Alternative Investments
- Length: 672 pages
- Edition: 1
- Language: English
- Publisher: Wiley
- Publication Date: 2021-11-24
- ISBN-10: 1119850606
- ISBN-13: 9781119850601
- Sales Rank: #1278954 (See Top 100 Books)
The complete guide to alternative investments, from experts working with CFA Institute
Alternative Investments is the definitive guide to understanding non-traditional asset classes. Alternatives are a disparate group of investments that are distinguished from long-only, publicly traded investments in stocks, bonds, and cash (often referred to as traditional investments). Alternative investments include real estate, commodities, infrastructure, and other non-traditional investments such as private equity or debt and hedge funds. They are attractive to investors because of the potential for portfolio diversification resulting in a higher risk-adjusted return for the portfolio.
Alternative Investments and its accompanying workbook (sold separately) lead students and investment professionals through the many characteristics of non-traditional assets, including:
- Narrow specialization of the investment managers
- Relatively low correlation of returns with those of traditional investments
- Less regulation and less transparency than traditional investments
- Limited historical risk and return data
- Unique legal and tax considerations
- Higher fees, often including performance or incentive fees
- Concentrated portfolios
- Restrictions on redemptions (i.e. “lockups” and “gates”)
CFA Institute is the world’s premier association for investment professionals, and the governing body for the CFA® Program, CIPM® Program, CFA Institute ESG Investing Certificate, and Investment Foundations® Program. Those seeking a deeper understanding of the markets, mechanisms, and use of alternatives will value the level of expertise CFA Institute brings to the discussion, providing a clear, comprehensive resource for students and professionals alike. Whether used alone or in conjunction with the companion workbook, Alternative Investments offers a complete course in alternative investments and their role in investment management.
Cover Title Page Copyright Contents Foreword Preface Acknowledgments About the CFA Institute Investment Series CHAPTER 1 Introduction to Corporate Governance and Other ESG Considerations Learning Outcomes 1. Introduction and Overview of Corporate Governance 1.1. Corporate Governance Overview 2. Stakeholder Groups 2.1. Stakeholder Groups 3. Principal–Agent and Other Relationships in Corporate Governance 3.1. Shareholder and Manager/Director Relationships 3.2. Controlling and Minority Shareholder Relationships 3.3. Manager and Board Relationships 3.4. Shareholder versus Creditor Interests 3.5. Other Stakeholder Conflicts 4. Overview and Mechanisms of Stakeholder Management 4.1. Overview of Stakeholder Management 4.2. Mechanisms of Stakeholder Management 5. Mechanisms to Mitigate Associated Stakeholder Risks 5.1. Employee Laws and Contracts 5.2. Contractual Agreements with Customers and Suppliers 5.3. Laws and Regulations 6. Company Boards and Committees 6.1. Composition of the Board of Directors 6.2. Functions and Responsibilities of the Board 6.3. Board of Directors Committees 7. Relevant Factors in Analyzing Corporate Governance and Stakeholder Management 7.1. Market Factors 7.2. Non-Market Factors 8. Risks and Benefits of Corporate Governance and Stakeholder Management 8.1. Risks of Poor Governance and Stakeholder Management 8.2. Benefits of Effective Governance and Stakeholder Management 9. Factors Relevant to Corporate Governance and Stakeholder Management Analysis 9.1. Economic Ownership and Voting Control 9.2. Board of Directors Representation 9.3. Remuneration and Company Performance 9.4. Investors in the Company 9.5. Strength of Shareholders’ Rights 9.6. Managing Long-Term Risks 9.7. Summary of Analyst Considerations 10. ESG Considerations for Investors and Analysts 10.1. Introduction to Environmental, Social, and Governance issues 10.2. ESG Investment Strategies 10.3. ESG Investment Approaches 10.4. Catalysts for Growth in ESG Investing 10.5. ESG Market Overview 10.6. ESG Factors in Investment Analysis Summary CHAPTER 2 Introduction to Alternative Investments Learning Outcomes 1. Introduction 1.1. Why Investors Consider Alternative Investments 1.2. Categories of Alternative Investments 2. Investment Methods 2.1. Methods of Investing in Alternative Investments 2.2. Advantages and Disadvantages of Direct Investing, Co-investing, and Fund Investing 2.3. Due Diligence for Fund Investing, Direct Investing, and Co-investing 3. Investment and Compensation Structures 3.1. Partnership Structures 3.2. Compensation Structures 3.3. Common Investment Clauses, Provisions, and Contingencies 4. Hedge Funds 4.1. Characteristics of Hedge Funds 4.2. Hedge Fund Strategies 4.3. Hedge Funds and Diversification Benefits 5. Private Capital 5.1. Overview of Private Capital 5.2. Description: Private Equity 5.3. Description: Private Debt 5.4. Risk/Return of Private Equity 5.5. Risk/Return of Private Debt 5.6. Diversification Benefits of Investing in Private Capital 6. Natural Resources 6.1. Overview of Natural Resources 6.2. Characteristics of Natural Resources 6.3. Risk/Return of Natural Resources 6.4. Diversification Benefits of Natural Resources 6.5. Instruments 7. Real Estate 7.1. Overview of the Real Estate Market 7.2. Characteristics: Forms of Real Estate Ownership 7.3. Characteristics: Real Estate Investment Categories 7.4. Risk and Return Characteristics 7.5. Diversification Benefits 8. Infrastructure 8.1. Introduction and Overview 8.2. Description 8.3. Risk and Return Characteristics 8.4. Diversification Benefits 9. Issues in Performance Appraisal 9.1. Overview of Performance Appraisal for Alternative Investments 9.2. Common Approaches to Performance Appraisal and Application Challenges 9.3. Private Equity and Real Estate Performance Evaluation 9.4. Hedge Funds: Leverage, Illiquidity, and Redemption Terms 10. Calculating Fees and Returns 10.1. Alternative Asset Fee Structures and Terms 10.2. Custom Fee Arrangements 10.3. Alignment of Interests and Survivorship Bias Summary CHAPTER 3 Real Estate Investments Learning Outcomes Section A. Overview of Types of Real Estate Investment 1. Introduction and Basic Forms of Real Estate Investment 1.1. Real Estate Market Size 1.2. Real Estate Investment: Basic Forms 1.3. Characteristics 1.4. Risk Factors 2. Economic Value Drivers, Role in Portfolio, and Risk/Return of Real Estate Investments Relative to Stocks and Bonds 2.1. Economic Drivers 2.2. Role of Real Estate in an Investment Portfolio 2.3. Real Estate Risk and Return Relative to Stocks and Bonds 2.4. Classifications 2.5. Investment Characteristics by Property Type 3. Considerations in Analysis and Due Diligence 4. Indexes 4.1. Appraisal-Based Indexes 4.2. Transaction-Based Indexes 4.3. Advantages and Disadvantages of Appraisal-Based and Transaction-Based Indexes 4.4. Real Estate Security Indexes Section B. Investments in Real Estate through Private Vehicles 5. Introduction to Valuation Approaches 5.1. Highest and Best Use 6. The Income Approach to Valuation: Discount Rates and the Direct Capitalization of NOI and DCF Methods 6.1. Similarities in Approaches 6.2. The Direct Capitalization Method 7. The DCF Method, the Relationship between Discount Rate and Cap Rate, and the Terminal Capitalization Rate 7.1. The Relationship between the Discount Rate and the Cap Rate 7.2. The Terminal Capitalization Rate 8. Private Market Real Estate Debt Section C. Investments in Real Estate Through Publicly Traded Securities 9. Types of Publicly Traded Real Estate Securities 9.1. REIT Structures 9.2. Market Size 9.3. Benefits and Disadvantages of Investing in REITs 10. Valuation: Net Asset Value Approach 10.1. Accounting for Investment Properties 10.2. Net Asset Value per Share: Calculation 10.3. Net Asset Value per Share: Application 11. Valuation: Relative Value (Price Multiple) Approach 11.1. Relative Value Approach to Valuing REIT Stocks 11.2. Funds from Operations and Adjusted Funds from Operations 11.3. P/FFO and P/AFFO Multiples: Advantages and Drawbacks 12. REIT Mini Case Study: Example of Disclosures and Valuation Analysis 12.1. Selection of Valuation Methods 13. Private versus Public: A Comparison Summary General Characteristics of Real Estate Private Equity Real Estate Publicly Traded Real Estate Securities CHAPTER 4 Private Equity Investments Learning Outcomes 1. Introduction 2. Introduction to Valuation Techniques in Private Equity Transactions 2.1. How Is Value Created in Private Equity? 2.2. Using Market Data in Valuation 3. Contrasting Venture Capital and Buyout Investments 4. LBO model for valuation of Buyout Transactions 4.1. The LBO Model 5. VC Method for valuation of Venture Capital Transactions1 5.1. Expected Exit Valuation 5.2. Required Rate of Return 5.3. Option Pools 5.4. Stage Financing 6. Exit Routes: Return Cash to Investors 6.1. Exit Routes: Summary 7. Risks and Costs of investing in Private Equity 7.1. What Are the Risks and Costs of Investing in Private Equity? 8. Private Equity Fund Structures and Terms 8.1. Economic Terms 8.2. Corporate Governance Terms 8.3. Due Diligence Investigations by Potential Investors 8.4. Private Equity Fund Valuation 9. Evaluating Fund Performance and Concept in Action: Evaluating a Private Equity Fund 9.1. Analysis of IRR since Inception 9.2. Analysis of Return Multiples Summary CHAPTER 5 Introduction to Commodities and Commodity Derivatives Learning Outcomes 1. Introduction 2. Commodity Sectors 2.1. Commodity Sectors 3. Life Cycle of Commodities 3.1. Energy 3.2. Industrial/Precious Metals 3.3. Livestock 3.4. Grains 3.5. Softs 4. Valuation of Commodities 5. Commodities Futures Markets: Participants 5.1. Futures Market Participants 6. Commodity Spot and Futures Pricing 7. Theories of Futures Returns 7.1. Theories of Futures Returns 8. Components of Futures Returns 9. Contango, Backwardation, and the Roll Return 10. Commodity Swaps 10.1. Total Return Swap 10.2. Basis Swap 10.3. Variance Swaps and Volatility Swaps 11. Commodity Indexes 11.1. S&P GSCI 11.2. Bloomberg Commodity Index 11.3. Deutsche Bank Liquid Commodity Index 11.4. Thomson Reuters/CoreCommodity CRB Index 11.5. Rogers International Commodity Index 11.6. Rebalancing Frequency 11.7. Commodity Index Summary Summary CHAPTER 6 Hedge Fund Strategies Learning Outcomes 1. Introduction and Classification of Hedge Fund Strategies 1.1. Classification of Hedge Funds and Strategies 2. Equity Strategies: Long/Short Equity 2.1. Long/Short Equity 3. Equity Strategies: Dedicated Short Selling and Short-Biased 3.1. Investment Characteristics 3.2. Strategy Implementation 4. Equity Strategies: Equity Market Neutral 4.1. Investment Characteristics 4.2. Strategy Implementation 5. Event-Driven Strategies: Merger Arbitrage 5.1. Merger Arbitrage 6. Event-Driven Strategies: Distressed Securities 6.1. Investment Characteristics 6.2. Strategy Implementation 7. Relative Value Strategies: Fixed Income Arbitrage 7.1. Fixed-Income Arbitrage 8. Relative Value Strategies: Convertible Bond Arbitrage 8.1. Investment Characteristics 8.2. Strategy Implementation 9. Opportunistic Strategies: Global Macro Strategies 9.1. Global Macro Strategies 10. Opportunistic Strategies: Managed Futures 10.1. Investment Characteristics 10.2. Strategy Implementation 11. Specialist Strategies 11.1. Volatility Trading 11.2. Reinsurance/Life Settlements 12. Multi-Manager Strategies 12.1. Fund-of-Funds 12.2. Multi-Strategy Hedge Funds 13. Analysis of Hedge Fund Strategies using a Conditional Factor Risk Model 13.1. Conditional Factor Risk Model 14. Evaluating Equity Hedge Fund Strategies: Application 15. Evaluating Multi-manager Hedge Fund Strategies: Application 16. Portfolio Contribution of Hedge Fund Strategies 16.1. Performance Contribution to a 60/40 Portfolio 16.2. Risk Metrics Summary CHAPTER 7 Capital Market Expectations: Forecasting Asset Class Returns Learning Outcomes 1. Introduction 2. Overview of Tools and Approaches 2.1. The Nature of the Problem 2.2. Approaches to Forecasting 3. Forecasting Fixed Income Returns 3.1. Applying DCF to Fixed Income 3.2. The Building Block Approach to Fixed-Income Returns 4. Risks in Emerging Market Bonds 4.1. Economic Risks/Ability to Pay 4.2. Political and Legal Risks/Willingness to Pay 5. Forecasting Equity Returns 5.1. Historical Statistics Approach to Equity Returns 5.2. DCF Approach to Equity Returns 5.3. Risk Premium Approaches to Equity Returns 5.4. Risks in Emerging Market Equities 6. Forecasting Real Estate Returns 6.1. Historical Real Estate Returns 6.2. Real Estate Cycles 6.3. Capitalization Rates 6.4. The Risk Premium Perspective on Real Estate Expected Return 6.5. Real Estate in Equilibrium 6.6. Public versus Private Real Estate 6.7. Long-Term Housing Returns 7. Forecasting Exchange Rates 7.1. Focus on Goods and Services, Trade, and the Current Account 7.2. Focus on Capital Flows 8. Forecasting Volatility 8.1. Estimating a Constant VCV Matrix with Sample Statistics 8.2. VCV Matrices from Multi-Factor Models 8.3. Shrinkage Estimation of VCV Matrices 8.4. Estimating Volatility from Smoothed Returns 8.5. Time-Varying Volatility: ARCH Models 9. Adjusting a Global Portfolio 9.1. Macro-Based Recommendations 9.2. Quantifying the Views Summary CHAPTER 8 Asset Allocation to Alternative Investments Learning Outcomes 1. Introduction and The Role of Alternative Investments in a Multi-asset Portfolio 1.1. The Role of Alternative Investments in a Multi-asset Portfolio 2. Diversifying Equity Risk 2.1. Volatility Reduction over the Short Time Horizon 2.2. Risk of Not Meeting the Investment Goals over the Long Time Horizon 3. Traditional Approaches to Asset Classification 3.1. Traditional Approaches to Asset Classification 4. Risk-Based Approaches to Asset Classification and Comparing Risk-Based and Traditional Approaches 4.1. Illustration: Asset Allocation and Risk-Based Approaches 4.2. Comparing Risk-Based and Traditional Approaches 5. Risk Considerations, Return Expectations and Investment Vehicle 5.1. Risk Considerations 5.2. Return Expectations 5.3. Investment Vehicle 6. Liquidity 6.1. Liquidity Risks Associated with the Investment Vehicle 6.2. Liquidity Risks Associated with the Underlying Investments 7. Fees and Expenses, Tax Considerations, and Other Considerations 7.1. Tax Considerations 7.2. Other Considerations 8. Suitability Considerations 8.1. Investment Horizon 8.2. Expertise 8.3. Governance 8.4. Transparency 9. Asset Allocation Approaches and Statistical Properties and Challenges of Asset Returns 9.1. Statistical Properties and Challenges of Asset Returns 10. Monte Carlo Simulation 10.1. Simulating Skewed and Fat-Tailed Financial Variables 10.2. Simulation for Long-Term Horizon Risk Assessment 11. Portfolio Optimization 11.1. Mean–Variance Optimization without and with Constraints 11.2. Mean–CVaR Optimization 12. Risk Factor-Based Optimization 13. Liquidity Planning and Achieving and Maintaining the Strategic Asset Allocation 13.1. Achieving and Maintaining the Strategic Asset Allocation 14. Managing the Capital Calls and Preparing for the Unexpected 14.1. Preparing for the Unexpected 15. Monitoring the Investment Program 15.1. Overall Investment Program Monitoring 15.2. Performance Evaluation 15.3. Monitoring the Firm and the Investment Process Summary CHAPTER 9 Integrated Cases in Risk Management: Institutional Learning Outcomes 1. Introduction 2. Financial Risks Faced by Institutional Investors 2.1. Long-Term Perspective 2.2. Dimensions of Financial Risk Management 2.3. Risk Considerations for Long-Term Investors 2.4. Risks Associated with Illiquid Asset Classes 2.5. Managing Liquidity Risk 2.6. Enterprise Risk Management for Institutional Investors 3. Environmental and Social Risks Faced by Institutional Investors 3.1. Universal Ownership, Externalities, and Responsible Investing 3.2. Material Environmental Issues for an Institutional Investor 3.3. Material Social Issues for an Institutional Investor Case Study 1. Case Study: Introduction 2. Case Study: Background 3. R-SWF’S Investments: 1.0 Investment Committee Meeting 1.0 4. R-SWF’S Investments: 2.0 Investment Committee Meeting 2.0 5. R-SWF’S Investments: 3.0 References Glossary About the Editors and Authors Index End User License Agreement
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