Newsletter - May 2009
- Member Profiles:
Director's Comments
Shoring up the Pillars of Capitalism
It's not often that we see political consensus on current issues, but crises have a way a bridging the widest of divides. So it shouldn't be surprising to hear a chorus of politicians around the globe calling for change to ensure an economic calamity like this never occurs again. And who can argue against them? Significant lapses in managerial oversight and unconscionable greed have shaken the very pillars of capitalism. Something must be done!
So what exactly went wrong? If we're going to fix what is broken, we must first establish what in fact is broken. In simple terms, sub-prime mortgages were marketed to home buyers who were unlikely to meet their payments in all but the rosiest of scenarios. Rates were low across the curve and around the globe, which encouraged financial institutions to seek out new sources of revenue. This combination of factors led to lax mortgage lending standards which in the extreme took the form of no-doc, zero down adjustable rate mortgages often with a teaser (artificially low) initial rate. These mortgages either were kept on the books of the originating bank or packaged up (with other more traditional mortgages) and sold off to investors around the globe. In either case, the allure of generating fees clouded management's judgment of the risks.
While some may point fingers at the credit rating agencies for their complicity, one should not confuse risk measurement with risk management. Risk management should never be based solely on quantitative analysis because economics is not and never will be simply pure science. There will always be a qualitative aspect to it. Understanding the fundamental numbers is critically important, but recognizing they have limitations and applying the "sniff test" for reasonableness is still a significant part of management's overall responsibility (and Corporate Board oversight).
In many instances management did not fully understand the exposures on their books. Excuses notwithstanding, management will always make mistakes, and markets will always be there to penalize them when they do and reward them when they don't. But ultimately it is the regulator that must ensure the efficient functioning of the market by guarding against systemic risk while protecting the individual investor.
Had it not been for the insights of a few analysts and the activities of short-sellers who recognized that the impending resets would cause defaults beyond what the models were forecasting, the situation may well have continued. As Jim Chanos - President of Kynikos Associates - said in a recent interview, "Blaming short-sellers for the problem is tantamount to shooting the messenger." The messenger didn't create the problem; rather it resulted from poor oversight at both the managerial and regulatory level. Unfortunately by the time the market exposed the problem; it had already grown to systemic levels.
Now politicians around the globe are calling for new regulations to prevent a recurrence of this crisis. This implies the existing controls are not adequate. So was it in fact a lack of regulatory controls that caused this problem or was it that regulators failed to exert the controls they had at their disposal? And even if regulators had the appropriate controls, did they have sufficient human capital to implement those controls effectively? These questions must be answered first before instituting any changes.
One final note: nowhere above did I include mention of Hedge Fund or Private Equity firms. Why not? Because to address our current problems we must address what went wrong at the financial institutions which got us into this calamity (banks, mortgage companies, and insurers), not the Hedge Fund or Private Equity firms which had nothing to do with the sub-prime crisis, and many of whom were merely victims themselves. Hedge Fund and Private Equity firms should be regulated when the institutions become large enough to constitute a systemic risk, but that is a separate discussion and should be treated as such.
Let's not muddy the waters and in doing so obscure the solutions we desperately seek.
E. Craig Asche
Executive Director
Exam Updates
September 2009 Exam Registration Now Open
- Exam registration closes July 29, 2009 at 11:59 EST
- Exam dates: September 08 - 23, 2009
- Register for an exam.
Scheduling an examination appointment:
Pearson VUE has now opened its testing centers to scheduling for the September 2009 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 have not received your scheduling instructions, please contact candidate@caia.org.
Chapter Notes
Canada: CAIA Canada held a post-exam social networking events on Tuesday, May 12 in Toronto, and will be holding one in Montreal and one in Vancouver, both on Thursday, May 28. Click on the links to register.
Iberia: CAIA Iberia held a highly successful post-exam social in Madrid on Thursday, May 7th, which took place at El Plató. The CAIA Iberia leaders truly appreciate everyone’s participation.
London: CAIA London cordially invites members and candidates to attend a "Congratulations, Commiserations and Social Event" which will be held at Mulligan's of Mayfair on May 20th. To register please click here.
Singapore: CAIA Singapore is pleased to invite members and Level II candidates to an educational event on May 19th, which will feature Managing Director & Co-Founder of Albourne Partners, Simon Ruddick as guest speaker. His presentation will focus on "The Future of the Hedge Fund Industry: Current trends and the outlook for allocators & managers." View details and register by clicking here.
CAIA members and Level II in Singapore are also invited to an educational panel entitled "Professional Liability for Fund Managers During a Recession," which will be jointly held by CAIA, IMAS, CFA, AIMA, and Marsh on May 27th. To view event agenda and to register please click here.
Switzerland: CAIA members and March '09 candidates will be attended a post-exam educational event on Tuesday, May 19th in Geneva. This event featured Michael Strating, Quantitative Equity Expert, Head of Disciplined Equity of Robeco, who will give the following presentation: "Controlling a Single Strategy Hedge Fund: the Case of an Equity Market Neutral Portfolio."
On June 17th, members and successful candidates will be invited to a social networking event in Zurich. This event will aim to provide an informal space for networking and socializing. This will also be an opportunity to welcome new members and successful candidates, and to meet CAIA staff. Registration will be announced by e-mail and will also be available via our website soon.
Hong Kong: The next Hong Kong social will take place on May 27th and will be co-hosted by CAIA and Stephenson Harwood and Lo. To view event details and to register click here.
Germany: CAIA members and candidates are invited to attend an educational panel discussion at the InterContinental Frankfurt entitled "Commodities - Portfolio Construction, Outlook and Market Mechanics" on June 9th. CAIA staff will be in attendance. For more details and to register, click here.
A social event will be taking place in Munich at Café Saha on June 18th. Members in Germany and Austria will receive invitations by email. To view event summary and to register please click here.
Paris: CAIA members in Paris will be holding a post-exam congratulations and commiserations event on Thursday, June 11th at Café Clovis. Please view details and register by clicking here.
San Francisco: A highly successful post-exam social event took place in San Francisco on Tuesday, May 12th at the Mark Hopkins Hotel. Members and candidates from the bay area had a chance to meet traveling to San Francisco from around the globe to attending the Global ARC conference.
Save the date! The next educational event for members and candidates in San Francisco scheduled to take place on Thursday, June 18th. The event will feature John Shoven, the Wallace R. Hawley Director of the Stanford Institute for Economic Policy Research & Charles R. Schwab Professor of Economics at Stanford University as the guest speaker. To view event summary please click here
Southern California: Members and candidates in Southern California are invited to attend a social event on June 11th. Save the date! Invitations with venue details will be circulated by e-mail.
*We are pleased to be witnessing such high levels of CAIA member and candidate activity taking palace in global chapter and pre-chapters. We are aiming to extend our service by offering the benefit of networking through events to our members and candidates in other select locations around the globe: several groups of CAIA members in non-chapter locations will be hosting social networking events in the next few weeks. Details will be posted on our website, and invitations will be circulated by e-mail. All members, candidates and those interested in the CAIA Association are encouraged to attend!
View event summary and register by clicking here.
Some confirmations of dates for chapter and non-chapter events so far:
- Melbourne - May 19th
- Sydney - May 21st
- Amsterdam - June 2, venue TBD
- Luxemburg - June 10
- Washington DC - June 11
- Seoul, Korea - June 11
- Atlanta, GA - June 17
- Shanghai, China - June 17
- Helsinki - June 22, venue TBD
- Copenhagen - June 24, venue TBD
Alternative Viewpoints... powered by CAIA
"The Ascendancy of Risk Management", posted April 30th on AllAboutAlpha.com
Abdul Sheikh, CAIA ...A Vice President at State Street's fund administration group, makes the case that many attendees of GAIM Ops also made: that independent fund administration may be the only way to fully address investor concerns in the post-Madoff world.
In the past years, investors used to select fund managers based on three criteria: performance, philosophy and pedigree. But in Deutsche Bank's annual Alternative Investment Survey released last month (see related post) , "risk management" entered the ranks of the top three selection criteria for the first time, and "pedigree" fell to fifth.
It's clear that we are witnessing a paradigm shift in manager selection and asset allocation criteria. Gone are the days of just looking at attributes like track records, top down vs. bottom up approaches, low correlations to markets, and manager size. Recent events have shown that investors need transparency, independent risk analysis, and independent asset servicing.
A State Street study conducted late last year in conjunction with the 2008 Global Absolute Return Congress (see related post) reinforces this - indicating that five out of six institutions (84 percent) expect more disclosure of hedge fund positions and nearly half (49 percent) anticipate more frequent reporting from hedge fund managers. Meanwhile, only a few (19 percent) currently receive some level of consistent transparency across hedge fund holdings.
Institutional investors may believe their portfolios are well diversified. However, do they really know what their concentrations are and what these concentrations mean to them? Depending on the strategy, the managers may be allowed to take on leverage, but only a thorough analysis can determine whether that leverage is accidental or deliberate (and thus beneficial to the overall portfolio). However, this kind of thorough analysis usually requires position-level transparency.
Heightened concerns over transparency and risk management are increasing demand for independent asset servicing. Functions such as securities processing, fund accounting, reconciliations, security settlement and safekeeping are no longer viewed as value-added but necessary. Many industry experts think that the Darwinian processes occurring for the past year will separate the "premier league" of funds from the others. Based on the result of the surveys above, these premier league funds will likely be distinguished by their ability to employ independent asset servicing, provide transparency and use better risk management systems.
To read more, please click here.
Field Notes: Copenhagen
During my recent visit to Copenhagen, Helsinki, Stockholm and Oslo, it was clear that since our last visits in September and October of last year, people's attitudes had changed in certain quarters and it had been a tough time for most individuals.
As elsewhere in the world there were a few bright sparks with some firms increasing staff members and launching new products. On looking at the statistics and talking to people from associations such as TELA The Finnish Pension Alliance, it was clear that a large number of funds were still planning to allocate to hedge funds, with some having separate allocations reserved for commodities.
One of the issues they face, which is again not isolated to the region, is that they have derisked their portfolios significantly from where they stood this time last year. However, the funding gap has widened, so the need to generate increased returns in a volatile market environment with lower risk in the portfolio is a challenge. Pension funds are not turning their back on alternative investments as some in the media would have us believe. Many are looking at, or are, allocating again to alternative investments.
The issue for most investors, not just pension funds, is that investor confidence has been eroded and needs to be rebuilt. Both on the buy side and sell side, 2009 seems to be the year of re-organising the infrastructure of their respective businesses to get ready for 2010.
Certainly what I am seeing across the Scandinavia region is an increase in the desire for a professional education programme and designation in alternative investments. Given the size of the pension funds in the region there is increasing development of internal alternative investment teams. While they build on existing expertise they also look to ensure a proactive, forward looking investment strategy.
By Steve Wallace - CAIA
Associate Director of Industry Relations, EMEA
Member Profiles:
Fabio De Gaspari – CAIA
Head Proprietary Trading
Ivest Banca
Florence, the capital of Tuscany and cradle of the Renaissance, is where Fabio De Gaspari calls home. One of the first CAIA members in Italy, he earned Chartered Alternative Investment Analyst designation in 2005.
De Gaspari’s day-to-day role consists of managing Invest Banca’s proprietary investment portfolio while coordinating asset allocation. Invest Banca offers a wide range of services that include high value-added brokerage, asset management, and Treasury management. A 2002 graduate of the University of Venice in Business Economics, De Gaspari began his career in alternative investments and has stayed involved ever since. “I began working for a CTA where I learned much about the quantitative world of finance, ranging from systemic trading to implementing neural-network tools. After three years, I moved on to a Rome-based asset management boutique where I served as portfolio manager for their global macro strategy fund.”
Since his university days, De Gaspari has been drawn to the alternative investment environment by strong leaders such as George Soros and Julian Robertson. “I focused my efforts on understanding their role in discretionary money management, while exploring all the opportunities offered by the financial markets.”After several more years, De Gaspari decided to widen his alternative knowledge and enhance his professional credibility by earning the CAIA professional designation. “The opportunity to gain an in-depth understanding of such non-traditional investment markets such as REITs and private equity, led me to the CAIA program.”
“As a portfolio manager and trader, my first goal is to preserve capital by investing through a risk budget framework. We live in a financial system where different asset classes remain deeply interconnected, making it impossible to ignore what’s happening in other investment areas. As an example, the REIT expertise that I gained through the CAIA program has helped me to better understand the various issues surrounding securitization and debt levels,” stated De Gaspari.
De Gaspari has noticed considerable change in the industry in recent years, particularly with regard to the need for a solid alternative investment education: “A few years ago, during the hedge fund boom, many people were not aware of the value and necessity of alternative investment education, certification was barely an afterthought. But in the current economic environment, financial professionals with the expertise, credibility and high standards associated with the CAIA designation have become increasingly sought after.
Dr. Wessel Marquering – CAIA, FRM
Quantitative Researcher/Risk Manager
Taler Asset Management
Dr. Wessel Marquering is a Quantitative Researcher/Risk Manager at Taler Asset Management in Gibraltar. Dr. Marquering, who earned the CAIA designation in 2007, holds a PhD. in Financial Economics and has taught at RSM Erasmus University and University of California at San Diego. He has published articles on asset pricing, professional asset management, and predictability of returns and volatility in many journals, among them the Journal of Financial and Quantitative Analysis and Journal of Banking and Finance.
In 2005, Dr. Marquering was advised by a colleague to enter the CAIA program. “The most difficult aspect of my job is to understand how hedge fund managers generate returns. The instruments through which managers invest are often complex and can change rapidly over time. As a risk manager, I need be on top of these risks by understanding each manager’s investments thoroughly. The CAIA program gave me a much better understanding of the many instruments they employ, which helped me in turn to build a superior risk management system.”
Notes Marquering, “A unique challenge in our marketplace is to avoid investing with fraudulent managers or those who would obscure the true risks associated with their strategies. We consider four types of hidden risk in this field:
- Non-linearity of return distributions for managers who utilize short out of the money option strategies or similar constructions.
- Managers who profit not from skill but simply through exposure to trending risk factors: when you consider such strategies over long time periods, we observe that such strategies are risky. Through factor analysis, we are able to identify these hidden risks.
- Managers who try to mask the illiquidity of their underlying investments by artificially smoothing their reported returns
- Outright fraud. We have developed quantitative and qualitative tools to detect potential fraud.
When asked how his team has adjusted to market volatility over the past year, Marquering responded, “We have allocated more towards government bonds and deposits and much less to equity over 2008. Our allocation to risky assets is a function of volatility of the risky assets. Further we have increased allocation to managers that perform well in turbulent conditions such as CTAs and volatility-driven arbitrage funds. While we may participate less in (bear) market rallies, our priority is first and foremost capital preservation.
Marquering believes that the knowledge and professionalism associated with those who have earned the CAIA designation will strengthen the public’s perception of hedge funds and restore investor trust. “Through the CAIA examination program, one obtains a strong and diverse knowledge of alternative investments. CAIA designees will continue to benefit from this growing recognition amongst professionals within the global investment community.
CAIA on the Road: US, New Zealand, Australia, Netherlands, Switzerland & Germany
We are currently developing our spring travel itinerary and are looking forward to meeting CAIA members and colleagues in the following cities:
May
- San Francisco: 11 - 15
- New Zealand: 11 - 18
- Australia: 19 - 26
- New York: 25 - 27
June
- Amsterdam & Zurich: 3 - 5
- Boston & Bermuda: 8 - 12
- Frankfurt & Munich: 8 - 9
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!