Newsletter - March 2009
- Meet a CAIA Member:
Director's Comments
If you’ve been watching the mainstream financial media, you might believe alternative investment funds, including hedge funds, private equity funds, and REITS, are teetering on the edge of a precipice. In response, I would like to take a step back and consider both the reasons why I believe this gloom-and-doom to be overblown and the opportunities I see ahead of us. To keep things in perspective, it’s important to remember that while hedge funds may not have achieved the level of returns seen in the earlier part of the decade, they significantly outperformed the global equity indices in 2008 and continue to do so in 2009.
In fact, in 2008, hedge fund managers outperformed the majority of global mutual fund managers, who collectively manage $60 trillion, or 24 times the hedge fund universe. (1)
In 2008, endowments invested roughly 46% in alternatives, up from 42% in 2007 and 27% in 2000. (2) Endowments have long provided an important lifeline for schools as these often use at least 5 percent a year to pay for salaries, maintain buildings and contribute to financial aid to help offset the considerable cost of attending private high schools and four year colleges. Relatively high allocation to global equity markets dealt endowments the biggest blow. While MSCI World index lost about 42 percent in 2008, schools with endowments of $1 billion or more lost 21.7 percent. Their alternatives strategies, including hedge funds (which were down an average of 19% in 2008) were a contributing factor in their outperformance of the equities indices. In short, given the disappointing performance of equity markets and the stronger performance of alternative investments on a relative and in some limited cases on an absolute basis during the past 18 months, it should come as no surprise that if anything, institutional investors continue to increase, and in some cases accelerate, their allocations to alternatives.
Opportunities abound for those investment professionals with the education, skills, capital and infrastructure. Market dislocations have created an ideal, perhaps once in a lifetime opportunity for our industry. Let’s take a moment to look at signs that our industry is still a thriving contributor to the health of the investment world.
Hedge Funds:
In light of the dramatic changes to the investment industry as a whole, hedge funds are now presented with the opportunity to redefine their relationships across the board. As CAIA Board member Peter Douglas recently pointed out, the market turmoil may hearken a new "golden age of hedge funds." For example, hedge funds have an excellent value proposition as the best risk managers available on the marketplace - a skill set that has dramatically increased in value since 2007.
In addition, regardless of the forthcoming regulatory changes, undoubtedly hedge funds will remain far more nimble than traditional asset managers, which will be facing increased scrutiny by regulators in the near future. This nimbleness will be extremely valuable as alpha opportunities begin to emerge from unexpected quarters - as they always do.
Finally, in the last two decades, the tail end of a bear market has generally marked the beginning of a hedge fund boom, as skilled managers no longer constrained at large firms take their ingenuity directly to the markets and find investors ready for new ideas.
Commodities/Managed Futures:
Despite the natural impact that the credit crunch has had on these asset classes in particular, commodities & managed futures continue to perform. According to the CASAM CISDM Hedge Fund Database, CTAs are posting the highest average year-to-date returns of any asset class at 5.79%. A renewed focus on sustainable investments, including carbon trading and alternative energy sources will certainly provide new opportunities in the commodities markets in particular.
Private Equity:
Opportunities are increasing in the private equity space as well, which traditionally experience their best vintage years during recessionary times. Reduced asset prices and an increased number of financially viable but cash-strapped companies are two important drivers of private equity returns. Strategic allocations to private equity are up in Europe, Australia and Japan, and down slightly in North America. However, all locations forecast allocations to increase through 2009. (3)
Private equity firms, faced with significantly decreased access to credit, are getting creative, as they move away from the large leveraged buyouts that have been their hallmark in recent years past. “You have to accept the fact that transactions will be smaller and have far less leverage—that’s a fact,” said Henry Kravis, co-founder of Kohlberg Kravis Roberts & Co. “That means all of us have to adapt. We have to change the way we’ll do business.” Kravis said the firm was seeking alternative investment opportunities, including distressed debt, mezzanine financing and infrastructure, instead of buyouts as it waits out the credit crisis. (4)
Real Estate:
True to form, volatility in the equity & fixed income markets has encouraged many institutional investors, from the China Investment Corporation to the local municipalities around the United States, to look for opportunities in hard assets, particularly real estate & infrastructure. In 2009, strategic allocations to real estate remain high, with slight declines in Europe and Australia, and the consensus is for increased allocations to this asset class worldwide. Real estate may prove a bellwether asset class, as investors begin to conclude that prices have hit rock bottom in certain markets. This trend also suggests that investors are going to be keenly seeking the talent that can help them find and execute on those opportunities – a bright spot in a difficult job market. (5)
Investors today have a far greater range of available investments than in the past. While it is true that the alternatives industry is facing significant challenges, I have no doubt that the best and the brightest will continue to uncover great investment opportunities.
Craig Asche
Executive Director
- AIMA Roadmap to Hedge Funds, 2008
- Reuters- The Commonfund Institute
- Alternative Investment News – Winter 2009
- Russell Research – Survey on Alternative Investing
- Ibid.
Exam Updates
March 2009 Exams In Session
Exam dates: March 09 - 20, 2009
The March exams are now underway. We wish the best of luck to the over 3200 individuals who have registered for this exam cycle.
Grade Release Information:
Grading will commence AFTER the examination window closes on March 20th. Please do not contact the Association for grades at this time. An announcement will appear on the homepage when grades are available. Examinees will also be notified via email.
Level I grades are expected to be released approximately three weeks from the last examination day.
Level II, which includes essays, takes more time and these grades are generally available between five and six weeks after the last examination day.
The Grading Process:
For more information about the grading process, please visit the Grading FAQs.
September 2009 Exam Registration:
Registration for the next exam period (September 08 - 23, 2009) opens April 1, 2009.
Curriculum Update
Significant Level II Updates for September 2009 & March 2010
The September 2009 and March 2010 Level II exam will cover a new edition of the CAIA Level II Current and Integrated Topic Readings, a dynamic curriculum section that integrates recent alternative investment industry developments. A total of 7 new and updated articles have been added to this latest edition of the curriculum text. Below is a list of articles that are new to the program for 2009-2010:
- “Coping with Climate Change" by Christian Weistroffer.
- "Beyond Markowitz: A Comprehensive Wealth Allocation Framework for Individual Investors" by Ashvin B. Chhabra.
- "The Strategic and Tactical Value of Commodity Futures" by Claude B. Erb, CFA, and Campbell R. Harvey.
- "The Subprime Credit Crisis of 2007" by Michel G. Crouhy, Robert A. Jarrow and Stuart M. Turnbull.
- "Tail Risk Management" by Vineer Bhansali.
- "Taming Global Village Risk" by Rodney N. Sullivan.
- "How Good are Private Equity Returns?" by Robert M. Conroy and Robert S. Harris.
“Industry change is occurring at unprecedented rates, making it a challenge for all but the best informed to keep on top of new developments and their implications,” said Craig Asche, Executive Director of the CAIA Association. “As the financial landscape adjusts to the realities of a new marketplace, so too must our curriculum. The modifications we have introduced..."
Chapter Notes
Please note: Some chapter events are open to members only.
Boston: Special Announcement! We’re pleased to announce the official launch of the CAIA Boston chapter! It will take place on March 26th. The event will feature an educational presentation by Mark Yusko, President and CIO of Morgan Creek Capital Management, LLC, entitled "The Great Repression - Dealing with the Aftermath of the Credit Crisis." Members and candidates can view event details and register here.
Canada: CAIA Canada held a social event in Vancouver for its members and candidates on March 5 at the Metro Restaurant.
Hong Kong: CAIA members and candidates in Hong Kong are invited to attend an “End of Exams Happy Hour,” which is tentatively scheduled to take place on April 2nd. An official invitation with event and venue details will follow.
Madrid: CAIA members and candidates in Iberia are invited to attend an educational event in Madrid on March 24, 2009 at IEB. It will feature Richard Ford, a member of the fixed income team at Morgan Stanley as the guest speaker with a presentation entitled "Corporate Bonds—a Once-in-your-lifetime Chance." Members and candidates can view event detail and register by clicking here.
New York: CAIA members in New York attended a “How to Network to a New Job.” on March 19th at the Harvard Club.
Paris: CAIA members in Paris are gathering for their first social cocktail reception at Bar le Cardinal on March 19th. Steve Wallace of the CAIA UK office will be in attendance.
Switzerland: CAIA members in Switzerland are attending an educational lunch in Zurich on Thursday, March 19. Alexander Ineichen- CAIA, Managing Director at UBS, is the featured guest speaker of this event, which is jointly held with INSEAD and the Swiss Association of MBAs.
San Francisco: CAIA San Francisco will be holding an educational event on April 29th, which will feature Richard Sandor, Chairman and CEO of the Chicago Climate Exchange with the following presentation: Environmental Commodities: Using Markets to Solve Environmental Problems and Create Wealth. Official invitation with event details will be circulated shortly.
CAIA San Francisco also held an educational event on March 5 at the Hyatt Regency Hotel for its members and mandidates. Event featured Justin Balas, Senior Portfolio Manager for Welton Investment Corporation, with a presentation on the following topic: “Asset Allocation Clarity after the Lessons of 2008: The Case for a Permanent Allocation to Managed Futures.”
Singapore: CAIA Singapore held a Member Dinner on March 2nd at the Tower Club.
Alternative Viewpoints... powered by CAIA
Monetizing hedge fund transparency, posted March 3 on AllAboutAlpha.com,
Mebane Faber, CAIA,
CMT, Portfolio Manager, Cambria Investment Management
Picking stocks is hard. Academic research has shown that most individuals and professionals under perform their benchmark indexes. That is not surprising given new research from Blackstar Funds that shows that roughly two thirds of all stocks under perform their index over their lifetime, 40% are unprofitable investments, and nearly a fifth lose at least... Click here to continue.
Field Notes: Netherlands, Hong Kong & Singapore
Netherlands
Despite its diminutive size when measured in square kilometers, the Netherlands proved to be an extremely diverse world from an investment professional’s perspective. While in Amsterdam, I had the opportunity to talk to representatives from across the spectrum, from regulators to local trade associations and firms of all sizes involved in the AI arena. I found Amsterdam to be one of the most welcoming locales I’ve visited over the last six months, and extremely open and transparent in how business is conducted. This attitude may be attributable to the regulatory approach.
In talking to the regulators, I was struck by their approach to investment oversight, which involves applying the same regulatory framework to alternative investment fund managers as long-only equity managers. In practice, this means that all funds come under the same asset management supervisory umbrella, rather than segmenting out hedge funds to specialist personnel. Given the way various areas of the industry are overlapping and converging, this seems to be a positive and efficient strategy.
Talking to institutional investors, private equity became a recurring theme in their forecasts. I found the size match-up to be a significant factor in their decision making, as the large institutional investors of the Netherlands seek strategic partners of sufficient size with whom they can team up. And of course, it is quite convenient that some of the world’s largest private equity firms are domiciled in the Netherlands.
As I meet with investors across Europe, I find that a common discussion point is how investments will be accessed in the future. Investors who are ready to get back into the game appear focused on direct access to products, such as one individual who wanted to ensure his bond allocations were structured in such a way as to mitigate the risk of potential redemptions by skittish fellow investors. It will be very interesting to see the new strategies that emerge to meet the changing investor requirements.
Steve Wallace, CAIA
Associate Director of Industry Relations, EMEA
Hong Kong
In spite of, or perhaps as a result of, recent challenges faced by the Asian hedge fund industry, education in alternatives investments remains a top priority for Asian financial professionals.
I was recently joined by Christopher Holt, the founder and editor of CAIA partner AllAboutAlpha.com, as we met with CAIA members, their employers, financial regulators, and educational organizations in Hong Kong and Singapore last month. Chris and I conducted two seminars in Hong Kong covering recent hedge fund industry developments and the importance of the CAIA designation. One such presentation attracted nearly 50 hedge fund professionals eager to gain a competitive advantage in today’s tight labor market.
We also met with officials from the Hong Kong Securities and Futures Commission (SFC) who are actively encouraging hedge funds to set up shop in the territory. As the local industry, and regulators in particular, focus on reducing the risks associated with a lack of adequate knowledge and on ensuring that Hong Kong continues to attract the highest quality laborforce, we see a clear synergy with the CAIA designation in Hong Kong.
Thanks to a CAIA Association member who flew in from Taiwan, we then joined over two dozen local chapter members for a traditional dinner at Hong Kong’s storied China Club. We were pleased to find that despite reported layoffs in the Asian hedge fund sector, the vast majority of members were pursuing vibrant careers with some of Hong Kong’s most successful firms.
Singapore
In Singapore – home of the newest CAIA Association office – we met with Association members, employers and regulators in that country. As in Hong Kong, Singapore’s financial regulator, the Monetary Authority of Singapore, is actively courting all forms of alternative investment funds. Singapore recently made hedge fund friendly changes to its tax code and is even building a special complex to house a planned hedge fund economic cluster. Once again, we delivered a presentation on the hedge fund industry and CAIA designation to group of nearly 50 young financial professionals and then joined CAIA Association members at Singapore’s famous “Tower Club” for dinner.
While in Singapore, we also met with several global financial services organizations to discuss the CAIA program, and were pleased to learn that several already encourage their employees to pursue the designation. The week-long series of meetings and presentations was exhausting (particularly for Chris who suffered from 13 hours of jetlag). But it was living proof to those we met that the CAIA Association is serious about serving the needs of employers and members in Asia. I have been in communication with many of the contacts since then and Chris and I are looking forward to a second round of presentations and meetings in the region during the fall.
Sue Lynn Oliveiro
Asia Regional Coordinator
CAIA on the Road: Luxembourg, France, Switzerland, Florida, & Chicago
We are currently developing our spring travel itinerary and are looking forward to meeting CAIA members and colleagues in the following cities:
March
- Luxembourg: 16 - 19
- Paris: 20
- Geneva/Zurich: 30 - 2 April
- Florida/Chicago: 25 - 27
April
- Baltimore/DC: 13 - 15
- Helsinki/Stockholm/Oslo/Copenhagen: 20 - 24
- Cayman Islands: 26 - 1 May
The Association is available to give private, on-site presentations of the CAIA program in each of these cities. These presentations are an excellent way to increase your company's awareness of the value of the CAIA program, as well as to highlight your significant achievement in earning the designation.
Contact events@caia.org for more information on planning an exclusive informational meeting for your colleagues.
We look forward to seeing you while we are on the road!
Meet a CAIA Member
"CAIA members come from across the globe as well as the investment spectrum. Below are profiles of 4 CAIA members, who represent a sampling of our diverse membership."
QiZhe Jin
FP&A Manager, CVC Capital Partners
QiZhe’s position as a financial analysis manager for a portfolio company at the fifth largest private equity firm in the world brings not only a diversity of responsibilities, but also a unique set of challenges. In his role at CVC Capital Partners, JIN engages in a wide range of activities such as fundamental analysis, economic evaluation of entity divestitures and acquisitions, and execution of due diligence, stress testing, and scenario analysis for investment-related strategy.
“One of the biggest challenges in my daily job is to work for and report to a private equity firm rather than a strategic investor,” he said. “As a P.E. firm, CVC has unique points of view on the financial data and operational targets. I was a member of the core team in the divestiture of the company from a key player in its industry and acquisition by CVC when the deal was in the confidential phase. I was in charge of the internal financial data consolidation, analysis, and disclosure, and involved in draft and revision of the information memorandum through the final acquisition agreement. After that, I also engaged in strategic investments and M&A decisions.”
For this complicated work, QiZhe needed to know the structure, investment style, and operational model of CVC in order to prepare reports and analysis from the viewpoint of the investor. Equipped with seven separate professional designations, QiZhe suggests the CAIA Program has provided him with a depth of understanding of alternative investments, including private equity, that was not introduced thoroughly in any other program.
“The CAIA Program helped a great deal in allowing me to develop a deep understanding of P.E. that is necessary for this work,” he said. “I am one of the first CAIA holders, if not the first one, in China. When I began taking the CAIA exam there was even not a test center on the mainland and I had to take the exams during vacation in Hong Kong.” QiZhe indicates that recognition of the CAIA designation is growing quickly in China, particularly because candidates can now take the exams in Shanghai, Beijing, and Guangzhou.
Vanessa Gilman
Analyst, Cayman Islands Monetary Authority
As an analyst for the Investments and Securities Division for the Cayman Islands Monetary Authority, the cumulative value of the hedge funds over which Vanessa Gilman has supervision is staggering. “Assets under management totaled US $2.316 trillion as of December 31, 2006, as was reported by 5,052 of the Authority’s regulated funds,” she said. “The Cayman Islands is the domicile of choice worldwide for offshore hedge funds,” she explained, which are known as mutual funds under Cayman law.
In this role, Gilman must have an intricate understanding of both hedge funds and all other alternative investment classes, to say the least. “The biggest challenge I face is gaining a global perspective of the functioning of the hedge fund industry and an understanding of alternative investment vehicles and their risks,” she said. “This knowledge is crucial in order for me to properly serve the needs of stakeholders in this vital industry, and in order to identify areas of regulatory weakness.” Events of the past few months only highlight the need not just for regulatory measures, according to Gilman, but also that investment professionals maintain a full understanding of the securities in which they are invested.
“The recent credit crisis has underscored the need for the alternative investments industry to improve its management of risk,” she said, “to strengthen its valuation processes, and to increase transparency of the investment structures being utilized.”
Dick Pfister
Executive Vice President, Institutional Research & Sales, Altegris Investments
Dick Pfister is not only one of the original partners of La Jolla, California-based Altegris Investments, he also holds a very special title at the CAIA Association: Member 10, the very first member of the July 2003 inaugural CAIA class. Mr. Pfister’s first-mover approach is no surprise, given his early attraction to the alternatives industry. “I was drawn to the alternative investment space when my father introduced me to commodities in the 1970’s. He was an orthodontist who also invested in precious metals futures and currencies”
After earning his degree in finance from the University of San Diego in 1993, he immediately jumped into the alternatives sphere, beginning his career on the floor of the Chicago Mercantile Exchange, trading and executing in the currency, stock index and commodity markets. “At the CME I learned about the futures markets. It was clear to me that actively managed alternative strategies were the best way to manage money for consistent long term results.” After 5 years of managing an overnight trade desk, working with large Macro and Systematic hedge fund managers like Tudor, Caxton, Campbell, Rotella and Eckhardt, Mr. Pfister took what he’d learned at the Merc, including the risk management techniques employed by both systematic and discretionary trading approaches, and moved into the buy side. Today, at Altegris, his firm’s clients have allocated over $2 billion in alternative investments and the firm employs approximately 50 staff.
At Altegris, Mr. Pfister is a member of the Investment Committee, reviewing existing investment managers and potential new additions to the platform of alternative investments that his firm recommends. He recommends and reviews structured portfolios for Altegris’ largest family offices and institutional clientele, and he oversees the Altegris sales team. Mr. Pfister has been very selective in building his team, which consists of multiple fellow CAIA members. With such a strong background and as a partner in a successful firm, what drew Mr. Pfister to the CAIA program? His dedication to education and the industry. “In 2002, Thomas Schneeweis contacted me about a group of alternative investment industry leaders who were creating a designation dedicated to the Alternative Investment world. At that time, the alternative space was missing educational outlets and opportunities to analyze the quality of an individual’s experience. I believed in the mission.” Six years after first enrolling in the CAIA program, the industry is in a very different place, but his views on the industry and the CAIA program continue to be bullish. “I believe that alternative investments will soon be categorized as “mainstream”. These styles are the future of investing.
The CAIA provides the cutting edge education in this space." And 15 years after entering the investment profession, he’s once again looking closely at the space in which he began, managed futures & commodities, but also taking advantage of the full alternatives spectrum. “In 2009, we believe managed futures will be one of the strategies that will perform well. Additionally, there are some compelling opportunities in the convertible bond, distressed debt and private equity spaces.”
To those CAIA candidates currently preparing for the next round of exams, this inaugural CAIA member offers a simple word of advice: “Study.”
Nick Gogerty
Associate Portfolio Manager, Fertilemind Capital
The term “interdisciplinary” is often considered just another corporate buzz word, but for Nick Gogerty, it has defined a career. This portfolio manager and trader has followed his interests and passions from corporate valuation & asset allocation of emerging market start-ups to Fortune 500 companies and research think tanks. Mr. Gogerty began exploring the finance world at an early age, first buying silver at age 10 (unknowingly during the Hunt brothers attempt to corner the market), then trading shares at 13, yen futures at 17, and t-bonds at 20.
More recently, his diverse interests lead him to obtain the CAIA designation in 2008. When asked what attracted him to the investment world, Nick said, “there are no absolute truths in finance and investing, this is what makes it interesting. Understanding the Popperian nature of these systems allows one to better navigate them. CAIA can provide another framework for looking at things from the different aspects of alternatives. Being able to step outside of the traditional bank or school training is what allows one to understand where things might stop working.” Mr. Gogerty has also developed commodity hedge fund portfolios, worked as a quantitative developer and trader on a proprietary foreign exchange desk in London, and been a serial entrepreneur in convergence spaces between technology and media. “Commodities and real assets are interesting as many paper based assets will be challenged by serious global currency devaluations. High frequency trading is looking interesting as well, provided the transaction tax doesn’t go through. The last thing we need now is less liquidity. I am looking for a return to value investing in 12-18 months when markets are less driven by the mood in Washington and the macro effect of the printing presses has hopefully calmed.
“Today’s challenge is the collapse of faith in the fund industry and its practitioners. A combination of false alpha from those who treat hedge funds as a compensation class instead of an asset class and a few bad apples have increased the pressure to differentiate and really deliver alpha.” Mr. Gogerty’s interest in cross-disciplinary insights can be seen not only in his diverse career path, but also in the firms in which he’s been involved. He was formerly chief analyst at Starlab NV/SA, which was a multidisciplinary, blue sky research institute established to serve as an incubator for long-term and basic research in the spirit of Bell Labs, Xerox PARC, Interval Research and MIT Media Lab. The laboratory's open and cross-disciplinary culture has been oft-cited as an innovative effort to foster creativity between researchers. It is this interdisciplinary approach to problem solving that Mr. Gogerty sees as essential for redirecting the investment world during these challenging times.
“This last year we have seen the failure of structured finance based on flawed application of covariance models and real-estate reshapes everything. Understandably, the CAIA program is still early, but I think it will grow more important as people seek to understand the risks involved. Seeing the world from multiple frameworks is a powerful thing. Each sector of the CAIA program is like a view into another country. You may not want to visit or even live there, but it is always useful to understand a bit about it.”
Mr. Gogerty earned his B.A. in Cultural Anthropology at the University of Iowa in 1993 and his M.B.A. in Hedge Fund Optimization at ENPC MBA Paris - ENPC School of International Management in 1997.