Newsletter - July 2010

Director's Comments

The Conundrum of Defining Alternative Investments

Can someone please explain to me exactly what are alternative investments?

I am often asked to do this; after all shouldn't anyone working for the Chartered Alternative Investment Analyst Association be able to answer this question clearly and concisely? Well unfortunately the answer is not nearly so simple; alternatives really defy precise defining.

In developing the CAIA Program, we chose to group various alternative opportunity sets into several broad buckets – Hedge Funds, Private Equity, Real Estate, Managed Futures, and Commodities. While helpful from an organizational standpoint, this ignores a multitude of strategies that either don't fit neatly into these groupings or cut across more than just one. For example, where does infrastructure fit in here? And how about strategies that invest in art or wine?

To circumvent this shortfall, I often choose to define alternatives not by what they are but by what they are NOT. Using this approach, alternative investments can be defined as everything "outside of" traditional long-only stock and bond investments. That helps to catch the outliers that would normally fall through the cracks, but it is still not ideal.

Led by the CAIA Association's Program Director, Dr Hossein Kazemi, the CAIA program specialists choose to define alternatives by looking at the two following identifiers:

  • Underlying asset: Some investment products are classified as alternative because their underlying assets have certain characteristics. The most important characteristic is lack of liquidity (e.g., private equity or intellectual property). A related characteristic is that markets for the underlying assets are highly inefficient and not fully integrated (e.g., art work or certain real estate investments). Typically, the main source of return for these investment products is derived from the underlying asset itself.
  • Underlying trading strategy: Some investment products are classified as alternative because implementing their underlying trading strategy requires skill. For example, most hedge fund strategies involve trading liquid instruments, many of which are associated with traditional investment products (e.g., stocks and bonds). However, implementing sophisticated trading strategies which involve both long and short positions, a skilled manager can provide tangible benefits to investors. Typically, the main source of return for these products comes from the skill of the manager.

But even this has its shortcomings. How does a long-only product that invests in commodities fit into this definition? Well it does not. As Hossein suggests, in such cases, we may simply choose to side-step the question just as U.S. Supreme Court Justice Potter Stewart did when asked to define pornography. "I know it when I see it" he replied.

Another approach might involve looking at asset correlations. Those assets that exhibit the least correlation to traditional long-only stock and bond investments would get lumped together into this amalgam we call alternatives. Ahh, if life were only so simple! Unfortunately, as we've learned all too well over the past dozen years, correlations are not fixed, they do not remain static. As witnessed in 2008, in times of severe market stress these tend to converge to "one". Moreover, while a lack of correlation remains one of the main drivers for investing in alternatives, this attraction can become self-defeating over time. Should a significant number of investors pile into the same uncorrelated strategy, they may end up reducing the potential alpha available for exploitation by any one manager, which in turn may result in lower expected returns and increased correlations with other asset classes.

This effective "crowding out" is what keeps managers constantly on the prowl for new opportunities, new inefficiencies to exploit. This thirst for alpha is what has driven the rapid innovation experienced in alternatives over the past two decades, and is why alternatives remain very much at the cutting-edge of industry developments. In the end, what counts in not a precise definition but a broad understanding of the complexities of alternative investments and how various methodologies can be employed to manage these complexities. Providing investment professionals with this depth and breadth of knowledge is what we do at the CAIA Association.

E. Craig Asche
Executive Director

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Exam Updates

September 2010 Exam Registration Update

  • Exam registration closes August 2, 2010 at 11:59 PM EDT
  • Late registrations are not considered under any circumstances
  • Exam Dates:
    • Level I Exam Session: September 13 - 24, 2010.
    • Level II Exam Session: September 20 - October 1, 2010.
    • Register for an exam here

Scheduling an examination appointment:

Pearson VUE testing centers are currently open to scheduling for the September 2010 CAIA exam period. We strongly recommend scheduling your exam appointment with them as soon as possible to ensure a seat at your preferred testing center. All exams are scheduled directly through Pearson VUE. If you encounter any scheduling difficulties, please contact Pearson VUE immediately. If you have not yet received your scheduling instructions, a copy is also located on the website. You must be logged in as a registered candidate in order to view the instructions.

Registration vs. Scheduling:

While exam registration closes on August 2, you may schedule your exam appointment with Pearson VUE at any time after completing the purchase process. The CAIA Association still recommends that you book your exam appointment with Pearson VUE at the earliest opportunity. Deferments are not allowed and will not be granted to candidates who are unable to sit for the exam due to failure to schedule an appointment.

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Alternative Viewpoints... powered by CAIA

The performance of hedge funds in different VIX "states"
Special to AllAboutAlpha.com by: Mikhail Munenzon, CFA, CAIA

There is a common belief among many that hedge funds thrive in times of market chaos. Hedge funds provide the market with much needed liquidity during times of crisis. Whether you call this market making, or contrarian investing, hedge funds have the flexibility to trade with desperate sellers ("fear") on one day and desperate buyers ("greed") the next – making them a useful balancing mechanism in financial markets.

Some types of hedge funds clearly benefit from market volatility while others don't. In the July installment of the "Alternative Viewpoints" column by a member of the CAIA Association, we feature an interesting study by Mikhail Munenzon of the relationship between the VIX and hedge fund returns. What you are about to read may surprise you or it may confirm your intuition. Regardless, it will likely help to clarify your understanding of the relationship between the volatility and hedge fund returns.

To continue, please click here.

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Chapter Notes

A record number of events were held around the globe in May and June, which we hope many of you were able to attend. Some of the resources and presentation slides from these events can be accessed through the links below. Activities usually slow down during July and August in order to give chapter executives a chance to have some time off and also to prepare for another season of events in the fall. Nevertheless, several great events will be taking place in the next few weeks.

CANADA:
On July 22, CAIA Canada hosted an educational event, "CAIA Canada Real Estate Roundup". This event aimed to provide introduction and insight into Canadian and international investment into private and public real estate opportunities (including RE hedge funds).

CHICAGO:
Members, candidates and other professionals participated in the networking event at the Elephant and Castle Pub on Wednesday, July 28.

On July 15, CAIA Chicago invited all members, candidates and other AI professionals to attend an educational event on the "Current State and Trends in the Private Equity and Distressed Debt Markets."

HONG KONG:
On Thursday, June 17, members attended an educational event to hear Paul Keogh, Chief Investment Officer at RREEF Asia Pacific discuss: "What opportunities have arisen on the property landscape and which real estate investment strategies will outperform: an Asian Perspective." View presentation slides.

LONDON:
On July 21 CAIA London held its monthly social event at the Counting House.

CAIA London presented an educational event titled "Demographics, Longevity Risk and the Pension Time Bomb." The event featured an expert panel, including Dr. Amlan Roy - Head, Global Demographics and Pensions Research, Credit Suisse, Dr. Bob Swarup, CAIA - Partner, Pension Corporation, Guy Coughlan - Managing Director, JPMorgan Pension Advisory Group, and David Willetts - Conservative MP for Havant and Minister of State for Universities and Science. View details.

On Wednesday, June 23, Mark Gilbert, Bureau Chief of Bloomberg News gave a presentation to CAIA members discussing his book: "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable." View presentation slides.

The CAIA London chapter invited all members and candidates to attend their social event on Wednesday, June 16.

SAN FRANCISCO:
An educational event, "How to Choose a Hedge Fund: The Due Diligence Process" was hosted by CAIA San Francisco on July 29. Speaker Brian Lahart of Wells Fargo spoke about how to perform due diligence on a hedge fund and how to select the best hedge fund managers. View details.

SINGAPORE:
Thursday, August 5: Networking Event
A networking social event is being held at Loof in Singapore for all interested CAIA members and candidates. View details and register.

SWITZERLAND:
An educational event was held in Lugano on Thursday, June 24, for members and candidates from the Ticino region (including Lugano and Milan). Speakers focused on the discussion of "Reinventing the Value Proposition of Hedge Funds in a Post Crisis Environment: How to Give Investors Access to Hedge Funds". View presentation slides.

EVENTS AT NON-CHAPTER LOCATIONS:

Thursday, August 12: Networking Event in Melbourne

On July 22 an Educational Event, "Current Topics in Hedge Fund Allocations" was held in Southern California.

On Tuesday, June 22 members, candidates and interested professionals gathered for the first CAIA networking event in Dallas, TX.

A networking event was organized in Seattle, WA on Wednesday, June 23.

On Monday, June 28 a networking event was held at Century Court in Tokyo, Japan.

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CAIA Out Front

Innovative Alternative Strategies Conference
Tuesday, July 27 — Wednesday, July 28

Chicago, IL

Chris Holt, the CAIA Association's Director of Industry Relations (Americas), moderated a two-day event held in Chicago. This was the first annual Innovative Alternative Strategies conference organized by Financial Advisor and Private Wealth magazines for private bankers, wealth advisors and RIA's. Featured speakers for this event included former Goldman Sachs chairman Jon Corzine, Cubs owner Tom Ricketts, and the venerable Roger Ibbotson.

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CAIA Conversation Pieces

The CAIA Academic Partnership Program
HEC Montréal is Inaugural Academic Partner

The CAIA Association launched the CAIA Academic Partnership Program in May to encourage academic institutions around the globe to incorporate alternative investment education into their mainstream curriculum. HEC Montréal is the inaugural CAIA Academic Partner. Several publications announced the partnership, including Canadian Business Online.

CAIA September Exam Registration in Financial Times Ad
For those who take alternative investment seriously

An ad for the September CAIA exam registration ran in the Markets and Investing page of the July 7 Weekend edition of the Financial Times. View the Ad.

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Podcast & Videos

New video makes it easy to share the CAIA story with those serious about alternative investments

The opportunity to tell the CAIA story in five minutes came about as the CAIA Association was preparing to participate in the CFA conference in Boston this May.

To view the video please click here.

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