INSEAD Library

Includes bibliographical references and index

Digitized

Caia Level I An Introduction to Core Topics in Alternative Investments Contents Preface Acknowledgments About the Authors PART I INTRODUCTION TO ALPHA DRIVERS AND BETA DRIVERS 1 What Is an Alternative Asset Class? Super Asset Classes Real Estate Asset Allocation Overview of This Book 2 Why Alternative Assets Are Important Strategic versus Tactical Asset Allocation Separating Alpha from Beta Rethinking Asset Allocation Summary 3 The Beta Continuum Introduction Classic Beta Bespoke Beta Alternative Beta Fundamental Beta Cheap Beta Active Beta Bulk Beta Summary: The Beta Continuum 4 Alpha versus Beta Introduction Another Demonstration of Beta versus Alpha Drivers xiii xvii xix 1 3 3 5 6 9 11 12 14 17 20 23 23 23 24 26 27 28 31 32 33 35 35 35 Product Innovators, Process Drivers, and Bespoke Beta Sherlock Holmes and the Case of Alpha Generation Markets Are Never Fully Efficient Is Alpha a Zero-Sum Game? Governance Model for Alpha and Beta Separation Conclusion: Evolution Is a Necessity 5 The Calculus of Active Management Introduction Fundamental Law of Active Management Some Real-Life Examples Benchmarks for Alternative Assets Risk Management The Transfer Coefficient 130/30 Equity Portfolios Conclusion References PART II REAL ESTATE 6 Real Estate Investment Trusts Introduction Advantages of REITs Disadvantages of REITs Different Types of REITs REIT Rules Economics of REITs Conclusion 7 Introduction to NCREIF and the NCREIF Indexes Introduction The NCREIF Property Index (NPI) Conclusion 8 Real Estate as an Investment Introduction The Benefits of Real Estate Investing Real Estate Performance Real Estate Risk Profile Real Estate as Part of a Diversified Portfolio Conclusion 9 Core, Value-Added, and Opportunistic Real Estate Introduction The NCREIF Style Boxes Return Expectations Private Equity Real Estate Conclusion 36 38 40 42 43 45 47 47 47 52 54 54 55 56 62 65 67 69 69 69 71 71 74 75 80 81 81 81 90 91 91 91 91 94 97 101 105 105 105 108 114 115 PART III HEDGE FUNDS 10 Introduction to Hedge Funds Categories of Hedge Funds A Brief History of Hedge Funds Hedge Fund Strategies Conclusion 11 Establishing a Hedge Fund Investment Program Should Hedge Funds Be Part of an Investment Program? Is Hedge Fund Performance Persistent? Do Hedge Funds Undermine the Financial Markets? Hedge Fund Investment Strategies within an Investment Program Conclusion 12 Due Diligence for Hedge Fund Managers Three Fundamental Questions Structural Review Strategic Review Performance Review Risk Review Administrative Review Legal Review Reference Checks Measuring Operational Risk Conclusion Appendix: Due Diligence Executive Summary 13 Risk Management Part I: Hedge Fund Return Distributions A Review of Hedge Fund Studies Hedge Fund Return Distributions Implications for Risk Management Conclusion 14 Risk Management Part H: More Hedge Fund Risks Process Risk Mapping Risk Transparency Risk Risk Management Risk Data Risk Performance Measurement Risk Event Risk Beta Expansion Risk Short Volatility Risk Multimoment Optimization Conclusion 117 119 121 122 125 149 151 151 154 157 158 168 169 169 174 178 182 185 187 188 191 192 192 193 203 203 208 226 230 231 231 233 235 237 240 242 246 248 249 250 252 15 Hedge Fund Benchmarks and Asset Allocation Hedge Funds as an Investment Issues with Hedge Fund Index Construction Hedge Fund Indices Asset Allocation with Hedge Fund Indices Conclusion 16 Hedge Fund Incentive Fees and the Free Option Hedge Fund Incentive Fees Hedge Fund Fees and Option Theory Data and Results Conclusions and Implications 17 Hedge Fund Collapses Amaranth Hedge Fund Peloton Partners Hedge Fund Carlyle Capital Corporation Bayou Management Marin Capital Bernie Madoff Conclusion 18 Top Ten Hedge Fund Quotes Number 10: "If We Don't Charge 2 and 20, Nobody Will Take Us Seriously." Number 9: "We Charge 3 and 30 Because That Is the Only Way We Can Keep Our Assets below Several Billion Dollars." Number 8: "We Are 75% Cash Because We Cannot Find Sufficient Investments." Number 7: "We Don't Invest in Crowded Shorts." Number 6: "I Haven't Shorted Before, but I Do Have My CAIA." Number 5: "Hedge Funds Are Better Investments Than Managed Futures Because Managed Futures Is a Zero-Sum Game." Number 4: "What's a Master Trust?" Number 3: "Your Head of Equity Does Not Understand Our Hedge Fund Strategy." Number 2: "Basically I Look at Screens All Day and Go with My Gut." And the Number 1 Top Ten Quote: "He Will Be with You in Just a Minute, Sir--He's Still Meeting with His Architect." Conclusion References PART IV COMMODITIES AND MANAGED FUTURES 19 Introduction to Commodities Exposure to Commodities Relationship between Futures Prices and Spot Prices Economics of the Commodity Markets: Normal Backwardation versus Contango Commodity Prices Compared to Financial Asset Prices Conclusion 255 255 256 260 268 271 273 273 274 276 284 287 287 289 291 292 293 294 295 297 297 297 298 298 299 299 300 300 301 302 302 303 307 309 311 317 323 327 328 20 Investing in Commodity Futures Economic Rationale Empirical Evidence Supporting Commodity Futures as an Asset Class Commodity Futures Indices Conclusion 21 Commodity Futures in a Portfolio Context Economic Summary of Commodity Futures Commodity Futures and the Efficient Investment Frontier Commodity Futures as a Defensive Investment Conclusion 22 Managed Futures History of Managed Futures Prior Empirical Research Return Distributions of Managed Futures Managed Futures in a Portfolio Context Managed Futures as Downside Risk Protection for Stocks and Bonds Conclusion PART V PRIVATE EQUITY 23 Introduction to Venture Capital History of Venture Capital Role of a Venture Capitalist The Business Plan Current Structure of the Venture Capital Industry Stages of Financing The J Curve for a Start-Up Company Venture Capital Case Study: CacheFlow Inc./Blue Coat Systems Conclusion 24 Introduction to Leveraged Buyouts History of LBOs Theoretical Example of a Leveraged Buyout How LBOs Create Value The Failed LBO LBO Fund Structures Profile of an LBO Candidate Venture Capital versus Leveraged Buyouts Risks of Leveraged Buyouts Corporate Governance and LBOs The Dismantling of Conglomerates Merchant Banking Conclusion 25 Debt as Private Equity Part I: Mezzanine Debt Overview of Mezzanine Debt Examples of Mezzanine Financing 329 329 335 337 352 353 353 356 360 365 367 368 369 375 382 384 386 387 389 390 395 398 404 411 414 415 417 419 419 424 427 433 435 438 441 442 444 446 447 448 449 449 454 Investors in Mezzanine Debt Conclusion 26 Debt as Private Equity Part II: Distressed Debt Growth of the Distressed Debt Market Vulture Investors and Hedge Fund Managers Distressed Debt and Bankruptcy Distressed Debt Investment Strategies Risks of Distressed Debt Investing Conclusion 27 Trends in Private Equity Industry Growth and Maturation Secondary Private Equity Market New Trends in Private Equity Private Investments in Public Equity (PIPEs) Conclusion 28 The Economics of Private Equity Performance of Private Equity Private Equity Return Distributions Private Equity within a Diversified Portfolio Conclusion PART VI CREDIT DERIVATIVES 29 Introduction to Credit Derivatives Three Sources of Credit Risk Credit-Risky Investments Credit Option Derivatives Credit Default Swaps Conclusion 30 Collateralized Debt Obligations General Structure of CDOs Balance Sheet CDO Structures Arbitrage CDOs CDO Life Cycle Example of a CDO Structure Conclusion 31 Risks and New Developments in CDOs New Developments in CDOs Risks of CDOs A Case Study of CDO Risk Conclusion 459 467 469 469 473 475 480 487 488 489 489 492 497 501 508 509 509 516 523 526 527 529 529 532 539 542 549 551 551 557 565 571 571 573 575 575 584 589 591 Appendix A: Basic Principles of Return and Present Value Appendix B: Measures of Risk and Risk Management Appendix C: Correlation and Regression Analysis Appendix D: The Quantitative Analysis of 130/30 Products Index 593 601 617 629 633