Many of these founding members were instrumental in establishing the CAIA designation as the global mark of excellence in alternative investment education. Through their support and with the help of the founding cosponsors, the AIMA and the Center for the International Securities and Derivatives Markets (CISDM), the CAIA Association is now firmly established as the most comprehensive and credible designation in the rapidly growing sphere of alternative investments.

The AIMA is the hedge fund industry's global, not-for-profit trade association, with over 2,000 corporate members worldwide. Members include leading hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting services, and fund administrators. They all benefit from the AIMA's active influence in policy development; its leadership in industry initiatives, including education and sound practice manuals; and its excellent reputation with regulators.

The CISDM of the Isenberg School of Management of the University of Massachusetts, Amherst seeks to enhance the understanding of the field of alternative investments through research, education, and networking opportunities for member donors, industry professionals, and academics.

The CAIA Association has experienced rapid growth in its membership over the past 17 years. It is now a truly global professional organization with over 11,000 members in over 90 countries. We strive to stay nimble in our process so that curriculum remains relevant and keeps pace with the constant changes in this dynamic industry.

Benefits

Although the CAIA Association's origins are largely based in the efforts of professionals in the hedge fund and managed futures space, these founders correctly identified a void in the wider understanding of alternative investments as a whole. From the beginning, the CAIA curriculum has also covered private equity, commodities, and real assets, always with an eye toward shifts in the industry. Today, several hundred CAIA members identify their main area of expertise as real estate or private equity; several hundred more members are from family offices, pension funds, endowments, and sovereign wealth funds that allocate across multiple classes within the alternative investment industry. To ensure benefit to the widest spectrum of members, we have developed curriculum subcommittees that represent each area of coverage within the curriculum. Alternative investment areas and products share some distinct features, such as the relative freedom on the part of investment managers to act in the best interests of their investors, alignment of interests between asset owners and asset managers, and relative illiquidity of investment positions of some investment products. These characteristics necessitate conceptual and actual modifications to the standard investment performance analysis and decision-making paradigms.

Our curriculum readings are designed with two goals in mind. First, to provide the readers with tools needed to solve problems they counter in performing their professional duties. Second, to provide them with a conceptual framework that is essential for investment professionals who strive to keep up with new developments in the alternative investment industry.

Readers will find the publications in our series to be beneficial, whether from the standpoint of allocating to new asset classes and strategies in order to gain broader diversification or from the standpoint of a specialist needing to understand better the competing options available to sophisticated investors globally. In both cases, readers will be better equipped to serve their clients’ needs.

The CAIA Programs and the CAIA Alternative Investment Analyst Series

The CAIA Level I required readings are contained in this one text, supplemented only by the CFA Institute's Standards of Practice Handbook. Level I candidates are assumed to have mastered some knowledge of financial markets, securities pricing, and derivatives markets in advance of commencing studies for the Level I exam.

Many resources are freely available on our website (caia.org). We will continue to update the CAIA Level I Study Guide every six months (each exam cycle). The study guide outlines all of the readings and corresponding learning objectives (LOs) that candidates are responsible for meeting. The guide also contains important information for candidates regarding the use of LOs, testing policies, topic weightings, where to find and report errata, and much more. The entire exam process is outlined in the CAIA Candidate Handbook and is available at caia.org. Candidates can also access a workbook that solves the problems presented at the end of each chapter of this book and other important study aids.

We believe you will find this series to be the most comprehensive, rigorous, and globally relevant source of educational material available within the field of alternative investments.

Donald R. Chambers, PhD, CAIA

Associate Director of Curriculum

CAIA Association

June 2019

Acknowledgments

We would like to thank the many individuals who played important roles in producing this book. In particular, we owe great thanks to William Kelly, Chief Executive Officer of the CAIA Association, and our committee members:

CAIA Allocator Advisory Board and CAIA Job Task Analysis Committee

Sean Anthonisz, CAIA, Mine Super & The University of Sydney Business School

Frank Barbarino, CAIA, Templum, Inc

James Bennett, CAIA, Maine Public Employees Retirement System

Robert Bennett-Lovesey, CAIA, Global ARC & CAIA Singapore

Jim Bethea, CAIA, University of Iowa Foundation

Ryan Bisch, CAIA, Ontario Power Generation

Cameron Black, CAIA, Blue Cross Blue Shield of Arizona

Dominic Blais, CAIA, Canadian Medical Protective Association

Joseph Borda, CAIA

Alex Bradford, CAIA, Starwood Capital

Elizabeth Burton, CAIA, Hawaii Employees Retirement System

Nathan Butler, CAIA, Voya Financial

Jenny Chan, CAIA, Children's Hospital of Philadelphia

Gang Chen, CAIA, PIMCO

Anthony (Tony) Cowell, KPMG

Edward (Ned) Creedon, University of Illinois Foundation

Pamela Fennelly Campbell, CAIA, Washington University

Darren Foreman, CAIA, Public School Employees Retirement System of Penn

Marcus Frampton, CAIA, Alaska Permanent Fund

Chase Frei, CAIA, Ashland Partners & Company LLP

John Freihammer, CAIA, Chicago Teachers Pension Fund

Craig Grenier, CAIA, Northeastern University Endowment

Weiyu Guo, CAIA, Huajin Capital (International) Ltd

Bobby Hagedorn, CAIA, Missouri Patrol Employees' Retirement System

Sajal Heda, CAIA, DAMAC Investment Company (Dubai)

Jeremy Heer, CAIA, The University of Chicago

Katy Huang, CAIA, Deutsche Bank (Suisse) SA

Drew Lerardi, CAIA, Exelon Corporation

Jason Josephiac, CAIA, United Technologies Corporation

Panayiotis Lambropoulos, CAIA, Employees Retirement Sysyem of Texas

Julia H. Lee, CAIA, Michigan State University

Grant Leslie, CAIA Tennessee Consolidated Retirement System

Yasir Mallick, CAIA, University of Toronto Asset Management

Tom Masthay, CAIA Texas Municipal Retirement System

Jason Morrow, CAIA, Utah Retirement Systems

Courtney Ann, CAIA, InvestorSpeak

Chad Myhre, CAIA, Public School & Education Employee Retirement Systems of Missouri

Michael Nicks, CAIA, Pepperdine University Endowment

Mansco Perry, CAIA Minnesota State Board of Investment

Steven Price, CAIA, Ohio School Employees Retirement System

Lin Qu, CAIA, Independent

Brian Quinn, CAIA, Newton Investment Management

Sarah Samuels, CAIA, NEPC

Andrew Sawyer, CAIA, Maine Public Employees Retirement System

Wolfdieter Schnee, CAIA, VP Fund Solutions (Liechtenstein) AG

Jamey Sharpe, CAIA, Blue Cross Blue Shield Association

Joseph Simonian, Quantitative Research, Natixis Investment Managers

Gaurav Singh, CAIA, Kuwait International Bank

Benjamin Skrodzki, CAIA, Teachers' Retirement System of the State of Illinois

Ken Stemme, CAIA, UAW Retiree Medical Benefits Trust

Graham Tedesco, CAIA, Storage Deluxe

Ryan Tidwell, CAIA, Oklahoma State University Foundation

Hilary Wiek, CAIA, Formerly the Saint Paul & Minnesota Community Foundations

Shane Willoughby, CAIA, State Universities Retirement System of Illinois

Michael Weinberg, CIO, MOV37

Thomas Woodbury, CAIA, University of Pennsylvania Investment Office

Gerald Yahoudy, CAIA, New York State Teachers

Ernest Yeung, CAIA, Changsheng Fund Management Ltd

Jasmine Yu, CAIA, BNY Mellon

Contributing Authors

Jim Campasano

Michal E. Crowder

Satyabrota Das, CAIA

Malay K. Dey

Jaeson Dubrovay, CAIA

Urbi Garay

Kathryn Kaminski, CAIA

Jim Kyung-Soo Liew

George Martin

Pierre-Yves Mathonet

Thomas Meyer

Putri Pascualy

Jason Scharfman, CAIA

Ed Szado

Reviewers and Members of Curriculum Committee

James Bachman, CAIA

Gordon Barnes, CAIA

David Blitz

Douglas Cumming

Samuel Gallo, CAIA

Sean Gill, CAIA

James T. Gillies, CAIA

Mark Hutchinson

Georg Inderst

Tom Johnson, CAIA

Tom Kehoe, CAIA

Jeff H. Li

David McCarthy

Sanjay Nawalkha

Ludovic Phalippou

Mark Rzepczynski

Danny Santiago, CAIA

Christopher Schelling, CAIA

Richard Spurgin

Shelly Tilaye, CAIA

Evgeny Vostretsov, CAIA

Mark Wiltshire, CAIA

Special credit goes to CAIA staff for their valuable contributions in painstakingly bringing the fourth edition to completion.

CAIA Staff

Charles Alvarez Zamorano, CAIA, Associate Director of Research and Publications

Yaseen Gholizadeh, Curriculum Intern

Nelson Lacey, Director of Exams

Kristaps Licis, Senior Associate Director of Exams

Nancy E. Perry, Curriculum and Exams Associate

About the Authors

The CAIA Association is an independent, not-for-profit global organization committed to education and professionalism in the field of alternative investments. The Association was established in 2002 by industry leaders under the guidance of the Alternative Investment Management Association (AIMA) and the Center for International Securities and Derivatives Markets (CISDM) with the belief that a strong foundation of knowledge is essential for all professionals. The curriculum includes two exams (Level I and Level II) administered to professional analysts in this growing field so that, upon successful completion, the individuals are designated “Chartered Alternative Investment Analysts” (CAIA). The CAIA designation has a great deal of prestige in the global community. Members come from over 80 countries on six continents.

Dr. Donald R. Chambers, CAIA, is Associate Director of Programs at the CAIA Association; Chief Investment Officer of Biltmore Capital Advisors; and Emeritus Professor at Lafayette College in Easton, Pennsylvania. Dr. Chambers previously served as Director of Alternative Investments at Karpus Investment Management. He is a member of the editorial board of the Journal of Alternative Investments.

Dr. Mark J. P. Anson, CAIA, CFA, CPA, PhD, JD, is a board member of CAIA and the President and Chief Investment Officer of the Bass Family Office—winner of the Family office of the Year award for 2014–2015. Dr. Anson previously served as President and Executive Director of Investment Services at Nuveen Investments Inc., Chief Executive Officer of both the British Telecom Pension Scheme and its wholly owned asset management company in London, Hermes Pension Management Limited, and Chief Investment Officer at California Public Employees’ Retirement System. He has published over 100 research articles in professional journals, has won two Best Paper Awards, is the author of six financial textbooks, and sits on the editorial boards of several financial journals.

Dr. Keith H. Black, CAIA, is Managing Director of Curriculum and Exams at the CAIA Association. He was previously an Associate at Ennis Knupp and, before that, an Assistant Professor at Illinois Institute of Technology. He is a member of the editorial board of the Journal of Alternative Investments.

Dr. Hossein B. Kazemi is a senior adviser to the CAIA Association. He is the Michael and Cheryl Philipp Professor of Finance at the University of Massachusetts, Amherst; Director of the Center for International Securities and Derivatives Markets; a cofounder of the CAIA Association; and Editor-in-Chief of the Journal of Alternative Investments—the official publication of the CAIA Association; and a member of the editorial board of the Journal of Financial Data Science.

PART OneIntroduction to Alternative Investments

Part 1 begins with an introduction to alternative investments and a description of the environment of alternative investing. Chapters 3 to 6 include primers on quantitative methods, statistics, and financial economics as they relate to alternative investments, as well as a chapter on derivatives and risk-neutral valuation. The last two chapters of Part 1 discuss measures of risk and performance, as well as alpha, beta, and hypothesis testing. The material is designed to provide a foundation for Parts 2 to 5, which detail each of the four main categories of alternative investments.

CHAPTER 1What Is an Alternative Investment?

Definitions of what constitutes an alternative investment vary considerably. One reason for these differences lies in the purposes for which the definitions are being used. But definitions also vary because alternative investing is largely a new field for which consensus has not emerged, as well as a rapidly changing field for which consensus will probably always remain elusive. Analyzing these various definitions provides a useful starting point to understanding alternative investments. So we begin this introductory chapter by examining commonly used methods of defining alternative investments.

1.1 Alternative Investments by Exclusion

Alternative investments are sometimes viewed as including any investment that is not simply a long position in traditional investments. Typically, traditional investments include publicly traded equities, fixed-income securities, and cash. For example, if an investment such as private equity is not commonly covered in detail in most books on investing, then many people would view it as an alternative investment.

The alternative-investments-by-exclusion definition is overly broad for the purposes of the CAIA curriculum. First, the term investment covers a very broad spectrum. A good definition of an investment is that it is deferred consumption. Any net outlay of cash made with the prospect of receiving future benefits might be considered an investment. So investments can range from planting a tree to buying stocks to acquiring a college education. As such, a more accurate definition of alternative investments requires more specificity than simply that of being nontraditional.

This book and the overall CAIA curriculum are focused on institutional-quality alternative investments. An institutional-quality investment is the type of investment that financial institutions such as pension funds or endowments might include in their holdings because they are expected to deliver reasonable returns at an acceptable level of risk. For example, a pension fund would consider holding the publicly traded equities of a major corporation but may be reluctant to hold collectibles such as baseball cards or stamps. Also, investments in very small and very speculative projects are typically viewed as being inappropriate for such an institution due to its responsibility to select investments that offer suitable risk levels and financial return prospects for its clients.

Not every financial institution, or even every type of financial institution, invests in alternative investments. Some financial institutions, such as some brokerage firms, are not focused on making long-term investments; rather, they hold securities to provide services to their clients. Other financial institutions, such as deposit-taking institutions like banks (especially smaller banks) might invest in only traditional investments because of government regulations or because of lack of expertise.

Of course, institutional-quality alternative investments are also held by entities other than financial institutions. Chapter 2 of this book discusses the alternative investment environment, including the various entities that commonly hold them (e.g., endowment funds and wealthy individuals).

1.2 Alternative Investments by Inclusion

Another method of identifying alternative investments is to define explicitly which investments are considered to be alternative. In this book, we classify four types of alternative investments:

Real assets (including natural resources, commodities, real estate, infrastructure, and intellectual property)

Hedge funds (including managed futures)

Private equity and private credit

Structured products (including credit derivatives)

These four categories correspond to Parts 2 to 5 of this book. Our list is not an exhaustive list of all alternative investments, especially because the CAIA curriculum is focused on institutional-quality investments. Furthermore, some of the investments on the list can be classified as traditional investments rather than alternative investments. For example, real estate and especially real estate investment trusts are frequently viewed as being traditional institutional-quality investments. Nevertheless, this list includes most institutional-quality investments that are currently commonly viewed as alternative. Exhibit 1.1 illustrates the relative proportion of these four categories of alternative investments.

The following sections provide brief introductions to the four categories.

1.2.1 Real Assets

Real assets are investments in which the underlying assets involve direct ownership of nonfinancial assets rather than ownership through financial assets, such as the securities of manufacturing or service enterprises. Real assets tend to represent more direct claims on consumption than do common stocks, and they tend to do so with less reliance on factors that create value in a company, such as intangible assets and managerial skill. So while a corporation such as Google holds real estate and other real assets, the value to its common stock is highly reliant on perceptions of the ability of the firm's management to oversee creation and sales of its goods and services. An aspect that distinguishes types of real assets is the extent to which the ownership of the real assets involves operational aspects, such as day-to-day management decisions that have substantial impacts on the performance of the assets. For example, in many instances, direct ownership of oil reserves or stockpiles of copper involve substantially less day-to-day managerial attention than does direct ownership of real estate, infrastructure, or intellectual property.

Exhibit 1.1 Major Alternative Asset Categories (percentages approximate), 2017 

Source: Global Alternatives Survey 2017, Willis Towers Watson; CAIA Association estimates.

Natural resources focus on direct ownership of real assets that have received little or no alteration by humans, such as mineral and energy rights or reserves. Commodities are differentiated from natural resources by their emphasis on having been extracted or produced. Commodities are homogeneous goods available in large quantities, such as energy products, agricultural products, metals, and building materials. Most of the investments covered in the commodities section of the CAIA curriculum involve futures contracts, so understanding futures contracts is an important part of understanding commodities. Futures contracts are regulated distinctly and have well-defined economic characteristics. For example, the analysis of futures contracts typically emphasizes notional amounts rather than the amount of money posted as collateral or margin to acquire positions.

Commodities as an investment class refer to investment products with somewhat passive (i.e., buy-and-hold) exposure to commodity prices. This exposure can be obtained through futures contracts, physical commodities, natural resource companies, and exchange-traded funds.

Some real assets are operationally focused. For the purposes of the CAIA curriculum, operationally focused real assets include real estate, land, infrastructure, and intellectual property. The performance of these types of real assets is substantially affected by the skill and success of regular and relatively frequent managerial decision-making. Traditional common stocks are typically even more highly operationally focused.

Real estate focuses on land and improvements that are permanently affixed, like buildings. Real estate was a significant asset class long before stocks and bonds became important. Prior to the Industrial Age, land was the single most valuable asset class. Only a century ago, real estate was the most valuable asset of most individuals, because ownership of a primary residence was more common than ownership of financial investments.

Land comprises a variety of forms, including undeveloped land, timberland, and farmland. Although undeveloped land might appear to belong under the category of natural resources rather than operationally focused real assets, the option to develop land often requires substantial and ongoing managerial decision-making. Timberland includes both the land and the timber of forests of tree species typically used in the forest products industry. While the underlying land is a natural resource, timberland requires some level of ongoing management. Finally, farmland consists of land cultivated for row crops (e.g., vegetables and grains) and permanent crops (e.g., orchards and vineyards). Farmland necessitates substantial operations and managerial decisions.

Infrastructure investments are claims on the income of toll roads, regulated utilities, ports, airports, and other real assets that are traditionally held and controlled by the public sector (i.e., various levels of government). Investable infrastructure opportunities include securities generated by the privatization of existing infrastructure or by the private creation of new infrastructure via private financing.

Finally, while some descriptions of real assets limit the category to tangible assets, we define real assets to include intangible assets, such as intellectual property (e.g., patents, copyrights, and trademarks, as well as music, film, and publishing royalties). The opposite of a real asset is a financial asset, not an intangible asset. A financial asset is not a real asset—it is a claim on cash flows, such as a share of stock or a bond. Intangible assets, such as technology, directly facilitate production, thereby creating increased value. It can be argued that intangible assets represent a very large and rapidly increasing role in the wealth of society.

1.2.2 Hedge Funds

Hedge funds represent perhaps the most visible category of alternative investments. While hedge funds are often associated with particular fee structures or levels of risk taking, we define a hedge fund as a privately organized investment vehicle that uses its less regulated nature to generate investment opportunities that are substantially distinct from those offered by traditional investment vehicles, which are subject to regulations such as those restricting their use of derivatives and leverage. Hedge funds represent a wide-ranging set of vehicles that are differentiated primarily by the investment strategy or strategies implemented. Managed futures funds are included as hedge funds in Part 3.

1.2.3 Private Equity

The term private equity is used in the CAIA curriculum to include both equity and debt positions that, among other things, are not publicly traded. In most cases, the debt positions contain so much risk from cash flow uncertainty that their short-term return behavior is similar to that of equity positions. In other words, the value of the debt positions in a highly leveraged company, discussed within the category of private equity, behaves much like that of the equity positions in the same firm, especially in the short run. Private equity investments emerge primarily from funding new ventures, known as venture capital; from the equity of leveraged buyouts of existing businesses; from mezzanine financing of leveraged buyouts or other ventures; and from distressed debt resulting from the decline in the health of previously healthy firms.

Venture capital refers to support via equity financing to start-up companies that do not have a sufficient size, track record, or desire to attract capital from traditional sources, such as public capital markets or lending institutions. Venture capitalists fund these high-risk, illiquid, and unproven ideas by purchasing senior equity stakes while the start-up companies are still privately held. The ultimate goal is to generate large profits primarily through the business success of the companies and their development into enterprises capable of attracting public investment capital (typically through an initial public offering, or IPO) or via their sale to other companies. In the context of investment management, venture capital is sometimes treated as a separate asset class from other types of private equity.

Leveraged buyouts (LBOs) refer to those transactions in which the equity of a publicly traded company is purchased using a small amount of investor capital and a large amount of borrowed funds in order to take the firm private. The borrowed funds are secured by the assets or cash flows of the target company. The goals can include exploiting tax advantages of debt financing, improving the operating efficiency and the profitability of the company, and ultimately taking the company public again (i.e., making an IPO of its new equity). Management buyouts and management buy-ins are types of LBOs with specific managerial changes.

Mezzanine debt derives its name from its position in the capital structure of a firm: between the ceiling of senior secured debt and the floor of equity. Mezzanine debt refers to a spectrum of risky claims, including preferred stock, convertible debt, and debt that includes equity kickers (i.e., options that allow investors to benefit from any upside success in the underlying business, also called hybrid securities).

Distressed debt refers to the debt of companies that have filed or are likely to file in the near future for bankruptcy protection. Even though these securities are fixed-income securities, distressed debt is included in our discussion of private equity because the future cash flows of the securities are highly risky and highly dependent on the financial success of the distressed companies, and thus share many similarities with common stock. Private equity firms investing in distressed debt tend to take longer-term ownership positions in the companies after converting all or some portion of their debt position to equity. Some hedge funds also invest in distressed debt, but they tend to do so with a shorter-term trading orientation.