Risk, Return, and Cash Flow Characteristics of Private Equity Investments in Infrastructure
Florian Bitsch, Axel Buchner, Christoph Kaserer

This article analyzes the risk, return, and cash flow characteristics of infrastructure investments by using a unique dataset of deals done by private-equity-like investment funds. The authors show that infrastructure deals exhibit performance that is higher than that of non-infrastructure deals, despite lower default frequencies. However, the authors do not find that infrastructure deals offer more stable cash flows. The article offers some evidence in favor of the hypothesis that higher infrastructure returns could be driven by higher market risk. In fact, these investments appear to be highly levered, with returns that are positively correlated to public equity markets, but uncorrelated to GDP growth. The results also indicate that returns could be influenced by the regulatory framework as well as by defective privatization mechanisms. By contrast, returns are neither linked to inflation nor subject to the "money chasing deals" phenomenon.

Investing in Distressed Debt
Sameer Jain

Over the past 20 years, distressed debt investing has become increasingly popular. The distressed debt market has increased in size, and private equity firms and hedge funds have become key players. There are around 170 U.S.-based, and 20-30 Europe-based, credit managers who invest in distressed debt. They manage $120-$150 billion of private capital (hedge funds and private equity, which–often overlap). Investors who have the ability to assume extended periods of investment illiquidity may consider active approaches to credit risk investing. This article provides a broad framework for understanding credit investing from an alternative investments perspective. The author highlights a variety of strategies across private equity and hedge fund formats, illustrating investing considerations, risks, drivers, sources of returns, and market dynamics.

The Wisdom of the Right Crowd: Service Provider Choice
James B. Crystal

An analysis of funds reporting five- and ten-year track records to performance databases demonstrates a relationship between reported use of the most popular key service providers–prime brokers, auditors, administrators, and domestic legal counsel–and significant reported outperformance relative to the peer group, over historic five- and ten-year time horizons. The most popular key service providers are able to be selective in the hedge funds with which they choose to work. Therefore, a hedge fund that reports the use of leading key service providers has, necessarily, persuaded such providers that the fund's combination of investment and operational strength positions it relatively well to survive and thrive; and the key service providers have-, in turn, concluded that the fund poses relatively low reputational risk to them and is reasonably likely to grow and, consequently, to increase the revenues it pays to them. Having passed this due diligence screen appears, on balance, to be a marker for superior performance relative to the overall hedge fund population.

What We Like about Closed-End Funds that Trade at a Discount
Ben Branch, Liping Qiu

Closed-end fund (CEF) shares usually trade at a discount, and less frequently for a premium, to their net asset values (NAVs, the total value of all the fund's assets divided by its outstanding shares). While much has been written on why such funds typically trade for a discount, no consensus explanation has yet emerged. This article provides an overview of the research on CEF discounts/premiums as well as a description of a potentially attractive approach to CEF investing. The authors argue that one should begin by identifying funds that are attractive on their own fundamental terms. For example, an investor who seeks exposure to emerging markets could search among the emerging market closed-end funds for well-managed funds with relatively low expense ratios, low management fees, and superior track records. From this set of funds, the investor can then select one or more that are trading at a substantial discount. Over time, the discount may narrow, the fund may self-tender, the fund may make some large distributions, and it may even convert to open-end status. By no means will every fund do one or more of these things. But a diversified portfolio of such funds is very likely to have at least some funds that do some of these things, which add to their returns.

Attribution Analysis of Bull/Bear Alphas and Betas
Andreas Steiner

Asymmetries in risk and return characteristics come in various forms: assets with highly non-linear payoff profiles, correlations that increase in times of market turbulence, successful information-driven market timing strategies and data-driven dynamic portfolio insurance strategies lead to gain and loss sensitivities which can be very different in bull and bear markets. This contrasts strongly with traditional models, which are dominated by symmetric risk measures such as volatility and beta. In this research note, the author discusses a specific asymmetrical model and build an attribution framework that allows an analysis of the impact of asymmetric alpha and beta on the traditional single-index model, with its symmetric alpha and beta. The author illustrates how such an asymmetrical model can be used in ex-post portfolio analysis to detect "false" alphas caused by "hidden" asymmetrical betas, and how asymmetrical betas can be used in ex-ante portfolio construction for the purpose of downside risk management.

Rising Stars of Public Funds
Keith Black

Each year, Institutional Investor honors a select number of financial professionals with the “Rising Star of Public Funds” award. Of the fourteen recipients of the 2012 award, four are members of the CAIA Association. This article profiles the four Charter holders and discusses how CAIA membership has benefitted their careers and their employers.