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Library of Congress Cataloging-in-Publication Data:
Names: Chambers, Donald R., author. | Anson, Mark Jonathan Paul, author. |
Black, Keith H., author. | Kazemi, Hossein B., author. CAIA level I. |
CAIA Association.
Title: Alternative investments : CAIA level I / Donald R. Chambers, Mark
J.P. Anson, Keith H. Black, Hossein B. Kazemi, CAIA Association.
Other titles: CAIA level I | CAIA level one
Description: Fourth Edition. | Hoboken : Wiley, 2020. | Series: The Wiley finance |
Revised edition of CAIA level I, [2015]
Identifiers: LCCN 2019035282 (print) | LCCN 2019035283 (ebook) |
ISBN 9781119604143 (hardback) | ISBN 9781119604174 (adobe pdf) |
ISBN 9781119604150 (epub)
Subjects: LCSH: Investments. | Securities. | Portfolio management.
Classification: LCC HG4521 .C45123 2019 (print) | LCC HG4521 (ebook) |
DDC 332.63–dc23
LC record available at https://lccn.loc.gov/2019035282
LC ebook record available at https://lccn.loc.gov/2019035283
Alternative Investments is designed as the primary reading resource for the Level I exam of the Chartered Alternative Investment Analyst (CAIA) Association's Charter program, as well as a textbook for university courses and a resource for alternative investment professionals. This book began three editions ago as a revision of Mark Anson's Handbook of Alternative Assets and represents another milestone in our efforts to continuously improve and update the CAIA curriculum. This edition includes material from a variety of contributors to the third edition of the CAIA Level II textbook. To ensure that the material best reflects up-to-date practices in the area of alternative investments, the CAIA Association invited a group of leading industry professionals to review the series, covering core areas of alternative investments: real assets, hedge funds, private equity/credit, and structured products.
Since its inception in 2002, the CAIA Association has strived to be the leader in alternative investment education worldwide, and to be the catalyst for the best education in the field wherever it lies. The CAIA program was established with the help of a core group of faculty and industry experts who were associated with the University of Massachusetts and the Alternative Investment Management Association (AIMA). From the beginning, the Association recognized that a meaningful portion of its curriculum must be devoted to codes of conduct and ethical behavior in the investment profession. To this end, with permission and cooperation of the CFA Institute, we have incorporated its Code of Ethics and the CFA Standards of Practice Handbook into our curriculum. Further, we leverage the experience and contributions of our members and other alternative investment professionals who serve on our board and committees to create and update the CAIA Association program's curriculum and its associated readings.
The quality, rigor, and relevance of our curriculum readings derive from the ideals upon which the CAIA Association was based. The CAIA program offered its first Level I examination in February 2003. Our first class consisted of 43 dedicated investment professionals who passed the Level I and Level II exams and met the other requirements of membership. Many of these founding members were instrumental in establishing the CAIA designation as the global mark of excellence in alternative investment education. Through their support and with the help of the founding cosponsors, the AIMA and the Center for the International Securities and Derivatives Markets (CISDM), the CAIA Association is now firmly established as the most comprehensive and credible designation in the rapidly growing sphere of alternative investments.
The AIMA is the hedge fund industry's global, not-for-profit trade association, with over 2,000 corporate members worldwide. Members include leading hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting services, and fund administrators. They all benefit from the AIMA's active influence in policy development; its leadership in industry initiatives, including education and sound practice manuals; and its excellent reputation with regulators.
The CISDM of the Isenberg School of Management of the University of Massachusetts, Amherst seeks to enhance the understanding of the field of alternative investments through research, education, and networking opportunities for member donors, industry professionals, and academics.
The CAIA Association has experienced rapid growth in its membership over the past 17 years. It is now a truly global professional organization with over 11,000 members in over 90 countries. We strive to stay nimble in our process so that curriculum remains relevant and keeps pace with the constant changes in this dynamic industry.
Although the CAIA Association's origins are largely based in the efforts of professionals in the hedge fund and managed futures space, these founders correctly identified a void in the wider understanding of alternative investments as a whole. From the beginning, the CAIA curriculum has also covered private equity, commodities, and real assets, always with an eye toward shifts in the industry. Today, several hundred CAIA members identify their main area of expertise as real estate or private equity; several hundred more members are from family offices, pension funds, endowments, and sovereign wealth funds that allocate across multiple classes within the alternative investment industry. To ensure benefit to the widest spectrum of members, we have developed curriculum subcommittees that represent each area of coverage within the curriculum. Alternative investment areas and products share some distinct features, such as the relative freedom on the part of investment managers to act in the best interests of their investors, alignment of interests between asset owners and asset managers, and relative illiquidity of investment positions of some investment products. These characteristics necessitate conceptual and actual modifications to the standard investment performance analysis and decision-making paradigms.
Our curriculum readings are designed with two goals in mind. First, to provide the readers with tools needed to solve problems they counter in performing their professional duties. Second, to provide them with a conceptual framework that is essential for investment professionals who strive to keep up with new developments in the alternative investment industry.
Readers will find the publications in our series to be beneficial, whether from the standpoint of allocating to new asset classes and strategies in order to gain broader diversification or from the standpoint of a specialist needing to understand better the competing options available to sophisticated investors globally. In both cases, readers will be better equipped to serve their clients’ needs.
The CAIA Level I required readings are contained in this one text, supplemented only by the CFA Institute's Standards of Practice Handbook. Level I candidates are assumed to have mastered some knowledge of financial markets, securities pricing, and derivatives markets in advance of commencing studies for the Level I exam.
Many resources are freely available on our website (caia.org). We will continue to update the CAIA Level I Study Guide every six months (each exam cycle). The study guide outlines all of the readings and corresponding learning objectives (LOs) that candidates are responsible for meeting. The guide also contains important information for candidates regarding the use of LOs, testing policies, topic weightings, where to find and report errata, and much more. The entire exam process is outlined in the CAIA Candidate Handbook and is available at caia.org. Candidates can also access a workbook that solves the problems presented at the end of each chapter of this book and other important study aids.
We believe you will find this series to be the most comprehensive, rigorous, and globally relevant source of educational material available within the field of alternative investments.
Donald R. Chambers, PhD, CAIA
Associate Director of Curriculum
CAIA Association
June 2019
We would like to thank the many individuals who played important roles in producing this book. In particular, we owe great thanks to William Kelly, Chief Executive Officer of the CAIA Association, and our committee members:
CAIA Allocator Advisory Board and CAIA Job Task Analysis Committee
Contributing Authors
Reviewers and Members of Curriculum Committee
Special credit goes to CAIA staff for their valuable contributions in painstakingly bringing the fourth edition to completion.
CAIA Staff
The CAIA Association is an independent, not-for-profit global organization committed to education and professionalism in the field of alternative investments. The Association was established in 2002 by industry leaders under the guidance of the Alternative Investment Management Association (AIMA) and the Center for International Securities and Derivatives Markets (CISDM) with the belief that a strong foundation of knowledge is essential for all professionals. The curriculum includes two exams (Level I and Level II) administered to professional analysts in this growing field so that, upon successful completion, the individuals are designated “Chartered Alternative Investment Analysts” (CAIA). The CAIA designation has a great deal of prestige in the global community. Members come from over 80 countries on six continents.
Dr. Donald R. Chambers, CAIA, is Associate Director of Programs at the CAIA Association; Chief Investment Officer of Biltmore Capital Advisors; and Emeritus Professor at Lafayette College in Easton, Pennsylvania. Dr. Chambers previously served as Director of Alternative Investments at Karpus Investment Management. He is a member of the editorial board of the Journal of Alternative Investments.
Dr. Mark J. P. Anson, CAIA, CFA, CPA, PhD, JD, is a board member of CAIA and the President and Chief Investment Officer of the Bass Family Office—winner of the Family office of the Year award for 2014–2015. Dr. Anson previously served as President and Executive Director of Investment Services at Nuveen Investments Inc., Chief Executive Officer of both the British Telecom Pension Scheme and its wholly owned asset management company in London, Hermes Pension Management Limited, and Chief Investment Officer at California Public Employees’ Retirement System. He has published over 100 research articles in professional journals, has won two Best Paper Awards, is the author of six financial textbooks, and sits on the editorial boards of several financial journals.
Dr. Keith H. Black, CAIA, is Managing Director of Curriculum and Exams at the CAIA Association. He was previously an Associate at Ennis Knupp and, before that, an Assistant Professor at Illinois Institute of Technology. He is a member of the editorial board of the Journal of Alternative Investments.
Dr. Hossein B. Kazemi is a senior adviser to the CAIA Association. He is the Michael and Cheryl Philipp Professor of Finance at the University of Massachusetts, Amherst; Director of the Center for International Securities and Derivatives Markets; a cofounder of the CAIA Association; and Editor-in-Chief of the Journal of Alternative Investments—the official publication of the CAIA Association; and a member of the editorial board of the Journal of Financial Data Science.
Part 1 begins with an introduction to alternative investments and a description of the environment of alternative investing. Chapters 3 to 6 include primers on quantitative methods, statistics, and financial economics as they relate to alternative investments, as well as a chapter on derivatives and risk-neutral valuation. The last two chapters of Part 1 discuss measures of risk and performance, as well as alpha, beta, and hypothesis testing. The material is designed to provide a foundation for Parts 2 to 5, which detail each of the four main categories of alternative investments.