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"CAIA Association has developed two examinations that are used to certify Chartered Alternative Investment Analysts. The Level I curriculum builds a foundation in both traditional and alternative investment markets--for example, the range of statistics that are used to define investment performance as well as the many types of hedge fund strategies. The readings for the Level II exam focus on the same strategies, but change the context to one of risk management and portfolio optimization. Level I CAIA exam takers have to work through an outline of terms, be able to identify and describe aspects of financial markets, develop reasoning skills, and in some cases make computations necessary to solve business problems"--
List of contents
Preface xiii
Acknowledgments xvii
About the Authors xxi
PART ONE Introduction to Alternative Investments 1
CHAPTER 1 What Is an Alternative Investment? 3
1.1 Alternative Investments by Exclusion 3
1.2 Alternative Investments by Inclusion 4
1.3 Structures among Alternative Investments 8
1.4 Investments Are Distinguished by Return Characteristics 12
1.5 Investments Are Distinguished by Methods of Analysis 14
1.6 Goals of Alternative Investing 17
1.7 Overview of This Book 19
CHAPTER 2 The Environment of Alternative Investments 21
2.1 The Participants 21
2.2 Financial Markets 28
2.3 Regulations 30
2.4 Taxation 38
CHAPTER 3 Statistical Foundations 41
3.1 Frequency and Probability Distributions 41
3.2 Compounding Multiple Time Period Returns 44
3.3 Return Distributions and Autocorrelation 48
3.4 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis 50
3.5 Computing Sample Statistics 54
3.6 More on Standard Deviation and Variance 59
3.7 Testing for Normality 64
3.8 Other Measures of Risk 66
3.9 Estimating Value at Risk (VaR) 70
3.10 Time Series Return Volatility Models 75
3.11 Conclusion 77
CHAPTER 4 Risk, Return, and Benchmarking 79
4.1 Benchmarking 79
4.2 Asset Pricing Models 82
4.3 Three Methods of Models 82
4.4 Cross-Sectional versus Time-Series Models 85
4.5 Single-Factor and Ex Ante Asset Pricing 87
4.6 Empirical Analyses with the CAPM 90
4.7 Multifactor Models 96
4.8 Alternative Asset Benchmarking 103
4.9 Conclusion 107
CHAPTER 5 Correlation, Alternative Returns, and Performance Measurement 109
5.1 Correlation 109
5.2 Internal Rate of Return 118
5.3 Problems with IRR 122
5.4 Returns Based on Notional Principal 129
5.5 Distribution of Cash Waterfall 132
5.6 Performance Measures 139
CHAPTER 6 Alpha and Beta 147
6.1 Overview of Beta and Alpha 147
6.2 Ex Ante versus Ex Post Alpha 149
6.3 Inferring Ex Ante Alpha from Ex Post Alpha 155
6.4 Return Attribution 158
6.5 Ex Ante Alpha Estimation and Persistence 163
6.6 Return Drivers 164
6.7 Summary of Alpha and Beta Analysis 168
CHAPTER 7 Hypothesis Testing in Alternative Investments 169
7.1 Four Steps of Hypothesis Testing 170
7.2 A Test Assuming Normality 173
7.3 Tests with Inferential Statistics 176
7.4 Sampling and Testing Problems 181
7.5 Cumulative Returns and Performance 185
7.6 Statistical Issues in Analyzing Alpha and Beta 189
7.7 Summary of Alpha and Beta Estimation 196
7.8 Conclusion 198
PART TWO Real Assets 201
CHAPTER 8 Land, Infrastructure, and Intangible Real Assets 203
8.1 Land 203
8.2 Timber and Timberland 208
8.3 Farmland 210
8.4 Infrastructure 214
8.5 Intellectual Property 220
8.6 Valuation and Volatility 224
8.7 Historical Risks and Returns 228
CHAPTER 9 Real Estate Fixed-Income Investments 233
9.1 Residential Mortgages 233
9.2 Commercial Mortgages 241
9.3 Mortgage-Backed Securities Market 244
9.4 Collateralized Mortgage Obligations 249
9.5 Real Estate Investment Trusts 255
9.6 Risks and Returns of Mortgage REITs 256
CHAPTER 10 Real Estate Equity Investments 261
10.1 Real Estate Development 261
10.2 Valuation and Risks of Real Estate Equity 264
10.3 Alternative Real Estate Investment Vehicles 272
10.4 Real Estate and Depreciation 278
10.5 Real Estate Equity Risks and Returns 283
10.6 Risks and Returns of Equity REITs 288
PART THREE Hedge Funds 293
CHAPTER 11 Introduction to Hedge Funds 295
11.1 Distinguishing Hedge Funds 295
11.2 Hedge Fund Types 302
11.3 Hedge Fund Fees 304
11.4 Conclusion 315
CHAPTER 12 Hedge Fund Returns and Asset Allocation 317
12.1 Describing the Hedge Fund Universe 317
12.2 Mean, Variance, Skewness, and Kurtosis of Strategies 319
12.3 Categorizing Hedge Fund Strategies 321
12.4 Should Hedge Funds Be Part of an Investment Program? 328
12.5 Do Hed
