Where Academics/Practitioners Get It Wrong
Thomas Schneeweis, PhD

This open letter is addressed to new researchers, as well as to those already committed to a research direction. I appreciate that “success” in both practitioner and academic research is based on AUM (Assets under Management or Articles under Management). How one achieves that goal is rarely criticized. For academics, if a reviewer passes it then it must be correct (note, this article is not a damnation of the academic review process. As the founding editor of the Journal of Alternative Investments, I rely on the kindness of the reviewers). I am constantly amazed as to what academics or practitioners believe to be the facts underlying the hedge fund industry. For years, a major part of the annual research conference sponsored by CISDM was a seminar on “Where Academic’s Got It Wrong” (including my own research errors). This paper only summarizes a few of the areas discussed during those CISDM presentations. There are many areas not covered in this note. I look forward to other academics and practitioners sending me their own findings. At the very least, I hope the concerns addressed herein will open up new research that may offer new insights. One insight I hope researchers will come to realize is that they have the responsibility and the opportunity of increasing their knowledge of the alternative investment industry either through direct discussions with industry professionals or through association with organizations such as Chartered Alternative Investment Analyst Association, the largest and most well-known global professional association in the AI area and the home of the CAIA Designation. As a co-founder of the nonprofit CAIA I can assure you that we do not have all the answers, but hopefully we can help you on the path to better understanding the questions. – Thomas Schneeweis, PhD

Who Sank The Boat?
Hillary Till

This paper reviews both the theory and empirical evidence regarding how commodity futures markets work, including the role of the speculator. The author also discusses the difficulty in identifying the cause and effect relationships for commodity price spikes. Till concludes by noting that commodity futures markets have been the product of 160 years of trial-anderror efforts. One result has been the creation of an effective price discovery process, which in turn enables the coordination of individual efforts globally in dynamically matching current production decisions with future consumption needs in commodities. The price risk management benefits of these markets are also particularly emphasized in this article. Till argues that the present concern with recent food and oil price spikes is fully justified. One can be concerned, though, that proposals to restrict “speculation” may actually be placeboes that distract from addressing the real causes of these price spikes. One hopes that advisers to influential policymakers will do careful research on the economic theory and practice of commodity futures markets. They would then understand why a large body of academics and practitioners desire to protect these vital institutions.

Measuring Systemic Biases in Real Estate Returns
Mark J.P. Anson, PhD

Real Estate is generally considered one of the least liquid asset classes. There are several reasons for the lack of liquidity: the unique nature of each property, the lack of a publicly traded market, the appraisal nature of valuing assets, and the large (‘chunky”) size of each asset. While real estate is a valuable asset class with a favorable risk and return profile, the value of real estate as either an alpha generator or a portfolio diversifier is potentially overstated. It is the illiquid nature of real estate that makes comparisons to contemporaneous financial market movements inappropriate.

Using a lagged beta analysis, the author finds that the overall beta of real estate to the public equity markets is much larger than previously thought – in fact it is many times greater than a single period beta. In addition to an increase in the beta, the author observes a decline in alpha or the excess returns derived from real estate. The decline in alpha was most noticeable when considering the behavioral aspect of lagged real estate betas; there was no measurable skill attributable to real estate managers in Up Markets, while there was large economically and statistically alpha in Down Markets.

Finally, using a multi-period correlation coefficient, the paper finds that real estate is not as large a portfolio diversifier as previously thought. This is perhaps the largest contribution of this paper as real estate has long been thought to be an ideal diversifying asset class from stocks and bonds. There is still value with real estate based on its own risk and return characteristics, but only about one half as much diversifying potential when a multi-period analysis is used.

Hedge Fund Seeding: A Compelling Alternative
Mark Jurish, Peter Brady, Todd Williams

For the past 10 years, interest in hedge funds has been increasing dramatically, as demonstrated by a continual stream of hedge fund launches and substantial asset growth. Institutional investors have steadily increased their hedge fund allocations to capitalize on the attractive risk, return, and correlation benefits compared to traditional investments. Over time, many investors have also recognized that a subset of the hedge fund industry – hedge fund seeding – offers an exceptional opportunity to benefit not just from attractive investment returns, but from the hedge fund industry’s growth as well.

Despite significant contraction in the second half of 2008, most experts predict the hedge fund industry will resume its growth and that hedge funds will continue to play a vital role in the institutional investment landscape (Quirk, 2009). Institutional investors can access hedge fund investment benefits through multiple strategies including direct investments, fund of funds and hedge fund seeding vehicles. This paper focuses on the potential benefits and process of providing seed capital to startup hedge funds through a hedge fund seeding vehicle. The authors present the potential risks and the rewards of seeding, compare commonly used seeding models, and explain why the current environment is attractive for seeding.

IPD Global Cities
Max Arkey

The IPD Global Cities Report summarizes the key analytical findings from IPD’s database of over 60,000 real estate investments worldwide. In this annual analysis of 60 cities, the authors discover wide performance variations across cities in Asia Pacific, North America, and Europe, and indeed across the various property types within these markets. The strongest and weakest markets are identified in both recent and long-term time horizons, and diversification benefits highlighted for multinational real estate investors. In addition, there were opportunities for positive returns to be found by investors throughout the economic downturn due to the unique drivers of performance in each market.

The Outlook for Alternative Investments
Keith Black, featuring David F. McCarthy, Donald R. Chambers, Francois-Serge Lhabitant, Galen Burghardt, Jim Liew, Mark Anson, Pierre-Yves Mathonet, and Thomas Meyer

The CAIA Association is pleased to announce the second edition of its main textbook for the Level II exams: Advanced Core Topics in Alternative Investments. The book will be published in September 2012, and will be a required core reading for CAIA Level II exam for March 2013 and beyond the March 2013 Level II exam. Given that markets for alternative investment are continuously changing, markets change quickly, CAIA regularly revises its curriculum material. The new Level II book was edited by Keith Black, Donald R. Chambers, and Hossein Kazemi, with contributions from a number of leading practitioners, including Mark Anson, Jim Liew, Francois-Serge Lhabitant, David McCarthy, Galen Burghardt, Thomas Meyer and Pierre-Yves Mathonet. The interviews presented below reflects the ever-changing nature of alternative investments and highlights the themes most important within each sector.