CAIA Wrap-Up

Definition AI:
- by exclusion: everything that is non-traditional)
- by inclusion: real assets, HF, PE, structured products
Structures among AI:
- regulatory: tax/regulation
- security: CFs/securitization/leverage
- trading: strategies
- compensation
- institutional: public/private
Goals of AI:
- active management
- absolute/relative returns
- arbitrage/return enhancers/risk diversifiers
Buy side:
- plan sponsors
- foundations/endowments
- family offices/private wealth
- sovereign wealth funds
- private ltd. partnership
- private investment pools
- separately managed accounts: investor owns invested assets, tailored, transparency,
liquidity protection, no limited liability
- mutual funds
- master limited partnership
Sell side:
- large dealer banks: trade
- brokers: executing transaction, research
Outside service providers:
- prime brokers: instead of many brokers
- accountants/auditors
- attorneys
- fund administrators: bookkeeping…
- HF infrastructure: platforms, software, and data providers
- consultants: advice, analysis, investment recommendations
- depositors/custodians: holding, clearing/settling
- investment/commercial banks
Financial markets:
- primary: IPO
- secondary: trading
- third/fourth: OTC, regional exchanges without going through large exchange / electronic
exchanges
HF Regulation Forms:
- establishing a HF
- investment advisers / managers
 - distribution and marketing
- operation (leverage…)
- reporting
Liquid alternatives:
- unconstrained clones: same strategy (if possible)
- constrained clones: similar strategy (but leverage/concentration/liquidity contraints)
- liquidity-based replication products: using liquid securities as proxy
- skill-based replication: simplified/more mechanical
- absolute return/diversified product: low beta investments
Liquid alternatives vs. private placements:
- leverage/concentration
- liquidity premia
- fees
- managerial skill
Returns when zero cost:
- take notional principal
- full collateralization: add risk free rate
- partial collateralization: leverage times return plus risk free rate
Types of IRR
- lifetime: all CF from end to beginning
- since-inception: until certain date + appraisal value
- interim: for purchased investments
- point-to-point: realized or appraised CF over certain time-period
time/dollar weighted returns:
- time: no cash contributed or withdrawn during period
- dollar: IRR
reasons for non-normality in AI returns:
- autocorrelation
- illiquidity
- nonlinearity
GARCH(p,q):
- adjust for varying volatility
- p=number of past return variations, q=number of periods for autoregressive terms
- heteroscedasticity: vola of variable changes through time or with variable itself
- autoregressive: variable is correlated with itself
- conditional: heteroscedastic even when other conditions are held constant
generalized: robust