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CAIA > Summary > Flashcards

Summary Flashcards

1
Q

Decentralised Exchanges

A

Facilitate transactions without the involvement of n intermediary. Examples include decentralized order book exchanges, constant function money maker, peer-to-peer protocols, and smart contract-based reserve aggregation.

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2
Q

Six Benefits for ESG inclusion in LPA

A

1) Lower negotiating costs
2) Reduced number of side letters
3) Demonstrated concern for LPs
4) Increase in goodwill for GPs
5) Greater transparency for all investors
6) Enhanced relationship building

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3
Q

Digital Asset Custody (Bitcoin)

A

Holders of digital assets may establish ownership via third party custody.

Benefits: Institutional grade trading, relatively low costs and capital efficiency opportunities.

Challenges: Gaps in technical knowledge and experience, fragmented liquidity and integration with traditional assets.

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4
Q

Private Placement in Passive Funds (Bitcoin)

A

Investors who want long-only exposure to bitcoin may use private placement in passive bitcoin funds.

Benefits: Familiarity and convenience as well as ability to account for investments at fair value.

Challenges: Relatively high costs and varying redemption mechanisms and frequencies.

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5
Q

Publicly Traded Shares (Bitcoin)

A

Open-ended private trusts provide investors with bitcoin exposure through publicly traded shares which represent ownership in the trust.

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6
Q

Futures (Bitcoin)

A

Cash-settled or physical-settled futures can add long exposure, establish risk-neutral exposure and create hedge spot exposure.

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7
Q

ETFs (Bitcoin)

A

The SEC has not approved ETF applications in the US due to concerns on:

Custody

Market Size

Surveillance

Market Manipulation

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8
Q

Private Equity Factor Tilts

A

Equity Risk

Illiquidity Premium

Size Premium

Value Premium

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9
Q

Poor Private Equity Returns Since 2006

A

1) More capital committed to PE

2) Lower levels of leverage following regulatory changes

3) Greater competition for deals

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10
Q

LTI Advantages

A

1) Idiosyncratic Advantages (goals / objectives)

2) Longer Time Horizon

3) Organizational Ambidexterity (Innovative Flexible)

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11
Q

LTI Environmental Enablers

A

Culture

Board (Governance)

Technology

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12
Q

LTI Product Input Metrics

A

People

Processes

Capital (Leverage)

Information

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13
Q

LTI Intermediate Output Metrics

A

Alignment

Commitment

Knowledge Management

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14
Q

LTI Investment Result Metrics

A

Investment Performance

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15
Q

Longevity Risk Measurement Steps

A

1) Accurately measure mortality

2) Use updated longevity expectations to adjust plan liabilities

3) Engage in stress testing

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16
Q

Longevity Risk Management

A

1) Pension plans can purchase longevity insurance

2) Buy Out (transfers all assets and liabilities to insurance company)

3) Buy In (transfers some of the risk for some of the participants)

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17
Q

Consensus Mechanism (Bitcoin)

A

Proof-of-Work ensures that all participants agree on each transaction (e.g., miners validate transactions)

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18
Q

Advantages of Crypto

A

1) Portfolio diversification

2) Payment promises attached to transactions (coloured coins)

3) Smart contracts

4) Data integrity

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19
Q

Disadvantages of Crypto

A

1) Forks in the blockchain

2) Computational power (cost and energy)

3) Bitcoin price volatility

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20
Q

Loyalty to Clients (3)
(PCR)

A

Priority of clients over the firm,

Client confidentiality,

Refusal of inappropriate business relationships and gifts.

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21
Q

Investment Process
(FARS)

A

Reasonable care and judgement

Fair dealing

Sufficient due diligence

Avoiding manipulation of securities price and volume

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22
Q

Trading
(TEMP C)

A

Not using material non-public

Prioritization of clients over the firm

Proper use of client commissions

Best execution

Fair an equitable trade allocation

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23
Q

Risk Management, Compliance and Support

A

Detailed policies and procedures to comply with the AMC

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24
Q

Performance and Valuation
(ART C)

A

Use of fair market prices or commonly used valuation methods.

Data that is Accurate, Relevant, Timely and Complete.

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25
Q

Disclosures
(TACU FIIP)

A

Ongoing and Timely communication with clients.

Truthful, Accurate, Complete and Understandable Communication.

All material facts regarding the Firm, Personnel, Investments and the Investment Process.

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26
Q

Advisors Act (I - VI)

A

I) Advisor Agreement Terms
II) Performance Fees
III) Client Solicitation
IV) Political Contributions
V) Trading Practices
VI) Advertising

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27
Q

Advisors Act (VII - XII)

A

VII) Recordkeeping
VIII) Personal Securities Reporting
IX) Custody
X) Proxy Voting
XI) Compliance Program
XII) Gifts and Entertainment

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28
Q

AIFM Requirements
(ACIL)

A

Required to be authorized subject to any applicable exemptions.

Caps on compensation for senior management and those in a position to gain.

AIFM must establish a maximum threshold for leverage.

Oversight duties for liquidity risks and stress tests.

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29
Q

EU AIFMs Requirements (6)
(ACRID C)

A

Meet Initial and subsequent capital requirements.

Establish Compensation guidelines who may significantly affect AIMF’s risk profile.

Create an Independent risk management group.

Provide Disclosures to investors of specific information initially and on a continuing basis.

Satisfy the Regulatory requirements of the competent authority of the home member country.

Produce an Annual report of the AIF.

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30
Q

ESG: Risk and Return

A

Return: Less support that ESG leads to higher returns.

Risk: Less systematic risk (operational controls). Less volatility.

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31
Q

PRI Principles

A

1) Incorporate ESG issues into the investment analysis and decision-making processes.

2) Be active owners and incorporate ESG issues into ownership policies and practices.

3) Seek appropriate disclosure on ESG issues by the entities invested.

4) Promote acceptance and implementation of the principels with the investment industry.

5) Work together to enhance effectiveness in implementing the principles.

6) Report on activities and progress toward implementing the principles.

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32
Q

Normative vs Positive

A

Normative: How people should behave.

Positive: How people actually behave.

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33
Q

Theoretical vs Emprical

A

Theoretical: Draw conclusions form existing observations of underlying behaviour.

Empirical: Makes predictions when behaviour is complex.

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34
Q

Applied vs Abstract

A

Applied: Solve actual real world problems in the present day.

Abstract: Solve hypothetical real world problems set in the future.

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35
Q

Ho-Lee Model

A

Arbitrage free model structured in a way that arbitrage opportunities do not exist.

Derived from the current yield curve.

Fixed-income derivatives priced with this model will reflect current bond prices.

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36
Q

KMV Model

A

Structural model that calculated volatility of equity through a structural relationship between firm’s equity market values and its assets, as well as relationship between volatilities of firm’s equity and it’s assets, uses a default trigger to model default.

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37
Q

Altman’s Z Score.

A

Financial Statement + Market Value of Equity:

Liquidity

Profitability

Leverage

Solvency

Activity

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38
Q

Multi-Factor Models

A

Allow for declining marginal utility and permit different investors to asses an economic situation as good or bad relative to their own vantage point.

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39
Q

Common Factors

A

Value
Size
Momentum
Liquidity
Credit Risk,
Term
Implied Volatility
Low Volatility
Carry Trade
Roll Premiums

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40
Q

Liquidity Risk

A

Market: No market for the asset.

Funding: Borrow is forced to liquidate holdings to cover loan obligations.

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41
Q

Risk Budget

A

Aggregate risk constraint at the portfolio level. Asset allocators can categorize exposures into risk buckets and then seek optimization of returns after risk constraints have been met.

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42
Q

Risk Parity

A

Balances risk between constituent assets so that their marginal risk contributions are equal.

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43
Q

Estimation Challenges in Alternative Assets (3)

A

1) Shorter history

2) Increased participation in alternative assets by investors diminishes the amount of alpha

3) New alternative asset classes have no historical track record

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44
Q

IPS

A

Stating the client’s long-term investment objectives together with the methodology to achieve them, advising the client and accounting for investment beliefs when determining risk tolerance and overseeing the investment strategy.

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45
Q

Types of Foundations

A

1) Operating

2) Community

3) Corporate

4) Independent

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46
Q

Large Endowment Outperformance (6)

A

Aggressive tactical allocation

Superior manager selection

First-mover advantage

Network alumni effect

Liquidity risk premium

Sophisticated investment staff

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47
Q

Pension Plan Risk Drivers (4)

A

1) Interest Rates

2) Inflation

3) Retirement Cycle

4) Mortality

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48
Q

Plan Sponsor Risk Tolerance (5)

A

1) Funded Status of the Plan

2) Fund Size

3) Expected Future Contributions Relative to the Sponsors Expected Cash Flows

4) Sponsor’s General Financial Position

5) Participant Demographics

49
Q

PV Growth Annuity

A

[Initial Payment / (r-g) ] x {1-[(1+g)/(1+r)]^n}

50
Q

Stabilization Funds

A

Smooth Volatility

51
Q

Savings Funds

A

Benefit Future Generations

52
Q

Reserve Funds

A

Meet Specific Future Liabilities

53
Q

Development Funds

A

Promote Economic Development

54
Q

Sterilization Methods to Offset Dutch Disease

A

1) Buy foreign currency and sell local currency.

2) Invest sovereign assets in foreign countries.

55
Q

Section 1256 Contracts

A

60% of gains at long-term rate (20%)

40% of gains at short-term rate (~40%)

Includes futures

56
Q

Advantages of Family Offices (I-V)

A

I) Aggressive asset allocation
II) Capturing liquidity premiums
III) Decision making speed
IV) Direct investment opportunities
V) Asset governance and management

57
Q

Advantages of Family Offices (VI-X)

A

VI) Alignment of interests
VII) Lower costs and higher returns
VIII) Centralized risk management
IX) Cenralized provision of services
X) Management of lifestyle assets in portfolio context.

58
Q

Cases in Tail Risk

A

1) Leverage

2) Over-Confidence

3) Risk Systems

4) Greed

59
Q

Bailey (Benchmark) Criteria

A

Specified in Advance
Unambiguous
Measurable
Opinion (Reflective of current)
Investable
Style (Same as portfolio)
Agreed (by Manager)

60
Q

CAPM vs Alts

A

Poor:

Multi-period non-stationarity
Non-normal returns
Illiquidity

61
Q

CTA Corrleations

A

Low:

Traditional Asset Classes
Long Only Commodity Indexes

62
Q

Variation Margin

A

Daily Settlement of Gains /Losses in Futures market

63
Q

Margin-to-Equity Ratio

A

Percentage of assets held for margin relative to NAV

64
Q

Unsmoothing Returns

A

R(t, true) = R(t, reported) - p R(t-1, reported) / (1 - p)

65
Q

Delta Hedging

A

1) Not directional

2) Pursues superior returns through mispricing

3) Partly a bet on volatility

66
Q

Rebalancing (3)

A

1) Enhance returns and decrease risk when mean-reverting

2) Helped when assets have high volatility and low correlation

3) Suited to commodities

67
Q

Components of Risk Measurement

A

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

68
Q

Historical Key Measurement Reviews

A

Compare key metrics to benchmarks / min and max values / returns / standard deviation / ratios

69
Q

SEC Best Practice Risk Managers (Cyber) (6)
(CITE IT)

A

1) Maintain a complete inventory of data, information and vendors
2) Detail Cyber security related instructions
3) Maintain prescriptive processes for testing data integrity and vulnerabilities
4) Establish and enforce controls to access data and systems
5) Provide mandatory employee training
6) Engage senior management

70
Q

PCA

A

Uses factor loading vector vectors that are orthogonal; process can be repeated and the marginal percentage of variance explained will decrease without altering the percentage explained by previous factors.

71
Q

Non-linear exposure

A

Occurs when value of the investment position changes based on magnitude of change in market values.

Returns can be estimated with dummy variables, separate regressions and quadratic variables.

72
Q

Four Approaches to Return Analysis

A

1) Asset classes

2) Strategies

3) Market-wide factors

4) Specialised market factors

73
Q

Commodity RV Strategies (4 x Spreads)

A

Location, correlation, time

1) Calendar Spreads

2) Processing Spreads

3) Location Spreads

4) Substitution Spreads

74
Q

Appraisal-based indices

A

1) Sales comparison

2) Cost approach

3) Income approach

75
Q

Hedge Fund Replication Products

A

1) Return enhancers

2) Risk diversifiers

3) Benchmark information sources

76
Q

Benefits of Replication Products (9)

A

Liquidity

Transparency

Flexibility

Lower Fees

Hedging

Lower Due-Diligence Costs

Reduced Monitoring Risks

Diversification

Benchmarking

77
Q

Beta Increase / Alpha Decrease Explanations

A

1) Fund Bubble Hypothesis (Terrible managers)

2) Capacity Constraint Hypothesis (Alpha zero sum game)

3) Increased Allocation to Hedge Funds (Traditional investors enter space)

78
Q

Factor-Based Replication Approach (4 Steps)

A

1) Chose an appropriate benchmark.

2) Choose a set of investible factors.

3) Determine the estimation period.

4) Identify factors to include.

79
Q

Payoff-Distribution Approach

A

Creates a portfolio to match ad desired return distribution. May match higher moments, but mean returns are lower.

80
Q

Algorithmic (Bottom-Up) Strategies

A

Use a simplified version of the actual trading strategies implemented in the hedge funds. Only works for well defined systematic trading strategies (merger arb, convertible arb, momentum)

81
Q

View Commonality

A

Dominant factor exposure when individual managers are aggregated.

82
Q

Exposure Inertia

A

As number of hedge fund managers in index increases, time for common view to change increases.

83
Q

Hedge Fund Access (3 Methods)

A

1) Direct Approach

2) Delegated Approach

3) Indexed Approach

84
Q

Non-Traded REIT advantage (4)

A

7-10 year lifespan

Diversification

Access to skilled managers

Targeted exposure

85
Q

Listed Real Estate advantage (4)

A

Diversification

Liquidity

Constant exposure

High information flow

86
Q

Unlisted Real Estate advantage (4)

A

Diversification of RE Specific Risk

Access to Skilled Managers

Targeted Exposure

Tax-Advantaged Income

87
Q

Direct Commodity Exposure

A

Pure Play

Requires Storage and Transportation –> Large initial capital ammounts.

88
Q

Indirect Commodity Products (5)

A

Mutual Funds

ETFs

MLPs

Private Partnerships

Commodity Linked ETNs

89
Q

Listed Assets Advantages (7)

A

Increase Liquidity

Lower Management Fees

Easier Diversification

Price Transparency

Regulatory Oversight

Enhanced Access to Financing

Tax Simplification

90
Q

Unlisted Assets Advantages (7)

A

Illiquidity Premiums

Incentivized Management

Ability to Target Holdings

Smoothed Values

Enhanced Investor Oversight

Managerial Flexibility

Tax Benefits

91
Q

ILPA Guiding Principles

A

Alignment of Mutual Interests

Governance

Transparency

92
Q

Special Rights for LPs x 8
(MEETS CCC)

A

Partnership Agreement:
___

Most-favoured nation

Excuse rights

ESG

Transferability of ownership stakes

Special reporting requests

Confidentiality protections

Co-investment rights

Capital call enforcement

93
Q

Illiquidity of Assets
(2 Measurements)

A

1) Time needed to close position if price is unaffected

2) Price at which position is closed if it must be done quickly

94
Q

Market Segmentation

A

Investors with a long time horizon and minimal liquidity needs may prefer predictable cash flows and relatively low volatility of private real estate.

Investors with shorter time horizons may prefer low expenses and high liquidity of public real estate.

95
Q

PE Performance Calculation Challenges (3)

A

Size

Timing

Variability of Cash Flows

96
Q

Purpose of Private Equity Pools (5)
(FIMPP)

A

1) Pool Capital

2) Identify Potential High-Return Companies

3) Financing and Management Expertise

4) Monitoring to Portfolio Companies

5) Profitable Exits

97
Q

Six Challenges of Performance Persistence
(CUSP DV)

A

Comparing dissimilar funds

Unclear definition of top performance

Secular market trends

Performance due to fund size growth and not manager skill

Distinguishing between skill and luck

Variable performance dispersions

98
Q

Considerations when analysing past performance for mangers’ funds (3)
(LSC)

A

1) Length of time managing current and previous funds

2) Stability of returns over time and across funds

3) Comparison and contrast of fund investment strategies amongst the funds

99
Q

Investment Process Risk

A

Refers to risk of errors and incorrectly applied decisions, policies and procedures in front office - resulting in incorrect asset exposures.

100
Q

Independent Third Parties should value fund assets because fund managers have incentives to (4):

(HASI)

A

1) Hide or defer losses

2) Smooth returns

3) Alter risks to recoup losses or secure profits

4) Inflate asset values to generate more fees

101
Q

Six Risk Alert Observations on Asset Values and Due Diligence
(VATE QQ)

A

More use of third-party Verification

Avoiding Ambiguity in valuations, performance reporting and measurement

More reliance on Transparency reports

Greater importance of External dealer quotes for valuations

More detailed Quantitative analysis and risk measurement

More use of Quantitative analysis in investment decisions

102
Q

Investment Warning Indicators (4x)
(TIII)

A

Lack of willingness by the manager to be transparent

Investment returns incongruent given the investment strategy

Investment process that is unclear

Inadequate controls and segregation of duties

103
Q

Trade Allocation

A

Distributing new positions among funds. A common allocation is on a pro rata basis.

104
Q

Trade Execution

A

Completing a trade. Trades are usually listed on a trade blotter.

105
Q

Trade Posting and Settlement

A

Internal logging of trades and completion of trade confirmations.

106
Q

Trade Reconciliation

A

Confirming Details of Each Trade

107
Q

PE ODD (8x)
[D-DOS-I-POO]

A

1) Document Analysis

2) Document Collection

3) On-site Visits

4) Service Provider Reviews and Confirmations

5) Investigative DD

6) Process Documentation

7) Operational Decision

8) Ongoing Monitoring

108
Q

Warning Signals of Operational Risk (9)
CAVETTO AF

A

Conflicts of interest (evidence of undisclosed…)
Administrator (no qualified external administrator)
Valuation process (weak)
Employees (red flags in background checks of key employees)
Third party service providers (frequent changes)
Transparency (none)
Operating infrastructure and compliance systems (weak)

Auditor (unknown)
Financial Statements (red flags in audited)

109
Q

Objectives of OM/PPM

A

Educating LPs

Disclosing Risk

Assigning Risk

Assigning Decision-Making Authority

110
Q

Six Properties of Realized Volatility

A

1) Nonconstant and exhibits behaviour of slow mean reversion and clusters.

2) Normally low until a market shock occurs, which causes volatility to rise for an extended period.

3) Can spike in the short term, but long-term volatility levels are near long-term averages.

4) Negatively correlated with risks asset returns when volatility is high.

5) Higher in equity bear markets and lower in equity bull markets.

6) Has greater rate of increases in bear markets than rate of decreases in bull markets.

111
Q

Variance Swaps (2x benefits)

A

Avoids high transaction costs of hedging

Avoids path dependence of options.

112
Q

Volatility Hedge Fund Strategies

A

1) Relative Volatility

2) Short Volatility

3) Tail Risk

4) Long Volatility

113
Q

Unpredictability

A

Unknown outcome with unknown probability

114
Q

Ambiguity

A

Relates to unknown future returns and probabilities of financial asset.

115
Q

Opacity

A

Occurs when characteristics of an asset are unknown.

116
Q

Complexity

A

Makes it difficult to precisely estimate probabilities and outcomes of investment decisions.

117
Q

Estate Complexities in Cross-Border Investing (6)
TREAT I

A

Transaction costs
Regulatory restrictions
Exchange Rate Risk
Access to Local Services
Taxation

Insufficient knowledge of agency costs

118
Q

Real Estate Taxes Imposed on Foreign Investors

A

1) WHT

2) Sales Taxes

3) Property Taxes

4) Flat Taxes

119
Q

International Real Estate Investment Risks

A

1) Political

2) Economic

3) Legal

CAIA (7 decks)

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