Alternative Investments Program outline: Asset management industry is undergoing a major transition: institutional and individual investors have suffered from massive capital loss in classic investment products like long-only mutual funds and pension funds during financial markets turmoil in 2008-09 and now they are allocating more assets into alternative investment (AI) strategies managed under absolute return objective and less correlated with the direction of major asset classes. Hedge funds industry as well as private equity, venture capital, credit derivatives, commodities trading and real estate are booming. This Alternative Investments Program (AIP) makes a hands-on introduction into alternative investments products and strategies, risk-return comparative analysis with classic investment funds and the role of AI in the diversified investment portfolio. AIP is focused on major hedge funds strategies and their risk/return profiles along with risk management techniques. AIP has a strong bias towards real life applications of econometric models (via Microsoft Excel Data Analysis Toolpack) where students train financial advisor's day-to-day skills. AIP is based on well-know Chartered Alternative Investment Analyst (CAIA) and Chartered Financial Analyst (CFA) programs. Syllabus: Chapter 1. Asset allocation in diversified investment portfolio. Major asset classes. Strategic and tactical asset allocation. Alpha and Beta of an investment strategy. Passive and active investment management styles. Factor model (W. Sharpe) for active investment strategy. Beta and Alpha drivers. 6 types of Alpha drivers. A case of factor analysis for Russian Equity mutual fund (PIF). Passive and active strategies comparison in the long run. Some statistical observations on Balanced strategies' performance. A case of rule-based tactical asset allocation. Separation alpha from beta in active strategy. Mathematics corner: multidimensional regression analysis, MS Excel Data Analysis Toolpack. Chapter 2. Fundamentals of active investment management. Fundamental characteristics of risk and return for active investment strategy - tracking error, information ratio. Investment strategy breadth. Fundamental law of active management. Cases of its application from financial advisor's perspective. Benchmark selection for AI. "130/30" investment funds. Exchange-traded funds (ETFs). Chapter 3. Introduction into hedge funds. History and major facts of hedge funds industry. Major hedge funds investment strategies. Reasoning on hedge funds inclusion into diversified investment portfolio. Performance persistence. Hedge funds myths. In depth review and risk/return analysis of hedge funds strategies: Equity Long/Short, Emerging Markets, Short-selling, Distressed debt, Merger Arbitrage, Regulation D, Event-Driven, Fixed Income Arbitrage, Convertible Bond Arbitrage, Market Neutral, Relative Value, Global Macro, Funds of Hedge Funds. Benchmark selection. Due Diligence when investing into hedge funds.
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Chapter 4. Risk management with hedge funds. Review of hedge funds research. Empirical distributions of hedge funds returns – stylized facts. Mathematics corner: normal, log-normal sample distributions, fat tails, moments of distribution, hypothesis tests. Value-At-Risk (VaR) of hedge funds. Hedge funds indices. Fees and omissions from hedge funds – a look from options theory. Hedge funds collapses: Amaranth Advisors, Peloton Partners, Carlyle Capital Corporation, Bayou Management, Marin Capital, Long-Term Capital Management, Bernard Madoff. Prerequisites A target audience for AIP are portfolio managers, financial advisors, pension funds managers responsible for investment portfolio management and strategy. Basic knowledge of Macroeconomics, Econometrics, Equity and Fixed Income valuation, Modern Portfolio Theory, Risk Management and pricing of derivatives is required. It assumes that students are familiar with Microsoft Excel Data Analysis Add-In Toolpack. Author Andrey Bershadsky has graduated (with honors) from Moscow Institute of Physics and Technology (MIPT) in 2000, received a PhD in Applied Mathematics in 2002. Andrey has an extensive experience in financial markets where he went from market risk management to fixed income fund management roles. At the moment he is with VTB Capital Asset Management as Fixed Income Fund manager with total assets under his supervision exceed USD 3 bln. Evaluation and tests Evaluation of AIP is based on scoring and credits that students collect during the classes and homework. The final grade consists of two pillars: • 50% comes from student's home assignments (a case of past performance analysis of Russian mutual fund performed by the student and presented to the group during the classes) • 50% comes from final test (multiple choice) Reading Main Reading: 1. CFA Level I 2012 - Schweser CFA Study Notes, Volume 5: Fixed income, Derivatives and Alternative Investments, Kaplan-Schweser, 2011 ISBN:978-1-4277-3597-3. 2. CFA Level 2 2012 - Schweser CFA Study Notes, Volume 4: Alternative Investments and Fixed income Kaplan Inc., 2011 ISBN:978-1-4277-3617-8. 3. William F. Sharpe, Gordon J. Alexander, Jeffery V. Bailey. Investments. Prentice Hall. 1999. 962 p. (Russian version: Уильям Ф. Шарп, Гордон Дж. Александер, Джеффри В. Бэйли ИНВЕСТИЦИИ - М.: Инфра-М, 2001 – 1035 с.). 4. CAIA Level I:Core Topics in Alternative Investments Wiley. 2009 ISBN: 978-0-470-44702-4. Further Reading: 5. Bodie, Z., A. Kane, and A. Marcus. McGraw. Investments. Hill Publishers. 9th Edition. 2010 6. DeFusco, R., D. McLeavey, J. Pinto, and D. Runkle. Quantitative Investment Analysis. Wiley Publishers. 2nd Edition. 2007. 7. Noël Amenc, Walter Géhin, Lionel Martellini, and Jean-Christophe Meyfredi. Passive Hedge Fund Replication: A Critical Assessment of Existing Techniques // Journal of Alternative Investments. 2008. Vol. 11. No. 2. pp. 69-83. 2
8. van der Zwan, M. Global Macro: An Essential Diversifier of Returns // Investment Management Journal. 2011. Vol. 1. Issue 1. pp. 45-62. 9. Girish Reddy, Peter Brady, and Kartik Patel. Are Funds of Funds Simply Multi-Strategy Managers with Extra Fees?// The Journal of Alternative Investments. 2007. Vol. 10. No. 3. pp. 49-61. 10. Naomi E. Boyd, Jeffrey H. Harris, and Arkadiusz Nowak The Role of Speculators During Times of Financial Distress // Journal of Alternative Investments. 2011. Vol. 14. No. 1. pp. 1025. 11. Xiaoqing Eleanor Xu , Jiong Liu , and Anthony L. Loviscek. An Examination of Hedge Fund Survivorship Bias and Attrition Before and During the Global Financial Crisis // Journal of Alternative Investments. 2011. Vol. 13. No. 4. pp. 40-52. 12. Jennifer Bender , Frank Nielsen , and Madhusudan Subramanian. Emerging Markets During the Crisis // Journal of Alternative Investments. 2010. Vol. 13. No. 2. pp. 104-112. 13. Meredith A Jones. Update to “An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance” // Journal of Investing. 2009. Vol. 18. No. 1. pp. 108-114. 14. Vikas Agarwal, Naveen D. Daniel, Narayan Y. Naik. Role of Managerial Incentives and Discretion in Hedge Fund Performance // Journal of Finance. 2009. Volume 64. Issue 5. pp. 2221–2256. 15. Thomas Heidorn , Dieter G Kaiser, Christoph Roder. The Risk of Funds of Hedge Funds: An Empirical Analysis of the Maximum Drawdown // Journal of Wealth Management. 2009. Vol. 12. No. 2. pp. 89-100. Internet: 16. Chartered Alternative Investment Analyst Association: http://caia.org/ 17. SEEKING ALPHA: http://seekingalpha.com/ 18. Institutional Investor Magazine: http://www.institutionalinvestor.com/ 19. “Absolute Return + Alpha” – Institutional Investor and Hedge Fund Intelligence // http://www.absolutereturn-alpha.com/ 20. “AllAboutAlpha” (CAIA): // http://www.allaboutalpha.com/ 21. The Journal of Alternative Investments (CAIA): http://www.iijournals.com/toc/jai/current
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