CAIA

Key Goals of Sustainable Finance Legislation in Europe

Reduce emissions, reduce pressures on the environment, and minimize waste in the use of the natural resources

SEC Risk Alert: Four Warning Indicators and Awareness Signals Regarding Risk Management

1. Concentrated Positions 2. Insufficiently knowledgeable investment personnel 3. Investment strategy drift 4. Overly complex or opaque investment descriptions

Three Important Questions in a Risk Management Review

1.) What are the types and levels of risk involved in the fund manager's strategy? 2.) What risks are measured, monitored, and managed? 3.) How are risks measured, monitored, and managed?

Establishing ESG within a Partner Organization

(1) establishing a formal commitment to ESG integration; (2) setting ESG related objectives and metrics; and (3) engaging and communicating with all stakeholders.

Positives and Negatives of Short Selling

+ : Helps promote well-functioning efficient markets -penalizes corporate fraud/mismanagement - : Harmful to market sentiment since it is hoping for price declines, may increase market volatility

Property Unit Trusts

- Unlisted investment vehicles comprised of a portfolio of properties held in the name of a trust. - PUTs are the most important open-end investment product used by pension funds and insurance funds to obtain exposure to the UK real estate market

Key differences between the single-factor market model and the CAPM

-CAPM: all assets are efficiently priced and their expected returns are linearly related to their market betas (i.e., all assets have equal Treynor ratios). Based on informational market efficiency, the CAPM's intercept term is the risk-free rate. -Single-factor market models: consistently abnormal returns are captured in the intercept term (i.e., intercept is not equal to the risk-free rate).

ESG Challenges

-ESG Adoption -Lack of Standards -Cost

First, Second, and Third Generation Commodity Indices

-First-generation indices hold long-only positions in front-month futures contracts. They roll the contracts to second-month contracts at set times (regardless of the shape of the term structure or market conditions). -Second-generation indices that spread the roll period across the forward curve or target sections of the curve. Forward curve positioning aims to enhance returns. -Third-generation indices that may engage in discretionary positioning. They add active commodity selection (on a discretionary basis or based on rules) to enhance second-generation commodity indices.

Goals for incorporating ESG into Institutional Portfolios

-Increasing Risk-Adjusted Returns -Reducing Reputational Risk -Addressing Stakeholder Concerns -Doing the right thing, or improving the planet

Real Estate Development and ESG

-Land Acquisition and Governance -Transparency -Workers' Rights -Environmental Stewardship -Quality of Design

Pension Protection Act of 2006

-Requires employers to disclose their funded status and requires they make contributions to underfunded plans -Contributions need to be such that the plan will be fully funded within seven yearsA

Real Estate: ESG Issues in Recovery and Disposal

-Strategic site-use Evaluation -Review market conditions and the long term demand for the existing building/site -Consider the social and community impact of changing the use of the building

Real Estate Use and ESG

-Transparency and Disclosure -Environmental Stewardship -Energy Consumption -Water -Waste Management

Three Major Advantages of Investing Directly in Hedge Funds

1. Cost Savings - avoiding extra layer of fees from FoFs 2. Access to cost effective, experienced consultants to assist in implementing approach 3. Improved control and transparency in the asset allocation and due diligence process

Two Circumstances where Issuer would exercise the option on a callable bond

1. Decline in interest rates 2. Reduction in Credit Risk -If the value of the call option is positive, then the non-callable bond price will be greater than the callable bond price.

Expected Time to Default

1 / Default Intensity

Five Steps on Implementing Impact Investing

1) Articulate Mission and Values 2) Creating Impact Themes or Theses 3) Developing Impact Investment Policy 4) Generate and Evaluate Deal Flow 5) Portfolio Construction and Management

Three Empirical Findings of PE fund performance

1) Venture capital fund performance tends to exceed that of buyout funds 2) Private equity outperformance and performance persistence have generally been lower in more recent years (since 2000) 3) Risk-adjustment of returns and netting of fees tended to lower private equity performance to unattractive levels.

Seven Major Potential Advantages of Listed Assets

1. Greater Liquidity 2. Lower Mgmt. Fees 3. Easier Diversification 4. Visible Indications of Market Values 5. Regulatory Oversight 6. Greater Access to Financing 7. Tax Simplification

ILPA Guidance for Clawbacks

1. Clawback liabilities should be determined & disclosed to LPs at the end of every reporting period. (IV) 2. Clawback amounts should be gross of taxes paid (I) and should be repaid no later than two years following recognition of liability (III). 3. Clawback periods must extend beyond the fund's term (including liquidation and provision for LP giveback of distributions) [II]. 4. LPs should have robust enforcement powers (including ability to directly enforce the clawback against individual GPs).

4 Factors Building Owners Should Consider

1. Comprehensive non-discrimination policies (for rentals and sales) 2. Procurement policies (use local labor and materials when possible) 3. Occupants' health, safety, and well-being 4. Workers' rights across the supply chain

4 Factors involved in Naive Allocation estimates

1. Absolute size of allocation 2. Size of allocation relative to overall portfolio 3. Comparison of existing portfolio 4.Liquidity needs

Key Factors for Disaster Recovery Plans

1. Adequate backup (preferably off-site) for all account information 2. Alternative plans for monitoring, analyzing, & trading investments if primary systems are unavailable 3. Plans for communicating with critical vendors & suppliers 4. Plans for employee communication and coverage of critical business functions in the event of a facility or communication disruption 5. Plans for contacting & communicating with clients during an extended disruption

Six Advantages that may explain Exception Returns by Large Endowments

1. Aggressive Asset Allocation 2.Effective research by investment manager 3. First-mover advantage 4. Access to a network of talented alumni 5. Acceptance of liquidity risk 6. Sophisticated investment staff and board oversight

Advantages of Large Endowments

1. Aggressive asset allocation (to alternative assets) 2. Effective manager selection - this is key to the high performance. 3. First-mover advantage (i.e., being one of the first to invest in alternatives) 4. Network of talented colleagues/alumni 5. Acceptance of liquidity risk 6. Sophisticated investment staff and board oversight

Six Primary Challenges to the Performance Persistence Hypothesis

1. Ambiguity regarding "top performance" measure 2. Comparing heterogeneous funds 3. Is the performance luck or skill? 4. Effect of changes in fund size over time 5. Secular market trends (not individual GP talent) may drive performance 6. Heterogeneous performance dispersion in the PE market

Examples of how Private Equity GPs can Create Wealth

1. Assembling a top management team 2. Selecting Portfolio companies with high return potential 3. Working with or replacing the mgmt teams of portfolio companies 4. Tapping the GPs networks to bring in personnel and contacts to optimize the potential success of each portfolio company 5. Assisting the successful portfolio companies to perform exits that maximize the creation of wealth

Classifications of Management Teams

1. Blue Chip - Generates a top-quartile performance for ALL of its funds for at least 2 business cycles (Sequence of > 3 funds) 2. Established - Generates top-quartile performance for most of its funds (>3 funds) for at least 2 business cycles 3. Emerging - Has a limited joint history, but has all the characteristics to become an established team 4. Re-Emerging - Previously blue chip or established team that has undergone a restructuring (after poor performance or operational issues), has potential to re-emerge as established/blue chip

Key Parties That Oversee Investments included in IPS

1. Board 2. Investment committee 3. Internal staff (e.g., CIO) 4. Investment advisers and/or outsourced chief investment officer (OCIO) 5. Trustee/custodian (or other external providers)

Three Methods for Approximating Short-Term Valuations of Illiquid Securities

1. Capital Statement Valuations 2. Discounted Cash Flow Model Based Calculations 3. Customized Index Based Calculations

Phases of Life Cycle for Non-Traded REITs

1. Capital raising 2. Property purchase 3. Asset management 4. Disposition (exit)

4 Primary Ways Hedge Funds Deal w/ Cash

1. Cash for fund expenses - These include frequent recurring expenses (e.g., office rent and salaries), and less frequent expenses (e.g., audit and legal bills). 2. Cash to facilitate trading - Besides the usual expenses inherent to trading (e.g., brokerage commissions), hedge funds may also have positive cash balances on account with trading counterparties (e.g., with a swap counterparty). 3. Cash flows to and from investors - This is cash arising from capital inflows (i.e., subscriptions) and outflows (i.e., redemptions). 4. Unencumbered cash - This cash is not currently being used for trading but may be used in the future for either trading or for another reason. Hedge funds usually earn interest on this type of cash by depositing it in liquid assets (e.g., checking accounts or interest-bearing money market accounts).

Areas Commonly Included in Background Investigation

1. Civil Searches 2. Criminal Searches 3. Regulatory Searches 4. Media Searches 5. Factual Information Searches

Challenges Associated with Constructing an Asset-Weighted Hedge Fund Portfolio (allocating based on predefined-strategy AUM)

1. Declining Alpha - Alpha eventually dissapears (becomes zero) in efficient markets 2. Biased AUMs - Capital inflows into hedge fund strategies can change over time, making it challenging to follow AUM weights over time 3. Flawed Strategy Classifications - Strict classification of hedge fund strategies is challenging due to the numerous strategy definitions and since hedge funds may change or add to their strategies (style drift) as their AUM increases

Three Key Observations Behind the Financial Economics of Delta Hedging

1. Delta hedging is not a directional speculation on the stock price 2. If a stock is efficiently priced, all trading strategies on that stock have an NPV of zero 3. Delta hedging is a part of a speculation on volatility

Steps to Ensure Buildings provide safe and sustainable environments to occupants

1. Design and construct buildings to accomodate the effect of fairly predictable future weather, seismic, and climate change events 2. Adhere to international building codes and construction standards 3. Conduct a sustainability analysis of the planned building to determine the optimal design that balances economic, social, and environmental costs and benefits 4. Plan for alternative future uses of the building 5. Ensure adequate levels of natural light, indoor air quality, and common spaces

Two Required Acts Based off 1940 Advisor's Act

1. Designate a Chief Compliance Officer. 2. Adopt and implement written compliance policies and procedures to prevent, detect, and correct violations of the Advisers Act.

2 Compliance Requirements from 1940 Investment Advisors Act

1. Designate a chief compliance officer 2. Adopt and implement written compliance policies and procedures to prevent, detect, and correct violations of the Advisers Act

Selection Process for PE Managers

1. Determine a wish list of fund characteristics 2. Classify the manager teams 3. Deal sourcing 4. Perform due diligence 5. Decide on investment proposal 6. Make a commitment

Four key reasons for loss of family wealth over generations

1. Dilution of family wealth as number of descendants increases over generations 2. Lack of skill or interest in the family business by later generations 3. Later generations not being well prepared to be productive or to manage family wealth 4. Assets are willed to philanthropy, not to descendants

Key Steps to ODD Conducted by Investors

1. Document Collection 2. Document Analysis 3. On-site visit 4. Service provider review and confirmation 5. Investigative Due Diligence 6. Process Documentation 7. Operational Decision 8. Ongoing Monitoring

Eight Core Elements of Operational Due Diligence Process

1. Document collection 2. Document analysis 3. On-site visit 4. Service provider review and confirmation 5. Investigative due diligence 6. Process documentation 7. Operational decision 8. Ongoing monitoring (if investment made)

Commodity Based ETNs

1. ETNs are zero coupon instruments 2. The return to the ETN is subject to the credit-worthiness of the issuer 3. The price of the ETN is based on a contractually designated relationship with the underlying index 4. ETNs may qualify for capital gains tax treatment if held for a sufficiently long period of time

5 ESG Categories of SASB Materiality Map

1. Environment 2. Social Capital 3. Human Capital 4. Business model and innovation 5. Leadership and governance

Three Weighting Measures for IRR

1. Equally Weighted IRR - easy but may be misleading 2. Commitment Weighted IRR - The commitment-weighted IRR does not capture the true weight of each fund's actual value. However, it might be useful for measuring the LP's skill in selecting and allocating the right amount to funds. 3. Pooled IRR - The advantage of this measure is that it takes the scale and timing of cash flows from various funds into account and may be indicative of LP's skills. A potential disadvantage is that larger cash flows will be given more weight An investor should consider all three because there is no perfect measurement

Steps of a Factor Based Replication Program

1. Estimate weights or risky assets in the replicating portfolio (Estimated betas of a regression equation using in-sample data, the R-square of the regression is generated after the regression is run at the end of step 1) 2. Estimate weight of cash 3. Invest in different areas (Determine out-of-sample returns on the replicating portfolio)

Three Key Differences Between PCA and Factor Anlaysis

1. Factor analysis makes specific statistical and modeling assumptions about the return process while PCA does not require a definite model because it simply maximizes explained variance. 2. Factor analysis generates different factor scores when different numbers of factors allowed in the model, while PCA's loadings do not change as the number of components considered is increased. 3.PCA can identify a factor driven almost entirely by one security (e.g., one stock or bond with a very volatile and unusual risk profile) while FA seeks factors that drive at least two securities.

Factors correlated to private equity real estate funds (PERE)

1. GDP Growth - increased productivity and wealth drive increases in the value of real assets. 2. Private market real estate return - shared underlying drivers of performance with PERE funds. 3. Inflation changes - real estate provides a partial hedge against inflation. 4. Default spread changes - investors in real estate expect a risk premium for exposure to default risk.

Three-Pronged Approach to Better Address Longevity Risk in Pension Plans

1. Generate accurate, up-to-date, and customized measures of mortality rates 2. Adjust plan liabilities based on updated longevity expectations 3. Stress test portfolios based on different longevity improvement scenarios

Three Pronged Approach to Addressing Longevity Risk

1. Generate accurate, up-to-date, and customized measures of mortality rates. 2. Adjust plan liabilities based on updated longevity expectations (including interactions with other investment risks). 3. Stress test portfolios based on different longevity improvement scenarios.

7 Categories of Quantitative information allocators may find helpful to regularly review

1. Historical Performance 2. Historical Risk Measurement Review 3. Asset Allocations and Capital Balances 4. Gross Contribution 5. Various Activity Reports 6. Fixed Income Reports 7. CTA and Managed Futures Exposures

ILPA Guidelines with respect to Key Persons

1. Identification and changes to key person(s) 2. Time and attention 3. Key person triggers and process to remove 4. GP removal and replacement

NIS Directive compliance measures

1. Identify critical systems and those with confidential data. 2. Perform penetration tests and cybersecurity risk assessments. 3. Provide training and awareness initiatives for employees. (I) 4. Have an incident response plan

Seven Major Advantages of Privately Organized Assets

1. Illiquidity Premium 2. More Incentivized Managers 3. Greater asset targeting by investors 4. Appearance of Stable Values 5. Greater Investor Oversight 6. Greater Managerial Flexibility 7. Tax Benefits

Fundamental Questions to ask about Fund's Investment Objective

1. In which markets and assets does the fund manager invest? 2. What is the fund manager's general investment strategy 3. What is the fund manager's benchmark, if any?

Goals for Incorporating ESG Principles into Institutional Portfolio

1. Increase Risk Adjusted Returns 2. Reduce reputational risk 3. Address stakeholder concerns 4. Do the right thing

Recent Hedge Fund vs Equity Risk Trends

1. Individual fund strategy indices tended to exhibit about half of the total risk and about one-third of the systematic risk of the equity indices. 2. Average hedge fund returns tended to exhibit about one-third of the equity indices' total risk. 3. Average hedge fund returns tended to exhibit about one-sixth the equity indices' systematic risk

Drawbacks of Ho and Lee Model

1. It assumes a simple binomial process for bond prices. 2. It can generate negative interest rates

Three Major Drawbacks of over-the-counter commodity index swaps

1. Limited Access - only avaialable to large, high credit worthy investors 2. Limited Exit - not liquid secondary market 3. Additional Risks - greater counterparty risks vs futures market

Risk Alert: Four Warning Indicators and Awareness Signals Regarding Investments

1. Manager unwillingness to provide transparency 2. Investment Returns inconsistent with the investment strategy 3. Lack of clarity in the investment process 4. Lack of controls and segregation of duties

Issues with CAPM to explain return of alternatives

1. Multi period issues 2. Non-normality of alternatives returns 3. Illiquidity and other barriers to diversification 4. Investor specific assets and liabilities in CAPM

Why the CAPM is an especially poor model with which to benchmark alternative investments

1. Multiperiod issues 2.Nonnormality, 3. Illiquidity of returns and other barriers to diversification

Considerations for PE investment in Emerging Markets (Technical Guide - Responsible Investing)

1. PE investments in these markets often have different levels of ownership and control than in developed markets, which increases the importance of aligning interests with other investors and fund management 2. GPs may be unable to access the same scope and volume of audited information during their due diligence process 3. There may be different regulatory regimes for ESG issues, requiring compliance aboce legalequirements

Three Characteristics of a Program Related Investment

1. Primary purpose is to accomplish one or more of the foundations exempt purposes 2. Income / appreciation is not a significant purpose of the investment 3. Influencing legislation / political campaigns is not part of the goal

PRI 4 Modules

1. Responsible Investment Policies and Approaches 2. Addresses Governance 3. Diligence process and Fund Terms 4. Monitoring and Reporting

Benefits of Using Hedge Fund Replication Products

1. Return Enhancers - benefit can come from earning alpha or by investing in underweighted alternative beta exposures - Liquidity risk is an alternative source of return not avaialble in traditional investments but available in distressed securities strategies 2. Risk Diversifiers - Reduce portfolio risk and provide exposure to alternative sources of risk and return

Five Components of Risk Management of Who , What , Where , When , How

1. Risk Reporting (Whom) 2. Dimensions of Risk (What) 3. Investment / Position Level (Where) 4. Frequency of Data Collection (When) 5. Aggregation and Systems Development (How)

Limitations of Investing in Secondary PE Market

1. Risk management is challenging 2. Small size (Relative to the primary market) 3. Liquidity can dry up when most needed

Key Risks of DeFi Ecosystem

1. Smart contract execution 2. Operational security 3. Dependencies 4. External data 5. illicit activity 6. scalability

five actions LPs can take when building capacity to apply the PRI principles for private equity

1. Start a dialogue w/ GP 2. Leverage the work across an organization 3. Engage w/ Industry peers at other LPs 4 Review resources and leverage existing tools 5. Identify and build current ESG processes

three potential reasons an actual investment strategy may differ from the stated investment strategy

1. Style Drift 2. Operational Errors 3. Fraud

Challenges of Using Third Party Custody for Digital Assets

1. Technical nature of custodian due diligence 2. Fragmented liquidity 3. Lack of integration with traditional assets

ESG Investing is permissable under trust fiduciary law only if:

1. The fiduciary believes in good faith that ESG investing will benefit the beneficiary directly by improving risk-adjusted return. 2. The fiduciary's exclusive motive for ESG investing is to obtain this direct benefit.

Justifications for Special Consideration of ESG Investment

1. The historic total returns from portfolios of listed securities based on ESG concerns and adjusted for risk based on single-market-factor methods appear to be equally attractive, and perhaps in some cases or jurisdictions more attractive, than portfolios that ignore or eschew ESG concerns. 2. Protects investors from ESG-related risks such as litigation or penalties 3. Contribute to a better world

Four Key Concepts of Risk Neutral Modeling

1. There is often an infinite number of sets of values that are consistent with a particular value for a financial derivative. 2. Expected risk premiums in a risk-averse world are generally unobservable. 2. The derivative's value obtained from Q-measures is identical to the no-arbitrage values that must exist in a risk-averse world using P-measures. 3. Since Q-measures are tractable, they are used in risk-neutral modeling under those conditions in which actual derivative prices must match risk-neutral model prices.

Six Advantages of Listed Real Estate Funds

1. They help diversify real estate specific risk (similar to the case of unlisted real estate funds). 2. These types of funds are liquid and divisible. 3. They provide instant exposure to a real estate portfolio. 4.They convey information to the investors. 5. Some listed real estate funds allow the targeting of subsectors or regions (similar to the case of unlisted real estate funds). 6. They provide tax benefits, such as exemption from corporate taxes (similar to the case of unlisted real estate funds).

Firms/Managers Responsibilities to Clients

1. To act in a professional and ethical manner at all times. 2. To act for the benefit of clients 3. To act with independence and objectivity 4. To act with skill, competence, and diligence 5. To communicate with clients in a timely and accurate manner 6. To uphold applicable rules governing capital markets

Firms / Managers Responsibilities to Clients

1. To act in a professional and ethical manner at all times. 2. To act for the benefit of clients. 3. To act with independence and objectivity. 4. To act with skill, competence, and diligence. 5. To communicate with clients in a timely and accurate manner. 6. To uphold applicable rules governing capital markets.

Akerlof's Market for Lemons

Akerlof explains that, in the presence of asymmetric information between buyers and sellers, the quality of goods in the market declines, leaving only "lemons" (i.e., poor-quality products).

PRI Principles of Responsible Investing - Starting a Dialogue w. GPs

1. Understand a GP's approach to ESG issues 2. Establish a baseline of understanding of current GP practices 3. Build a long-term relationship with the GP on responsible investing

Possible ways to estimate expected returns of non-core (i.e., value-added and opportunistic) real estate investments

1. Using observed cap rates - This yields inaccurate results since estimates of NOI for non-core real estate are less reliable than those of core real estate. Using absolute hurdle rates - This may be inappropriate since it does not account for changing interest rates and inflation. Using a risk premium approach - This is an effective approach for determining non-core properties' expected returns (typically expressed relative to core real estate investment returns).

On-site visits enable LPs to:

1. Verify that the GP's employees have knowledge of the written procedures and to determine how closely the procedures are followed. 2. Meet with and evaluate key personnel (e.g., CFO). 3. Get demonstrations of the fund's IT systems. 4. Review documents only available in physical form.

Three Fundamental Screening Questions regarding Investment Process

1. What is the investment objective of the fund? 2. What is the investment process of the fund manager? 3. What is the nature and source of any value added by the fund manager?

Criticisms of Non-Traded REITs

1. illiquidity may give false sense of low volatility 2. Command high fees and frequently entail significant conflicts of interest 3. Leverage is often used to finance current dividend payments

Three Assumptions of Geometric Brownian Motion (GBM)

1.) A constant variance through time 2.) Are normally distributed 3.) Are uncorrelated through time

Common Steps to Implementing Impact Investing

1.) Articulating mission and values 2.) Create impact themes or theses 3.) Developing impact investment policy 4.) Generate and evaluate deal flow 5.) Portfolio construction and management

PE Specific Considerations that affect the Introduction of ESG Policies

1.) Blind Pool Investing 2.) Structure - limited partnerships 3.) Role of intermediaries 4.) Illiquid assets

Three most typical external credit enhancements from credit card receivables

1.) Cash collateral accounts 2.) Third party letters of credit 3.) Collateral Invested amounts

Private Investment Fund Exemption

1.) Must have no more than 100 beneficial owners 2.) Must not make or propose to make any public offering -Must only be offered to qualified purchasers

Rules for U.S Alternative Mutual Funds

1.) Must provide daily liquidity 2.) At most 15% of the fund can be in illiquid assets 3.) Fund can have at most 33% leverage

Four Implications of Conflicts of Interest in Fund Asset Valuation

1.) Obscure or delay losses 2.) Smooth returns by shifting performance between reporting periods 3.) Vary risks to recoup losses or lock in profits 4.) Inflate valuations to increase fees

Three Primary Responsibilities of SEC

1.) Protect Investors 2.) Maintain fair, orderly, and efficient markets 3.) Facilitate capital formation

Four most common internal enhancements from credit card receivables

1.) Senior / Subordinated Certificates 2.) Spread accounts 3.) Excess finance charges 4.) Overcollateralization

Four Important Properties of the Merton Model

1.) Sensitivity to Maturity - PoD increases as maturity increases 2.) Sensitivity to asset Volatility - PoD increases as the volatility of asset increases 3.) Sensitivity to Leverage - PoD and Credit Spread Increase as Leverage Increases 4.) Sensitivity to Riskless Rate - PoD Decreases as riskless rate Increases

Three Main Categories of Factors that Drive Asset Returns

1.) Statistical Factors 2.) Macroeconomic Factors 3.) Fundamental, Style, Investment or Dynamic Factors

2015 UN's Sustainable Developments Goals

1.No poverty 2.Zero hunger 3.Good health and well-being 4.Quality education 5.Gender equality 6.Clean water and sanitation 7.Affordable and clean energy 8.Decent work and economic growth 9.Industry, innovation, and infrastructure 10.Reduced inequalities 11.Sustainable cities and communities1 12.Responsible consumption and production 13.Climate action 14.Life below water 15.Life on land 16.Peace, justice and strong institutions 17.Partnerships for the goals

Intermediate Outputs

Alignment, Commitment, Knowledge Mgmt

Traditional Convertible Bond

A bond with an embedded option that allows the holder to convert the bond into a certain number of shares of the underlying stock. If the option is exercised, the issuing firm creates new shares to be delivered to the convertible bond holder.

Code Of Ethics

A code of ethics sets forth standards of conduct and requires compliance with federal securities laws and is required to be established in writing, maintained, and enforced in the US for any fund manager registered under the Advisers Act, and must include requiring access persons to: (1) report personal securities transactions and holdings periodically; and (2) obtain the adviser's preapproval before investing in reportable securities, including but not limited to IPOs or limited offerings (such as interests in hedge funds). Access persons include the adviser's directors, officers, partners, and supervised persons who have access to nonpublic information regarding securities transactions.

Criticism of Vasicek Model

A criticism of the Vasicek model is that it assumes that the volatility of interest rate changes is constant, which results in the model generating negative interest rates.

Desk Review

A desk review is an ODD review based exclusively on documents collected, and possibly conference or video calls. LPs may argue in favor of desk reviews because of their lower costs (compared to on-site visits), shortened overall review time, and a belief that the quality of information collection is the same for desk reviews as it is for on-site visits Desk reviews are not regarded to be best practice because they generally produce a less comprehensive review, thus exposing investors to higher levels of operational risk. -the problem is compounded by the inherent illiquidity of private equity investing (the long lockup period of PE funds prevents redemption for many of the problems that may come up after the capital has been committed).

Factor of an Asset Pricing Model

A factor represents a unique source of return that is not highly correlated w/ other factors (other independent variables in the model)

Fund Culture

A fund culture is generally a shared set of priorities and values with the fund's organization. One of the strongest protections against operational risk is a fund culture that fosters competence, honesty, and diligence

GARCH Model

A model for forecasting volatility where the variance rate follows a mean-reverting process. Can capture clustering

Moral Hazard

A party to a transaction changing its behavior after an economic transaction is completed and the other party to the transaction bearing the consequences.

Stablecoin

A stablecoin is an asset whose value is pegged to a traditional currency -Stablecoins are used when financial contracts require low-volatility assets

Value-Based Commodity Index

A value-based includes has fixed component weights. Since market price fluctuations change the relative weightings of index constituents, the number of contracts must be changed in order for the constituent weights to remain unchanged. Thus, frequent rebalancing is needed in value-weighted indexes.

Asset Manager Code's Principles

A. Loyalty to Clients B. Investment Process and Actions C. Trading D. Risk management, compliance, and support E. Performance reporting and valuation F. Disclosures

AIFMD Key Features

AIFMD key features include, among others: (1) AIFMs managing AIFs must be authorized, unless an exemption is available; (2) restrictions are placed on the levels of remuneration for senior management and risk-takers; (3) AIFMs are required to set a maximum level of leverage for each AIF; and (4) AIFMs are required to manage and monitor liquidity risks and conduct regular stress tests.

Asset Stripping Rules (European Regulation)

AIFs that acquire nonlisted companies are subject to asset stripping rules. Asset stripping rules prevent an AIF from making a controlling private equity investment, having the nonlisted company take a loan, and then distributing the loan proceeds to themselves, and thereby creating leverage that may or may not create unnecessary risk. Asset stripping rules apply for a period of 2 years after acquiring control of a nonlisted company, during which time the AIF and/or AIFM is not permitted to influence or set distributions, make reductions in capital, or share redemptions.

Volatility Anomaly

According to the volatility anomaly, low-volatility stocks have outperformed the market and higher-volatility stocks

Accredited Investor

Accredited Investor - includes a natural person who either has a net worth (along with his or her spouse) that exceeds $1M, excluding the value of the person's primary residence; or Income in excess of $200,000 (or joint income in excess of $300,000 with spouse) in each of the prior 2 years with a reasonable expectation of reaching the same income level in the current year. -The definition also provides for various entities such as trusts. Unregistered interests (i.e., private placement) in a fund may be offered through general solicitations or general advertising if: o (1) all purchasers are accredited investors; o (2) the issuer takes reasonable steps to verify the purchasers' accredited investor status; and o (3) certain other conditions set out in Rule 506(c) of the Securities Act are satisfied

Advantages/Disadvantages of Using Centralized Crypto Exchange

Advantage: Relative Efficiency Disadvantages: 1. Deposited assets are exposed to the possibility of loss due to dishonest exchange operator misconduct. 2. Centralized exchanges have a single point of entry, which may come under attack by malicious third parties and result in losses of deposited assets.

Advantages and Disadvantages of Merton Credit Risk Model

Advantage: Useful Point of Departure for more complex models Disadvantages: -Some parameters of the model are not easily observable (MV of Assets and Asset Volatility) -Performs poorly in explaining the credit spread on short term securities

Meta Risks

All non-investment related risks not covered by a particular category Ex: how an investment manager acts behaviorally during a meeting

Altman Z-Scores

Altman Z-score default-based categories - Z < 1.81 -> Default group 1.81 ≤ Z ≤ 2.99 -> Gray zone Z > 2.99 -> Non-default group

Key Advantage of Principal Component Analysis

An advantage of principal component analysis is dimensionality reduction; it significantly reduces the dimensions of the original data set (from perhaps thousands of variables to a few), which results in a relatively small number of factors

Time-Varying Volatility

An asset with time-varying volatility has a return distribution that is not normally distributed over a time period. Therefore, factors such as skewness have risk premiums

Competent Authority

Any regulator or other authority that possesses the authorized power to regulate or otherwise exert control over

Applied Models vs Abstract Models

Applied Models - are designed to address immediate real-world challenges and opportunities o Ex: Markowitz models , most asset pricing models are applied Abstract Models - also called basic models, tend to have applicability only in solving real-world challenges of the future o Abstract models tend to be theoretical models that explain hypothetical behavior in less realistic scenarios

PRI Principle of Seeking Disclosure on ESG issues from entities

Applied by: GP's Actions -> Implement monitoring processes to assess portfolio companies' management of ESG factors LP's Actions -> Request info from GPs about their responsible investing practices and the underlying fund investment's ESG traits

Qualified Opportunity Zones

Areas in the U.S designated for special income tax breaks for investors that invest in those areas

AIFMD Home Member State

As noted above, AIFMs managing AIFs must be authorized by the competent authority of its home member state. The home member state is the EU country where the AIFM is authorized

Risk Management Schemes for DB Plans

Asset-Liability Risk Management - The DB plan's risk is measured n terms of the volatility of its surplus Asset-Focused Risk Management - The risk is measured in terms of the volatility of the asset returns Integrated Asset-Liability Risk Management - The risk measure considers the funding status and the plan sponsor's operations. It may also be measured as the volatility of the firm's equity

Fund Bubble Hypothesis

Assumes skilled managers can earn substantially superior returns than successful traditional managers · This hypothesis asserts that the number of less qualified managers in the hedge fund industry increases w/ the supply of capital to hedge funds · The corresponding inferior returns earned by these less qualified managers dilute the aggregate industry performance

Attractive Features of Bottom-Up Approach

Attractive features of the bottom-up approach - 1. Being easy to understand, and being robust (because it depends only on the ranking of individual funds). 2. Enhancing portfolio expected returns by concentrating the portfolio in highest-alpha opportunities.

Vasicek and CIR Models

Both models generate yield curves of various shapes The Vasicek Model generates negative interest rates The CIR Model is a modification of the Vasicek model that prevents negative interest rates (by allowing the volatility of interest rates to change)

binomial BDT Model

BDT Model - is a popular interest rate model used for valuing fixed income derivatives consistent w/ both the observed term structure of interest rates and the implied volatilities of interest rate caplets o The BDT model can be used to directly model spot rates, forward rates, and/or discount factors o The model centers on two relations: average forward rates and interest rate volatilities

Classifications of Management Teams

Blue Chip - a team that has been able to generate a top-quartile performance for all of its funds through at least two business cycles Established - team that has been able to generate a top-quartile performance for most of its funds (more than 3 funds) through at least two business cycles Emerging - team with limited joint history but with all the characteristics to become an established team Reemerging - previous a blue chip or established team that has been through a restructuring following poor performance or some significant operational issues and has regained the potential to reemerge as an established or blue chip team

Pension Buy-Out vs Buy-In

Buy-Out - transfers the pension plan's assets and liabilities to an insurer, which is not done in buy-ins. Buy-In - the insurer makes the benefit payments to the pension fund and the pension fund pays the plan participants

Collateralized Debt Position (CDP)

CDPs are fully collateralized loans that involve issuing new tokens w/o the need for a counterparty -To create the tokens, the user deposits cryptoassets in a smart contract as collateral -The owner of a CDP closes the position by repaying the outstanding debt + interest

Most Economical Channel for Bitcoin Exposure

CME Bitcoin Futures Contracts

Calibrating a Model

Calibrating a model entail adjusting the model's potential outcomes so as to ensure no arbitrage opportunities occur given observed market prices or rates

Production Inputs

Capital, People, Process, Information

Carlyle Capital Corporation

Carlyle held long positions in government-backed mortgage bonds. They borrowed at low short-term interest rates and invested in long-term AAA-rated mortgage bonds issued by Freddie Mac and Fannie Mae. The strategy was profitable until the value of Freddie Mac and Fannie Mae securities plummeted during the U.S. housing crisis.

Negative/Exclusionary Screening

Choosing not to invest in entire industries of publicly traded companies due to the firm's involvement in activities deemed objectifiable, often based on the morals or the religion of the investor ex: sin stocks

Mean Variance Efficient Portfolio

Constructed using the risk-free rate and the market portfolio

Real Estate Valuation Approaches

Cost Approach - tends to be used to value new properties, cover costs of construction Sales Comparison Approach - Estimates value using recent sales prices of similar homes Income Approach - Used to value income-producing properties

Cross Sectional vs Time Series Model

Cross Sectional Models - analyze relationships across characteristics or variables observed at a single point in time such as when investment returns are used to explain the difference in risk premiums Time Series Models - Analyze behavior of a single subject or set of subjects through time o Panel Data Sets - combine the two approaches by tracking multiple subjects through time and can also be referred to as longitudinal data sets and cross-sectional time-series data sets.

Cross-Sectional Models

Cross Sectional Models analyze relationships across variables observed at one point in time

Exposure Inertia

Exposure inertia refers to a large number of hedge fund managers in a hedge fund index reducing the speed at which the managers' common views (in the form of exposures) change over time. This is one of the concepts (along with view commonality) that explains why hedge fund replication can replicate aggregate hedge fund returns.

Family Offices Natural Competitive Advantages

FOs' natural competitive advantages - 1. Aggressive asset allocation 2. Liquidity premium capture 3. Deal flow 4. Speed 5. Governance and management of assets 6. Alignment of interests (i.e., no competition among outside managers) 7. Higher returns 8. Risk management 9. Centralization of services 10. Lifestyle assets

Data collected daily, weekly, monthly, quarterly, annually

Daily - values, returns, position size, volume, index and benchmark data, and keyword alerts. Weekly - Monthly - manager changes, position changes, and non-investment qualitative risks (e.g., business, legal, regulatory, and compliance risks) should be collected. Quarterly - manager calls and reports, and valuations of illiquid positions... Should be info you can't get from public sources Annually - site visits, audits of illiquid positions, and reference updates.

NFT

Digital representation of unique assets, such as pieces of art and other collectibles .. subject to counterparty risk

Expected Loss from Credit Risk

EAD ( 1 - RR) * PD

ESG Materiality

ESG materiality is the property of being likely to be considered important (i.e., potentially having a substantial impact) from the reasonable perspective of stakeholders in the context of ESG principles. o The issue of ESG materiality includes which matters have sufficient importance to both 1) warrant consideration in a firm's operational and investment decisions 2) warrant disclosure to a firm's investors and others.

Engagement and Proxy Voting Strategies

Engagement Strategy - investor w/ a long position in a stock will start a dialogue with company on how it can improve its ESG standing i. In extreme cases, an investor will create an opportunity for proxy voting by sponsoring an initiative for all shareholders to vote on how the company should change their operations. This differs from standard or passive proxy voting, where shareholders vote on issues put up for election by management, typically focused on routine elections of board members and service providers.

Equilibrium and Arbitrage Term Structures of Interest Rate Models

Equilibrium models use an assumed short-term interest rate process to determine the expected path of future interest rates. Arbitrage-free models model future interest rates so that they are consistent with the observed term structure of interest rates.

Hedge Fund Strategies: Return Enhancer vs Risk Diversifider

Equity Long / Short Strategies - RE , Can provide high returns due to their high systematic risk exposure. Thus, they are return enhancers, but not risk diversifiers Convertible Arbitrage Strategies - RD , Have relatively low returns, but reduce risk when added to a traditional portfolio Global Macro Strategies- Can be both return enhancers and risk diversifiers

Exculpation

Exculpation is a legal term that assign risk, releasing a party from liability

Exogeneous vs Endogenous

Exogeneous Value - is a value that is determined outside the model and is therefore taken as a given Endogeneous Value - is determined inside a model and therefore takes on whatever value the model prescribes

Regulatory Bodies in South Korea

Financial Services and Capital Markets Act- primary legislation for regulation of asset management Financial Services Commission (FSC) - primary regulator and regulates the Financial Supervisory Service - which is responsible for inspection of financial institutions and enforcement of regulations

Flash Loan

Flah loans are unsecured loans (no collateral required) available on decentralized platforms The loans must be repaid atomically, the borrower receives and repays the funds within the same blockchain transaction

Qualitative Elements of Risk Management for Alts

For alternative investments, qualitative risks are typically reviewed in the areas of business operations, legal, regulatory and compliance

Arguments for / against short-selling

For: Helps to promote well-functioning, efficient markets since it enables a vehicle to dampen the potential for overpriced securities or to prevent and penalize corporate fraud and mismanagement. Against: Hoping for price declines is harmful to market sentiment and may increase market volatility

Spoofing

Form of market manipulation that involves placing large trade orders with no intention of executing the orders. A trader in the UK was charged by the U.S. Department of Justice with spoofing related to the Dow Jones Flash Crash of 2010. It was alleged that the trader implemented a trading program to manipulate the market for E-Mini S&P 500 futures contracts.

Annualized Returns of Systematic Pairs Trading Strategies (According to Gatev)

Gatev et al (2006) finds that systematic pairs trading strategies generate annualized returns of up to 11% above Treasury rates (for a 4-month holding period).The authors stress the importance of diversification; they recommend a portfolio with at least 20 pairs to ensure stable returns.

Mass Affluent High Net Worth Ultra-High-Net-Worth

Mass Affluent - $100K - $1M High Net Worth - $1M - $30M Ultra-High-Net-Worth - > $30M

Crush Spread

Going long on soybean futures Short on the product -> soybean oil and soy meal futures

Environmental Enablers

Governance, Culture, Technology

Completion Portfolio

Group of assets that is managed with the objective of diversifying and managing the aggregated risks of the concentrated portfolio. The assets purchased for the completion portfolio should have a low correlation to the concentrated asset

Heston Model

Heston is a time-varying volatility model that assumes that volatility reverts to a long-term mean. -It also assumes that volatility is a continuous stochastic process

Key Advantage of Smart contracts

High Level of Security

EU Home Member State Vs. Host State

Home Member State - is the EU country where the AIFM is authorized Host State - Refers to the EU country (other than the home country) where the AIF is being marketed. Host competent authorities can inspect AIFs without notice. The competent authorities can also issue cease and desist orders, freeze assets of an AIF or AIFM, request the prohibition of professional activity, suspend issues of units or shares, withdraw the authorization of an AIFM, and refer matters for criminal prosecution.

Questions that should be asked when reviewing IT-related documents

How is the firm's IT function organized? What is the process for distributing revisions of IT software and hardware? How are information security issues (e.g., firewalls) addressed? What are the escalation procedures for managing IT issues? What is the IT support management plan (for hardware and software)?

Issue w/ IRR for PE Firms

IRR can be gamed based off when GP realizes g/s -A preferred performance measure is the public market equivalent (PME) - Involves comparing capital generated by a PE fund to that generated by a public market index over the fund's life, based on similar amounts being invested w/ the same timings in the two indices

Vega

Measuring the current price of a portfolio to a change in the market's anticipated volatility of the returns of the portfolio's underlying asset Vega is always positive for a long position in a call or put option

Impact Investing

Impact investing - is the inclusion of ESG and related issues in the asset allocation and security decisions of the investor w/ the goal of generating positive environmental and social influence alongside financial returns · Many believe that impact investing is most effective in venture capital and private equity, where an investment is specifically targeted to a new project that would not otherwise receive funding, such as entrepreneurs or water quality in emerging markets.

National Private Placement Rules

Impose rules for selling non-EU funds in the EU at an EU level, but also each EU member country may impose their own requirements on any sale of fund interests within their own border

Hard Lockup Period vs Soft Lockup Period

In a hard lockup period, withdrawals are contractually not allowed for the entire duration of the lockup period. In a soft lockup period, investors may be allowed to withdraw capital from the fund before the expiration of the lockup period, but only after the payment of a redemption fee, which is frequently 1% to 5% of the withdrawal amount.

Buy-Out Strategy

In a pension buy-out, a pension fund transfers its assets and liabilities to an insurer, and the insurer assumes all responsibilities for paying the pension fund's beneficiaries for life. Involves more accounting on behalf of pension and they need to realize gains/losses

AIFMD sovereignty exception

In cases in which the host state and home state disagree on issues, either party can bring the issue to the ESMA. The ESMA will facilitate negotiations between the parties and does have the power to impose binding mediation. When a host state believes a violation has occurred and the violation is not within the host state's jurisdiction, the host state may refer this information to the authorities in the home state of the AIFM. An important exception to the enforcement powers of the ESMA is the sovereignty exception. The AIFMD sovereignty exception provides that member states may refuse to cooperate if "cooperating adversely affects the sovereignty, security, or public order of the member state addressed."

Coase Theorem

In competitive and frictionless markets, economically efficient production and distribution will occur regardless of how governments divide property rights. -In an ESG context, Coase asserts that whether the law sides with shareholders who claim a right to generate negative externalities or with the victims of negative externalities, it will not interfere with the ability of the parties to negotiate the most efficient resolution to the dispute so that they can share in the net benefits (or least costs).

Master Limited Partnership (MLP)

In the United States, master limited partnerships are a popular structure for obtaining exposure to energy commodities and enterprises. A master limited partnership (MLP) is a tax-efficient structure that can be used to gain access to sources of returns that are correlated to certain parts of the commodity sector and has its shares (called "units") traded on a public exchange, such as the NYSE or NASDAQ. - MLPs have stable cash flows, but equity-like volatility and drawdowns in distressed markets -They must generate at least 90% of their income from "qualified sources" -They do not have required distribution minimums (in contrast to REITs) -Are exempt from income tax at the corporate level

Cash Dividends vs Capital Distribution from PE

Income taxes are a significant constraint for family offices. To a family office, there is a significant difference between cash dividends and capital distributions from a private equity fund. This is because, in most jurisdictions, cash dividends are considered ordinary income, and thus taxed at a higher tax rate than distributions from a private equity fund.

Increasing Revenue / Reducing Expenses with Responsible Investing

Increasing Revenue: -Identify new, sustainable products -Attract and retain top talent via strong company values -Acquire new customers via better brand image Reducing costs and liabilities: -Reduce potential liabilities -Use resources more efficiently -Ensure access to capital

European Systemic Risk Board (ESRB)

Independent body within the EU responsible for macro-prudential oversight of the financial system within the EU

GRI (Global Reporting Initiative)

Independent, not-for profit helping businesses / governments understand and communicate their impact on critical sustainability issues -GRI Standards are designed to enable all orgs to report publicly on their economic, environmental, and social impacts (shows how they contribute to sustainable development)

Information Gathering Vs Information Filtering

Information gathering - indicates the ability of the manager to create access to information or to have access to better information than other managers. Information filtering - is the fund manager's ability to use data available to others but to be better able to glean tradable insights from it.

How does investment process risk differ from market risk?

Investment process risk comes from the imperfect application of the investment mandate, resulting in errors or purposeful decisions that result in exposures that do not match the investment mandate. Market risk measures the risk of the overall market, not the risk of an investment strategy being improperly implemented.

Positive Screening

Investor's portfolio is designed to focus on publicly-traded firms that are judged to have operations that performed in an exemplary manner on one or more ESG issue. Investors who employ a positive screening methodology may do so with the belief that funds invested in the most sustainable companies may offer lower downside risk than the broader market.

Prospect Theory

Investors underweight probable outcomes relative to certain out comes For example, between two options: getting $1000 with certainty or getting $2400 with a 50% chance, a risk-averse investor may choose the certain $1000.

Black-Dermon-Toy Interest Rate Model

Is a no-arbitrage interest rate tree model constructed using the observed interest rate term structure and interest rate volatilities. In this model: -Observed spot rates drive interest rate levels -Implied rate volatilities drive interest rate spreads As a no-arbitrage model, it is calibrated to match zero-coupon bonds

illiquidity premium based off Ilmanen's paper "Demystifying Illiquid Assets: Expected Returns for Private Equity,"

It is suggested that the illiquidity premium, if it exists, is limited and is likely entirely offset by investors overpaying for private equity's smooth returns.

KPMG's framework for materiality

KPMG proposes a six-step process for materiality assessments: (1) identify and analyze; (2) assess and plan; (3) implement and integrate; (4) monitor and measure; (5) assure and report; and (6) evaluate and revise. The assessment is designed for use in developing strategy, reporting regarding ESG, communicating importance, and spotting future trends.

Lancer Hedge Fund

Key issues associated with the Lancer hedge fund - 1. Manager valuation 2. Lack of transparency 3. Window dressing 4. Failed auditing and regulatory safeguards

Mission-Related Investment vs Program-Related Investment

Mission Related Investment- An investment offers investors both ESG impact and a competitive risk-adjusted return. Program Related Investment- An investment offers investors ESG impact but sub-competitive risk-adjusted returns

The Financial Accounting Standards Board in the US defines three types, or levels, of assets in the context of determining fair asset values using Generally Accepted Accounting Principles (GAAP)

Level 1 - Assets are those that can be valued based on an unadjusted market price quote from an actively traded market of identical assets Level 2 - Assets are best valued based on nonactive market price quotes, active market price quotes for similar assets, or nonquoted values based on observable inputs that can be corroborated Level 3 - Assets are valued based on the estimated fair value of assets that are subject to the greatest uncertainty and may be valued based on models with ambiguous inputs such as volatility

Liew et al's bifurcarted fund analysis

Liew et al.'s bifurcated fund analysis model involves evaluation of hedge fund managers' return traits from 2 perspectives: 1) mean-variance 2) rankings from a peer group scoring method.

Bull Spread

Long a short dated call, Short a long dated call -In an efficient market, there losses are limited

Benefits of Liquid Alternatives over Investing Directly in Hedge Funds

Lower Fees Better Liquidity Improved Transparency

European Banking Authority (EBA)

Main objective to safeguard the integrity, efficiency, and orderly functioning of the banking sector

Marketing of AIFs by AIFMs

Marketing a fund with the EU triggers AIFMD compliance obligations for an AIFM (whether EU or non-EU). There are two methods that allow marketing of AIFMs in the EU. Marketing of AIFs by AIFMs is allowed by: (1) using a marketing passport available under the AIFMD that provides that once a fund is approved in one EU member country, the AIF can be marketed to professional investors located in other EU countries; and (2) marketing in a specific EU member country in accordance with that country's private placement regime, subject to certain conditions being met.

Momentum

Momentum in equities is commonly defined as the tendency of stocks that have performed well in last 6-12 months to continue to perform well

Most Favored Nation Status

Most Favored Nation (MFN) Clauses: LPs may negotiate side letters that grant the LP most favored nation status. Most favored nation status is a term from international trade that is used in private partnership negotiations to refer to the negotiated right of an LP to be treated with any and all benefits being offered to any other LP.

Multicollinearity

Multicollinearity is when two or more independent variables in a regression model have high correlation to one another

Open Protocol

Open Protocol Hedge Fund Reporting - this process involves standardizing risk monitoring, managing, and reporting at the portfolio level in order to provide important information to investors while protecting specific asset allocation data for hedge fund investments. More specifically, Open Protocol provides a standard and consistent framework around: (1) data and inputs; (2) calculations and methods; (3) timely and regular reporting; and (4) protocols and standards, where appropriate.

Volatility Clustering

Occurs in a price series when large changes are likely to be followed by more large changes and periods of small changes are likely to be followed by more small changes

Amaranth Advisors

Other than the narrowing calendar spread between winter and non-winter natural gas futures contracts, key issues associated with the demise of Amaranth - -Very large positions -Poor risk management (e.g., no stop-loss limits, possible underestimation of risk, and lead trader moved trading desk out of country) -Use of leverage, and prime broker not providing or releasing collateral when needed.

Partial Autocorrelation

Partial autocorrelations may be found as the beta coefficients of the factors in a regression model. The first-order PA corresponds to the beta of the first factor, the 2nd order refers to the beta of the second factor, etc.

Linaburg-Maduell Transparency Index

Rates transparency, on 10 principles, of sovereign wealth funds with respect to their organization and disclosure of information. SWF Institute suggests at least 8 out of 10 rating.

Satisficing

Portfolio management in private equity typically involves satisficing "Satisficing" refers to accepting an available solution as satisfactory The lack of quality PE data makes it challenging to apply modern portfolio theory to PE to determine an optimal solution

Gamma + Vega Exposure

Portfolios w. positive gamma and vega exposure will benefit from high volatility

Positive Model Vs Normative Model

Positive Model: Attempts to describe how people and prices actually behave o Positive economic models are often used to try to identify mispricing of securities by recognizing patterns in actual price movement. Technical trading strategies are based on positive economic modeling. For example, a strategy based on point-and-figure charts is a positive strategy. Normative Model: attempts to describe how people and prices ought to behave o Normative approaches can be used to identify the potential mispricing of securities by identifying how securities should be priced o Trading strategies based on normative reasoning anticipate that actual prices will converge toward normatively derived values if the models are well designed. Arbitrage-free pricing models are normative models. Ex: put call parity

Positive and Negative Autocorrelation

Positive autocorrelation -> Trending markets , benefits from volatility, buy and hold Negative autocorrelation -> Mean Reverting markets, benefits from rebalancing

Price Smoothing

Price smoothing has little impact on fund returns but understates standard deviations, betas, and correlations with the market.

Principal Component Analysis

Principal Component Analysis is a linear statistical method that identifies the set of orthogonal factors from a dataset that maximize the percentage of explained variation The process of PCA reduces the dimensionality of a matrix of multiples asset classes. Rather than relying on potentially hundred or thousands of inputs, PCA seeks to find a few factors that explain most of the data's variation

Info that could be lost in cybersecurity breach

Proprietary investment methods (algorithms, models, analytics, and research), Confidential information on individuals and organizations, investments, sales and distribution, and business management.

Marketing Passport

Provisions in AIFMD allow AIFMs to use a marketing passport. A marketing passport permits marketing across the EU as a single marketplace for the marketing of AIFs to professional investors.

Q-Measure vs P-Measure

Q-Measure - is a probability like value or other related variable within a model derived for modeling purposes under the assumption that risk-neutrality holds when it is likely that the world is not risk neutral P-Measure - is a statstical probability that represents the likelihood of an outcome in the real world

Positive Conditional Correlation

Refers to an environment in which correlation in up-markets exceeds correlation in down-markets Negative conditional correlation refers to correlations in down markets exceeding correlations in up-markets. Investors typically prefer positive conditional correlation, since the environment provides investors with greater participation in profitable opportunities in markets that rose and less participation in losses in markets that declined

Risk Parity Portfolios

Risk parity portfolios allocate risk equally across the assets in the portfolio. -For the allocations of assets to be the same, the variances of the asset returns (i.e., their risk) must be the same. -RP approach diversifies by risk, assuming the same risk levels in all assets, thus investing more in low-risk assets than high-risk assets. -Risk parity is a viable asset allocation approach; however, it does not represent a trading strategy that can be used by active managers because it does not estimate the expected return of an asset class, which is a potential source of skill for active managers

Risk Vs Knightian Uncertainty

Risk- Occurs when an investor understands the probabilities of various outcomes, but in unsure which outcome will occur Knightian Uncertainty- occurs when the investor cannot form reasonable quantified estimates of either the possible outcomes or their associated probabilities

Value of Risky Debt

Risky Debt Value = Riskless bond value - Put Value -An increase in the volatility of the firm's assets increases the value of the put option, and thus decreases the value of the firm's debt (since the put is subtracted from the riskless bond).

Roll Return

Roll return, or roll yield, is the portion of the return to a futures contract that is due to the change in basis.

SEC's needed improvements for cybersecurity risks

SEC staff identified that firms need to improve the following: -Untailored (e.g., vague) policies and procedures -Lax firm adherence -Inadequate system maintenance (e.g., outdated operating systems)

Implied Volatility Premium Strategy

Short implied volatility and long realized volatility It is based on implied volatility generally being higher than realized volatility, and thus investor benefits from shorting implied volatility

Singapore Regulatory Bodies

Securities and Futures Act (SFA) - the primary legislation for the regulation of asset management activity in Singapore Monetary Authority of Singapore (MAS) - is the regulator responsible for administering the SFA A Collective Investment Scheme (CIS) is the statutory term used to describe an investment fund A Variable Capital Company (VCC) - is a new legal entity for investment funds in Singapore that provides greater flexibility on varying capital and allows for economies of scale for fund managers through the creation of an umbrella fund

Hong Kong Regulatory Bodies

Securities and Futures Ordinance (SFO) - primary legislation for the regulation of asset management activity in Hong Kong. The Securities and Futures Commission (SFC) - is the regulator responsible for overseeing the SFO Authorizations Required: under the SFO, a fund manager may operate in Hong Kong once it registers with the SFC, provided the manager meets other licensing requirements. Additionally, the public offer and sale of interests in a fund to Hong Kong investors would generally require the fund to be authorized by the SFC. To avoid the cost of the registration process, alternative fund managers generally offer their funds on a private placement basis as there are no requirements to obtain authorization from the SFC. However, use of the private placement alternative is limited to only certain types of funds and can only be offered by certain persons.

Shrinkage Technique

Shrinkage is technique used to reduce estimation errors of parameters (e.g., those used for MVO). The process involves reducing confidence intervals of statistical parameters. Smaller confidence intervals imply improved forecasts of parameters, which help to mitigate extreme portfolio allocations (which is a key issue with MVO).

Use of Name Clause

Side letter for LP to request anonymity

Constant Function Market Maker (CFMM)

Smart contract liquidity pool that holds at least two cryptoassets in reserve and allows users to trade between two cryptoassets, with the exchange rate determined by a constant product model

Tactical Asset Allocation Model

Sound tactical asset allocation models should have: 1) economically meaningful signals, 2) no data mining, and 3) no overfitting

Physical Commodities and ESG Factors

Sourcing: Long positions in a physical commodity may expose the investor to ESG issues regarding how the commodity is produced and delivered. The diamond and gold industries are notorious for examples of working conditions rife with human rights violations. These industries are comprised of global firms with multiple distribution channels. The commodities are high-value, fungible, and in some cases indistinguishable, which can make tracing their origin and provenance impossible. This makes consistent application of ESG criteria difficult. Hoarding: From an ESG perspective, there may be issues with investing in productive commodities that have a limited supply solely for financial gain. Buying a physical commodity impacts demand and will therefore have a more direct effect on price (and possibly volatility). In extreme cases, it could produce shortages that have negative effects on countries, industries, companies, and workers. Money laundering: Diamonds, precious metals, and oil can be bought and sold outside of the regulated banking industry. A significant proportion of the global production of these commodities comes from developing countries with higher levels of corruption. This makes them attractive for money laundering and creates an additional ESG challenge for investors.

Blue Sky Laws

State level anti-fraud laws

Expected Utility for Investor with 2 possible outcomes

Suppose the initial capital available for an investment is W and that the utility derived from W is U(W). The expected utility for an investor with two potential outcomes to his or her wealth, W1 and W2, shown below: E[u(w)]=[π1×u(w1)]+[π2×u(w2)] -Where the probabilities of w1 and w2 are π1 and π2, respectively. -The function U(⋅) is the utility function. The asset owner would prefer investment A to investment B if E[U(WA)] ˃ E[U(WB)].

Avg. / Median Advisory Fees

Surveys of advisory fees have shown that average investment product fees charged to clients via the investment vehicles were 0.54%. Median fees were 1% up to $1 million, 0.9% at $2 million, and 0.8% at $5 million

Sweep Exam

Sweep inspections involve the SEC focusing on a number of investment advisers engaged in a certain activity or located in a specific region. EX: Soft Dollar practices

David Swensen's Endowment Model

Swensen's endowment model allocates heavily to public and private equity securities and real assets.

Classifications of Fund of Funds

Tactical FoFs - pursue opportunistic exposure to a specific market factor and are typically composed of 5-15 hedge funds Diversified FoFs - Allocate to a large number of hedge funds (~30-50) that follow different strategies Concentrated FoFs - Invest in a fairly small number of managers (~5-10) Single Strategy FoFs - Allocate across several hedge funds (~5-15) that follow the same strategy

Alternative Investment Fund Managers Directive (AIFMD) EU

The Alternative Investment Fund Managers Directive (AIFMD) regulates alternative investment managers—meaning any whose regular business is managing one or more alternative investment funds (AIFs). The AIFMD does not regulate AIFs directly. The AIFMD applies to non-UCITS investments such as private equity, venture capital, hedge funds, and real estate funds. Collective investment schemes (CIS) are either a UCITS or an AIF.

Alternative Investment Fund Managers Directive

The Alternative Investment Fund Managers Directive is the regulatory framework for alternative investment fund managers in the EU

Black-Litterman Model

The Black-Litterman model constructs portfolios that address the issue of extreme portfolio weights generated by the mean-variance optimization model. A contribution of Black-Litterman is that it enables returns to be adjusted so that they reflect portfolio managers' views on outliers; i.e., the model enables managers to combine their views of expected returns with views consistent with market weights in a market equilibrium model.

Chief Compliance Officer Responsibilities

The Chief Compliance Officer (CCO) has the role of being primarily responsible for overseeing and managing regulatory compliance issues. However, it is the obligation of each team member to act with honesty and integrity. -In addition to setting the general tone for the organization in conjunction with senior management about the importance of compliance, the CCO is responsible for administering the compliance program, including: (1) compliance (or forensic testing and reporting) which includes testing the effectiveness of the policies and procedures; and (2) reporting to senior management.

Fama-French 5 Factor Model

The Fama-French 5-factor model adds to the original Fama-French 3-factor model the factors below. Robust minus weak Conservative minus aggressive The factors of the original Fama-French model are: 1) market portfolio, 2) value (book-to-market), and 3) size.

Regulatory Bodies in Japan

The Financial Instruments and Exchange Act (FIEA) and the Act on Investment Trust and Investment Corporation (ITIC) are the primary legislation for the regulation of asset management activity in Japan. The Kanto Local Finance Bureau of Ministry of Finance Japan (KLFB) is the regulator for the purposes of disclosure in Japan under the FIEA. -The marketing of fund interests in Japan is heavily regulated

Ho and Lee Model

The Ho and Lee model is an arbitrage-free interest rate model, which inherently means that resulting bond prices match the current term structure of interest rates. This implies that, under risk-neutral probability, resulting investment returns should equal the short-term rate. -The model assumes that the short-term interest rate follows a normally distributed process. -The model uses binomial pricing to determine bond prices, and the binomial model inherently assumes that the interest rate changes (i.e., between nodes in the tree).

Omega Ratio

The Omega Ratio is the ratio of the total realized returns in excess of a given target return relative to the total realized loss relative to the same target return Upper Partial Moment / Lower Partial Moment · For a symmetrical distribution with a target return equal to the mean, the omega ratio should average one. When the omega ratio is less than one, it means the investment has failed to earn a summed return that exceeds the target level. Furthermore, it can be shown that higher volatility, lower skewness, and higher kurtosis will, in general, reduce the omega of a portfolio · In addition, increasing the target return will reduce the omega of the investment product

Santiago Principles

The Santiago Principles were developed as principles and practices of good governance of sovereign wealth funds.

Adaptive Markets Hypothesis

The adaptive markets hypothesis maintains that profitable opportunities exist when more resources are available and competition is low. As competition increases, market participants with a competitive advantage adapt and survive, while those that are not able to adapt perish

Bias Ratio

The bias ratio attempts to indicate when returns have been manipulated and thus do not exhibit a distribution consistent with competitive markets

Functions of Chief Risk Officer

The chief risk officer (CRO) oversees the fund manager's program for identifying, measuring, monitoring, and managing risk.

Delegated Approach - Key Value Props

The delegated approach refers to fund of fund investing, which provides five key services: 1. Sourcing managers 2. Due diligence 3. Strategy and fund selection (this value proposition has declined as institutional investors' knowledge and expertise in the industry has increased) 4. Portfolio construction 5. Risk management and monitoring FoF provides investors with knowledge transfer and incentive fees paid on gross returns

Efficient Frontier

The efficient frontier is a graph that represents the maximum return attainable for any level of portfolio risk or the minimum portfolio risk associated with any rate of return.

Return to Commodity Beta

The fundamental risk-based return from holding a passive long position in a commodity

Good-Leaver Termination Clause

The good-leaver termination clause offers a clear framework for closing a partnership that is not functioning well, or when the confidence of the limited partners is lost. This without-cause clause allows limited partners to stop funding the partnership with a vote requiring a qualified majority (generally more than 75% of the limited partners)

Liquidity Profile of UHNWI vs Endowment

The liquidity profile of a UHNWI can be more aggressive than a well-known university endowment. This allows UHNWIs to gain the liquidity premium inherent to illiquid assets. University endowments are constrained by the sum of the university budget that they must backfill.

Benefits of Replication Products

The most important benefit is the enhancement of absolute and risk adjusted portfolio returns - Earned by gaining access to alternative beta exposures that arent in traditional portfolios - Time varying traditional source of beta could also be considered an alternative source of beta

Commodity Index Swaps

The primary vehicle used by institutional investors for obtaining exposure to commodity indices is commodity index swaps.

The principal advantage of master limited partnership (MLP)

The principal advantage of master limited partnership (MLP) structures is in avoiding corporate taxation. Income from qualifying MLPs is distributed directly to investors.

Disposition Effect

The psychological effect that causes investors to realize profits too quickly and not cut losses in a timely fashion is referred to as the disposition effect

Repeat Sales Approach

The repeat-sales approach is a transaction-based approach to constructing a real estate index. It measures the price change of the same housing unit over time. A number of repeat sales over several years are used to develop a repeat-sales real estate index.

illiquidity premium

The theory behind an illiquidity premium is that higher returns can be earned by an investor willing to take on the risk of illiquidity for an extended amount of time. -It can be observed in U.S. Treasuries by observing higher prices of on-the-run government bonds vs. off-the-run government bonds of the same maturity. -In U.S. equities, stock liquidity has improved over the recent four decades to the point that illiquidity is significantly priced only for the smallest common stocks.

Three Models of Risk Management Structure

The three models of risk management are as follows: 1) CEO/President as Risk Manager, 2) COO/CFO as Risk Manager, and 3) Chief Investment Officer as Risk Manager. It might make sense for the CIO to be Risk Manager because the CIO has a complete understanding of the risks associated with the investments.

Variance in Pension Fund Returns

The variance in pension fund returns is largely (~90%) attributable to strategic asset allocation. The rest of the variance in fund returns (~10%) is attributable to security selection and market timing.

Heterogeneity of ESG Ratings

There has been criticism of the heterogeneity of ESG related ratings for the same firms across rating agencies. For example, one study found that while the three biggest credit rating agencies have credit rating correlations of .9, the ESG ratings of MSCI, sustainalytics, and Reprisk have an ESG correlation of .32

Form PF

This form must be filed by US registered investment advisers with regulatory AUM attributable to private funds that exceed $150M

Practical Implications of an adaptive view on markets

Time-varying risk premiums - this implies that strategies that allocate dynamically across time may be able to capture risk premiums. Market efficiency is relative/varies with respect to time and market participants. This implies that, in less than efficient markets, strategies that exploit market efficiencies can find opportunities. Adapting for success and survival (i.e., strategies must be adapted as the market evolves) - this implies that adaptive strategies can provide opportunities when other strategies may suffer. Degradation of alpha - this implies that adaptive strategies may find alpha opportunities at certain periods.

Relationship between Price Stickiness and the need to Currency Hedge an asset

To the extent that assets have: -international trade -substantial transportation costs -high trading costs -substantial taxation -The prices of these assets may deviate from those predicted by the law of one price for substantial periods of time -If prices are stickier, then currency hedging may be more necessary

Noise Traders

Trade securities for reasons unrelated to their fundamental values

Securities Exchange Act of 1934

US legislation governing trading in secondary markets

Potential Confliect of ESG Principles and U.S Fiduciary Responsibility

Under the Investment Advisors Act of 1940, fiduciary duties cannot conflict w/ the client's best interest. Therefore, there is a potential conflict in that ESG matters may not always result in a direct financial benefit, such as improved risk-adjusted returns. Unless explicitly directed by the investor, fiduciaries in the US are directed to only invest with the goal of maximizing returns relative to the financial risk constraints of the client

UCITS

Undertakings for Collective Investment In Transferrable Securities

Adverse Selection

Undesirable results that occur when parties to a transaction have asymmetric information before a transaction is completed

Value and Size Factors

Value - Book-to-market (BTM) ratios are used as a measure for value. The value factor is the spread between returns on high BTM ratio and low BTM stocks; i.e., long a portfolio of high BTM stocks and short a portfolio of low BTM. Size - Size is measured by market capitalization (i.e., small-cap vs. large-cap). The size factor is the spread between returns on small stocks and on large stocks; long a portfolio of small-cap stocks and short a portfolio of large-cap stocks. (Sm - Lg)

Cap and Trade

government program regarding pollution or other externalities that specifies caps (allowances) on the activity for each entity but allows each entity to trade its rights (e.g., its allotment of pollution). Thus, each entity can be viewed as having a private property right to, for example, pollute up to its assigned cap. Importantly, cap and trade programs allow each entity to exchange these rights. Economic reasoning finds that these exchange rights serve as a mechanism through which pollution reductions or other goals will be generated by those entities who can accomplish the reductions at the least financial cost

Active Funds Hypothesis

hypothesis argues that as investments in hedge funds becomes more popular; the aggregate performance of the industry will be adversely affected by the decisions of investors who have allocations to these funds as well as to traditional assets -Basically, systematic risks increases as investors who are invested in both may have to liquidate both traditional and hedge fund allocations during financial turmoil

Enviropreneurship

is an emerging branch of entrepreneurship that deals with a mixed motive of profit seeking and concern regarding ESG-related issues

European Securities and Market Authority (ESMA)

is responsible for safeguarding the stability of the EU's financial system by enhancing investor protection and promoting orderly markets and financial stability -Has the power to write technical standards and bring about systems of mutual recognition. ESMA's role in the AIFMD is one of legislation.

Undertakings for Collective Investments in Transferrable Securities (UCITS)

is the main European framework covering collective investment schemes. UCITS funds must be open-ended and liquid and typically invest in securities listed on public stock exchanges and regulated markets

Expected Short-Term Rate Using Vasicek Model

k = speed of adjustment u = long term rate r = current short term rate if the long-run mean interest rate is higher than the current interest rate, then the expected short-term rate for the next period needs to be higher than the current rate

Alts with non-linear relations between returns and market factors

non-linear relations are typically associated with alternative investments that have a option component (event risk funds, such as merger arbitrage and distressed investmetns) or engage in market timing (managed futures)

Capacity Constraint Hypothesis

o The capacity constraint hypothesis asserts that alpha is esentially a zero sum game, and that therefore, only a few managers can be expected to consistently deliver alpha. o The per capita amount of alpha available in the marketplace has declined substantially with AUM growing almost exponentially since the early 1990s

Greenwashing

occurs when investment promoters mislead prospective investors with overstated claims regarding the likely social impact of an investment opportunity.

Examples of Data Collected on Monthly Basis

position and manager changes and non-investment qualitative risks such as business, legal, regulatory, and compliance.

Vertical vs Ratio Spread

· A vertical spread is a combination of long calls and short calls (or short puts and long puts) having the long options with one strike price (the long leg) and the short options with a different strike price but with the same expiration dates. The spread is intra-asset when it involves options from the same asset. The vertical spread is a type of skew spread. · While a vertical spread that is created using the same number of long and short options is a pure vertical spread, a ratio spread is a vertical spread with unequal numbers of long and short option positions. For example, a pure vertical spread would be long 10 March 100 strike calls and short 10 March 120 strike calls, while a ratio vertical spread may be long 10 March 100 strike calls and short 20 March 120 strike calls · At expiration, a vertical spread will have a minimum value of zero, when both options expire out-of-the-money. The maximum value will be equal to the difference between strike prices when both options are in-the-money.

Why is it difficult to hedge risks in the case of asset-based lending (ABL) strategies?

· Asset based lending strategies are usually long-only strategies · Hedging is difficult because borrowers tend to be small, due to the unique features of the specific ABL facility, and because the nature of small businesses is highly idiosyncratic. · Furthermore, hedging a long portfolio constituted by small issuers with a short portfolio of large bond issuers (because of the difficulty in finding borrowers for middle market bonds) creates basis risk.

ILPA Guidelines of Fund Extensions

· Fund Term Extensions: (1) Extensions should be in 1-year increments and require majority approval of the LP Advisory Committee or the LPs; and (2) the GP should be required to liquidate the fund within one year of the expiration of the term of the fund.

Mission Related Investments (MRI) Vs. Program Related Investments (PRI)

· Mission related investments (MRI) - are investments viewed as offering a combination of ESG impact as well a financial return. Offer competitive risk-adjusted returns along with ESG impact · Program related investments (PRI) - are investments offering ESG impact and no financial return or offering a combination of ESG impact as well as a sub competitive risk adjusted financial return o The importance of the distinction is primarily based on US tax rules for not-for-profit organizations. The US Internal Revenue Service specifies three characteristics of a program-related investment: 1. The primary purpose is to accomplish one or more of the foundation's exempt purposes, 2. Production of income or appreciation of property is not a significant purpose, and 3. Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.

Hedge Fund Investment Techniques and ESG

· Short selling: Some hedge funds that are taking an active role in governance by purposefully shorting the stocks of firms that have low ESG scores, especially those with potential fraud and serious concerns around governance · Leverage: Funds should consider disclosing: i. The conditions under which leverage may be used ii. Restrictions and sources of the leverage iii. Additional risk of leverage (ex: counterparty credit risk) iv. Details about how leverage is defined and measured by the fund v. The match or mismatch of the maturity of the leverage relative to the maturity of the assets · Derivatives: Funds should consider disclosing: i. Whether or not derivatives are used by the fund ii. if the use of derivatives is a central and key tactic used by the fund, as opposed to the use of derivatives as an occasional support feature, for example; and iii. the existence of regulatory and operating risk factors investors will be exposed to if they invest in the hedge fund. -High Frequency Trading: · hedge funds that focus on this primarily on this technique may not be a good fit for ESG strategies, unless and until data inputs for quantitative trading using ESG factors are sufficiently high quality to be usable for day-to-day trading strategies

Global Reporting Initiative (GRI)

· The Global Reporting Initiative (GRI) is a nongovernmental organization (NGO) that promotes improved reporting principles and disclosure of ESG-related issues through the development of the GRI Standards. o G4 Materiality Principle - asserts that relevant topics within reports should include those topics that "may reasonably be considered important for reflecting the organization's economic, environmental, and social impacts, or influencing the decisions of stakeholders, and, therefore, potentially merit inclusion in the report." o G4 notes that this materiality focus will make reports more relevant, credible, and user-friendly.

SASB Materiality Map

· The SASB Materiality Map analyzes ESG-related issues along two major dimensions: o ESG Category -Environment -Social Capital -Human Capital -Business Model and Innovation -Leadership and Governance · These are broken down into 25+ subcategories o Industry: 10 industry categories (eg,, consumer goods, financials, infrastructure, etc.) - broken down into 75 sub categoreies · Each location on the map (each combination of subcategories) is rated as falling into 3 categories: o 1) Likely to be material for more than 50% of the firms o 2) Likely to be material for fewer than 50% of the firms o 3) Not likely at all