CAIA Level II: Advanced Core Topics in Alternative Investments

718 Pages·2012·3.792 MB·English

by  CAIA Association

CAIA
Level II
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CAIA
Level II
Advanced Core Topics
in Alternative Investments
Second Edition
KEITH H. BLACK
DONALD R. CHAMBERS
HOSSEIN KAZEMI
MARK J.P. ANSON
GALEN BURGHARDT
FRANCOIS-SERGE LHABITANT
JIM LIEW
SUSAN LIEW
GEORGE A. MARTIN
PIERRE-YVES MATHONET
DAVID F. McCARTHY
THOMAS MEYER
EDWARD SZADO
BRIAN WALLS
John Wiley & Sons, Inc.
Copyright(cid:2)C 2009,2012byTheCAIAAssociation.Allrightsreserved.
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ISBN978-1-118-36975-3(cloth)
ISBN978-1-118-44727-7(ebk)
ISBN978-1-118-44728-4(ebk)
ISBN978-1-118-44729-1(ebk)
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
Contents
Preface xv
Acknowledgments xxi
AbouttheAuthors xxv
CHAPTER1
Introduction 1
1.1 OutlineofThisBook 1
1.2 StudyingfortheCAIALevelIIExamination 3
PARTONE
AssetAllocationandPortfolioManagement
CHAPTER2
TheEndowmentModel 7
2.1 DefiningEndowmentsandFoundations 7
2.2 IntergenerationalEquity,Inflation,andSpendingChallenges 10
2.3 TheEndowmentModel 12
2.4 WhyMightLargeEndowmentsOutperform? 14
2.5 Conclusion 19
CHAPTER3
RiskManagementforEndowmentandFoundationPortfolios 21
3.1 SpendingRatesandInflation 21
3.2 LiquidityIssues 24
3.3 RebalancingandTacticalAssetAllocation 28
3.4 TailRisk 30
3.5 Conclusion 32
CHAPTER4
PensionFundPortfolioManagement 33
4.1 DefinedBenefitPlans 34
4.2 GovernmentalSocialSecurityPlans 43
4.3 DefinedContributionPlans 43
v
vi CONTENTS
PARTTWO
PrivateEquity
CHAPTER5
PrivateEquityMarketLandscape 49
5.1 MainStrategies 49
5.2 MainDifferencesbetweenVentureCapitalandBuyout 50
5.3 PrivateEquityFundsasIntermediaries 54
5.4 PrivateEquityFundsofFundsasIntermediaries 56
5.5 PrivateEquityFundsofFundsValue-Added 58
5.6 TheRelationshipLifeCyclebetweenLimitedandGeneralPartners 59
5.7 TheJ-Curve 62
5.8 Conclusion 64
CHAPTER6
PrivateEquityFundStructure 67
6.1 KeyFeatures 69
6.2 ConflictsofInterest 77
6.3 FindingtheBalance 77
CHAPTER7
TheInvestmentProcess 79
7.1 ProcessDescription 79
7.2 RiskManagement 85
CHAPTER8
PrivateEquityPortfolioDesign 89
8.1 ThreeApproachestoPrivateEquityPortfolioDesign 89
8.2 Risk-ReturnManagementApproaches 93
8.3 TheRiskProfileofPrivateEquityAssets 99
CHAPTER9
FundManagerSelectionProcess 107
9.1 DeterminationoftheWishListofFundCharacteristics 107
9.2 DealSourcing 109
9.3 DueDiligence:ImportanceandLimitations 111
9.4 DecisionandCommitment 116
CHAPTER10
MeasuringPerformanceandBenchmarkinginthePrivateEquityWorld 117
10.1 IndividualFunds 117
10.2 PortfolioofFunds 129
CHAPTER11
MonitoringPrivateEquityFundInvestments 135
11.1 ApproachtoMonitoring 135
11.2 TheMonitoringObjectives 136
Contents vii
11.3 InformationGatheringintheMonitoringProcess 139
11.4 ActionsResultingfromMonitoring 142
CHAPTER12
PrivateEquityFundValuation 145
12.1 NetAssetValue(NAV) 145
12.2 InternalRateofReturn(IRR) 147
12.3 EconomicValueApproach 149
CHAPTER13
PrivateEquityFundDiscountRates 151
13.1 TheCapitalAssetPricingModel(CAPM) 151
13.2 PrivateEquityFundBetas 153
CHAPTER14
TheManagementofLiquidity 161
14.1 PrivateEquityCashFlowSchedules 161
14.2 SourcesofLiquidity 162
14.3 InvestmentStrategiesforUndrawnCapital 164
14.4 CashFlowProjections 165
14.5 Overcommitment 174
14.6 Conclusion 177
PARTTHREE
RealAssets
CHAPTER15
RealEstateasanInvestment 181
15.1 AttributesofRealEstate 181
15.2 AssetAllocation 182
15.3 CategoriesofRealEstate 185
15.4 ReturnDriversofRealEstate 189
CHAPTER16
UnsmoothingofAppraisal-BasedReturns 191
16.1 SmoothedPricing 191
16.2 ModelsofPriceandReturnSmoothing 194
16.3 UnsmoothingaPriceorReturnSeries 198
16.4 AnIllustrationofUnsmoothing 201
CHAPTER17
Core,Value-Added,andOpportunisticRealEstate 207
17.1 DefiningtheThreeNCREIFRealEstateStyles 208
17.2 DifferentiatingStyleswithAttributes 210
17.3 PurposesofRealEstateStyleAnalysis 210
viii CONTENTS
17.4 RealEstateStyleBoxes 213
17.5 CapRatesandExpectedReturns 214
17.6 DevelopingRiskandReturnExpectationswithStyles 215
CHAPTER18
RealEstateIndices 221
18.1 TheMechanicsofAppraisal-BasedIndices 221
18.2 Non-Appraisal-BasedIndices 224
18.3 DescriptionofMajorRealEstateIndices 226
CHAPTER19
PublicversusPrivateRealEstateRisks 231
19.1 Market-BasedversusAppraisal-BasedReturns 231
19.2 Arbitrage,Liquidity,andSegmentation 234
19.3 PublicRealEstateProducts 244
CHAPTER20
PortfolioAllocationwithinRealEstate 247
20.1 IncomeTaxation 247
20.2 Leverage 250
20.3 AgencyRelationships 251
20.4 InformationAsymmetries 252
20.5 LiquidityandTransactionCosts 253
20.6 Cross-BorderRealEstateInvestment 253
20.7 SummaryandConclusions 255
CHAPTER21
FarmlandandTimberInvestments 257
21.1 GlobalDemandforAgriculturalProducts 258
21.2 AccessingAgriculturalReturns 260
21.3 UnderstandingtheReturnstoFarmland 264
21.4 CommodityPriceVolatilityandItsImplicationfor
Farmland-BasedInvestmentStrategies 270
21.5 GlobalInvestinginTimberland 274
21.6 KeyPointsandSummaryConclusions 277
CHAPTER22
InvestinginIntellectualProperty 279
22.1 CharacteristicsofIntellectualProperty 279
22.2 FilmProductionandDistribution 281
22.3 ArtasanInvestmentAsset 288
22.4 R&DandPatents 293
22.5 Conclusion 298