Retooling In-House Investment Teams Inside Institutional Investors: Three Perspectives on the Shift Towards Direct Infrastructure Investment
Eric Knight and Rajiv Sharma

Over the last 10 years, institutional investors have moved strongly away from intermediated infrastructure investment towards a direct investment model. This model directly exposes investors to the underlying risks associated with managing and governing complex infrastructure projects. This is problematic since few institutional investors traditionally have the skills to manage these risks in-house. Building on the perspectives of governments, infrastructure management teams, and investment partners, we draw three implications for in-house investment teams, focusing on the importance of close government relationships, talent management strategies to acquire the right in-house skills, and using partnerships to manage risk exposure.

 

How to Lose Money in the Financial Markets: Examples from the Recent Financial Crisis
Sebastien Lleo and William T. Ziemba

What makes financial institutions, banks, and hedge funds fail? The common ingredient is over betting and not being diversified in some bad scenarios that can lead to disaster. Once troubles arise, it is difficult to take the necessary actions that eliminate the problem. Moreover, many hedge fund operators tend not to make decisions to minimize losses, but rather tend to bet more, doubling up, with the hope to exit the problem with a profit. Incentives, including large fees on gains and minimal penalties for losses, push managers into such risky behavior. We discuss some specific ways losses occur. To illustrate, we discuss specific cases from the recent financial crisis, including subprime mortgages. We also list other hedge fund and bank trading failures with brief commentaries.

 

Hedge Fund Lifecycle
Jeffrey D. Furst

All companies pass through various stages of development over the course of their existence; each stage has unique characteristics, and the managerial focus will reflect the current point in the firm’s life cycle. Hedge funds experience a similar transformation, with incentives, opportunities, and risks evolving over time. Understanding the stages of a hedge fund’s life cycle has important implications for investors, including when to hire or fire a manager, and how to establish proper expectations for return, volatility, and correlation.

 

Private Equity and Value Creation in Frontier Markets: The Need for an Operational Approach
Stephen J. Mezias and Afzal Amijee

For private equity firms seeking to invest in companies in emerging markets, the operational value creation approach is in high demand, particularly in the Middle East North Africa (MENA) region. Building operational capabilities requires active investment in business processes, cultivation of human capital, and allowance for an extended time horizon. Developing the knowledge and skills of local managers to deliver value from operations will not only result in improved prospects for producing great companies, it will also help to advance human talent and organizational capacity in the region. In the long-term, the support of a new generation of business leaders could have a profound effect on the local economies, their competitiveness, and the overall integration of private equity markets in the MENA region.

 

What is Money? From Commodities to Virtual Currencies/Bitcoin
Benton E. Gup

Money in various forms has been in circulation since about 2200 BC. What constitutes money has evolved from commodities with intrinsic value, such as gold to fiat money that is backed by federal governments and is in wide use around the world today. Payments systems have also evolved to include credit cards, debit cards, and various forms of electronic remittances. Virtual currencies, such as Bitcoin, are the latest innovation. This article examines the pros and cons of Bitcoin and assesses the future of the so-called “cryptocurrencies.”

 

IR&M Momentum Monitor
Alexander Ineichen, CAIA

Risk is often defined as exposure to change. Spotting change, therefore, is important. There are essentially three approaches to change: 1. Displaying complete ignorance, 2. Having a wild guess as to what it means, or 3. Measuring it in a systematic fashion with an applicable methodology and adapting to it. The author recommends choice number 3. Momentum can be perceived as a philosophy. The author discusses the Momentum Monitor (MOM) and recommends it as a risk management tool. If risk is defined as “exposure to change,” then one ought to spot the change.

 

VC-PE Index: A Look at Private Equity and Venture Capital as of Q1 2014
Mike Nugent, Mike Roth

Funds raised in the last decade generally showed a positive trend in Q1 2014. However, median DPI ratios for the last decade are less than 1.0x. Funds from 2004 and 2005 that are nearing the end of their fund life appear to be generating realizations slowly.