JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index

Bold page numbers indicate keyword definitions or explanations.

Abnormal return persistence, managers and shareholder statistical methods to locate, 231 wealth in, 508–509 234–239 ABS (asset-backed securities), mergers or divestitures, Alpha decay, 483 569–570 514–515 Alpha drivers, 232, 233 Absolute pricing model, 133 shareholder–manager Alpha testing, 642 Absolute priority rule, 725 misalignment, 509–510 Alternative asset markets, Absolute return products, 12 strategies, 507–508 121–122 Absolute returns: Adjustable-rate mortgages Alternative hypotheses, 235 absolute value vs., 12 (ARMs), 370. See also Alternative investments, 3 liquid alternative product, 44 Variable-rate mortgages in 2x2 framework, 22 Absolute return standard, 19 Aesthetic benefit, 345–346 active management, 18–19 Absolute return strategies, 434 Affirmative covenants, 719 economic reasoning, 21–22 Absolute return structured After-tax discounting approach, empirical analysis, 21 product, 843–844 401 environment of, 25–53 Absolute value, 12 Agency costs, 509 by exclusion, 3–4 Acceleration, 737 Agency theory, 508 goals of, 18–20 Accessibility: Agent compensation scheme, hedge funds as, 4–6 (see also with funds of funds, 610–611 509 Hedge funds) of hedge fund managers, 611 Aggregation: history of, 10–11 with managed futures, of profits and losses, 80–81 by inclusion, 4–8 462–463, 483 return computation interval, liquid alternatives, 43–47 Accountants as outside service 56–57 methods of analysis, 14–18 providers, 30 of VaR, 202–203 (see also Portfolio Accounting accrual, 585–586 Agricultural products, 266 management) Accounting convention Agronomy, 266 non-normality of returns, conservatism, 75–76 Alpha, 216 13–14 Accruals, accounting, 585–586 analyzing, 242–246 pillars of, 20–22 Accrued funding costs, 158–159 biased testing, 243–244 private equity as, 4–7 Acquisitions, 734 commingling of beta and, 230 (see also Private equity) Active activists, 507 cross-sectional search and real assets as, 4–6 (see also Active management, 18–19 non-normality, 242–243 Real assets) Active returns, 19 estimating, fallacies of, 245 return characteristics, 11–14 Active risk, 19 ex ante, 217–218, 225–226, (see also Returns) Activist hedge funds, 516–517COPYRIGHTED230–231 MATERIALstructured products as, 4, 5, Activist investment strategy: ex post, 218–220, 225–226 7–8 (see also Structured capital structure and dividend managed futures funds, 485 products) policy, 513–514 numerical example of, traditional vs., 8–10, 16–18 CEOs and boards of 227–228 Alternative real estate directors, 512–513 outliers, 243 investment vehicles, and corporate governance, overview, 216–217 403–409 505–506, 510–512 rolling contracts and, American credit options, 802 dimensions of shareholder 301–302 Amortization, 364–365, 370 activists, 506–507 and roll yield, 300 Amortization period, 811 with distressed firm, 528–529 selling to increase, Anchoring, 271 historical returns, 516–517 592–593 Angel investing, 642

857 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

858 INDEX

Annual compounding, 129–130 Asset-backed securities (ABS), Backward induction, 388–389 Annuity view of hedge fund 569–570 Bad-leaver clause, 685–686 fees, 424–427 Asset-backed securities Balance sheet CDOs, 812–813 Anomalies, market. See Market arbitrage: Balloon payments, 370–371 anomalies about, 569–570 Banks: Anticipated inflation rate (π), risks of, 572–573 city banks (Japan), 32 124 Asset classes, 334, 335, 337 clearing banks (UK), 33 Anticipated , 551 Asset gatherers, 233, 429 commercial banks (U.S.), 32 Anxious sellers, 580 Asset managers, 800 in Germany, 32 Appraisals: Asset pricing models: investment banks (U.S.), 32 real estate, 390 ex ante, 145–146 in Japan, 32 selective appraisals, 270 ex post, 146–148 large dealer banks (U.S.), 28 smoothing, 270–271 single-factor, 143–145 merchant banks (UK), 33 spanning financial crisis, 275 Asset-weighted hedge fund in United Kingdom, 33 Appraisal-based models: indices, 444–445 in United States, 32 NCREIF Property Index as, Assignment, 798, 799 universal banks (Germany), 395–396 Asymmetrical information, 18 32 transaction-based vs., Asymmetric incentive fees, 424 Bank loan portfolios, 799 394–395 Asynchronous trading, 582 Bankruptcy, 795 Arbitrage, 131 Attachment point, 771 Bankruptcy process, 524–525, as active absolute return At-the-money incentive fee 723–725 strategy, 19–20 approximation, 428 Bankruptcy remote (term), 811 capital structure, 529–530 Attorneys as outside service Bankruptcy-remote entities, 35 convertible bond, 536–550 providers, 30 Bank trading activities, 799 fixed-income, 565–575 Audit due date obligations, 347 Barrier notes, 844 limits to, 593–594 Auditors, 30 Barrier options, 840 merger, 434–435, 517–524 Autocorrelation, 100 in vs. out, 841–842 mortgage-backed securities, Durbin-Watson test for, 104 and structured products, 570–573 first-order, 102 840–841 pure, 132 higher-order, 102–104 up-and-in call options, 839 volatility, 551–565 non-normality source, 111 up vs. down, 841–842 Arbitrage CDOs, 812 partial, 103–104 Basis, 293 example, 814 for regression, 222 of forward and futures motivation, 816 statistical analysis, 100–104 contracts on commodities, structure, 813–814 Autoregressive, 115 293–294 tranches and priorities, Autoregressive conditional and roll yield, 300 814–815 heteroskedasticity (ARCH), Basis risk, 293 waterfall of, 815–816 115 with CDOs, 828 Arbitrage-free models, 132 Averages: with credit derivatives, 807 applications of, 132–133 exponential moving, 468–470 BCOM (Bloomberg Commodity carry trades, 133–134 internal rate of return, 67–68 Index), 314 spot markets, 133 moving, 466–467, 470–471 BDCs (business development underlying concept, 132 simple moving, 466–468 companies), 694–696 ARCH (autoregressive weighted moving, 468–470 , 183 conditional Average tracking error, 214 Behavioral biases, 270–271 heteroskedasticity), 115 Benchmarks, 19 Arithmetic mean log return, 57 Back contracts, 178 opportunistic hedge fund ARMs (Adjustable-rate Backfill bias, 240–241, 446–447 investing, 440–441 mortgages). See also Backfilling, 240–241 PSA, 377–378 Variable-rate mortgages Back office operations, 29 Benchmarking, 203–204 , 370 Backtesting, 241 Benchmark return, 19 Asian options, 839–840 Backwardation, 291 Beta(s): Asset(s): andcostofcarry,292 analyzing, 242–246 forward contracts on, for forward contracts on commingling of alpha and, 165–170 commodities, 291–292 230 referenced, 797 in imperfect market, 292–293 of commodity-related Asset allocation, 433–438 normal, 303–305 equities, 284 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 859

estimating, fallacies of, 246 Bloomberg Commodity Index objectives of, 654 misestimated, 228 (BCOM), 314 and operational efficiency overview, 215–216 Blue top lots, 257 optimization, 654–655 spurious correlation, 244 Boards of directors: of private companies, statistical analysis, 96, interlocking, 512 653–655 99–100 and mezzanine debt, 736 risks of, 693 Beta creep, 229 with staggered board seats, types of, 652–653 Beta drivers, 232–233 511–512 and venture capital managers, Beta expansion, 229 Bonds: 389, 689 Beta nonstationarity, 229–230 convertible (see Convertible Buyout-to-buyout deal, Beta testing, 643 bond arbitrage) 662–663 Bias(es): fixed-coupon, 138 Buy side, 25–27 and alpha, 243–244 global macro funds, 457 backfill, 240–241, 446–447 loans vs., 712 CAIA Classification of Hedge and contagion, 275–277 referenced, 797 Fund Strategies, 431–432 hedge fund indices, 445–449 zero-coupon, 122–125, 141 Calculation of the returns to the instant history, 446–447 Bond duration. See Duration NPI, 396 liquidation, 447 Bond funds, nontraditional, Calendar spreads, 294 participation, 447–448 627 on forward contracts, 294 and price indices, 275–277 Bond portfolio: return on, 294–295 selection, 239 duration for, 138–139 Calibrating a model, 781 self-selection, 239 long-only, 139–140 Call exposures, 182 survivorship, 239–240 long-short, 142–143 Call options: Bid-ask spread, 41 Bond price, 802–803 binary, 503–505, 838 Bidding contest, 519–520 Bootstrapping, 126–127 binomial tree example, Binary , 503–505, Borrowers, restrictions on, 135–136 838 736–737 on credit default swaps, 803 Binary options, 802, 840 Borrowing type cash flow naked, 526–527 view of returns, pattern, 64 natural resource development, 502–504 Bought in, 52 254 Binary , 503 Boundary condition, 851–852 Call option view of capital Binomial option, 258–260 Breakout strategies, 471–472 structure, 762 Binomial option pricing, 258 Bridge financing, 734 Caps, 369, 766–767 Binomial tree models, 134 Brokers, 29 Capacity, 450, 453 advantage of, 136–137 Brownfield phase, 330 Capacity risk, 488–489 and nature/power of Brownfield project, 326 Capital: risk-neutral models, Building blocks approach, committed, 680–681 136–137 852–853 regulatory, 816–817 and normal distribution, Bull call spread, 772–773 replacement, 653 134–135 Bull put spread, 772–773 rescue, 653 recombining, 134–135 , 183 venture (see Venture capital for stock and call option, Burnout, refinancing, 379 [VC]) 135–136 Business development Capital asset pricing model in structural credit risk companies (BDCs), (CAPM), 143–145 models, 765–766 694–696 Capital at risk, 480 Black-box model trading, Business risk, 720 Capital calls, 681 453–454. See also Busted convertibles, 538 Capitalists, venture, 621–622 Systematic fund trading Buy-and-build strategy, Capital protection structured Black forward option pricing 658–659 products, 845–846 model, 188 Buy-in management buyout, Capital structure: Black-Scholes call option 653 call option view of, 762 formula, 187–188 Buyouts, 651–652 in credit risk analysis, Black-Scholes option pricing, and capital structure 721–722 764–765 optimization, 654 optimization of, 654 Blanket subordination, 737 to initial public offering, put option view of, 762–763 Blind pool, 670–671 638–639 as target of shareholder Blocking position, 724–725 leveraged, 652 activism, 513–514 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

860 INDEX

Capital structure arbitrage, Catch-up rate, 78 CMOs. See Collateralized 529–530 Causality, 244 mortgage obligations Caplet, 766 CDOs. See Collateralized debt (CMOs) CAPM (capital asset pricing obligations (CDOs) CMO tranches, 755 model), 143–145 CDS indices, 804–805 Coinvesting, managerial, 424 Cap rate, 264, 391–393, CDS premium, 795 (option), 771–772 392 CDSs. See Credit default swaps Collateral: Carried interest, 78, 80. See also (CDSs) cash, 822–823 Incentive fee CDS spread, 795, 797 CDO risk from, 824–825 and hurdle rates, 682–684 Central limit theorem, 88 fully collateralized positions, in private equity, 680–681 Central moments, 91–92 58–59 Carrying costs, 165, 300 CEOs, as target of shareholder overcollateralization, 822 Carry trades, 133–134, 567 activism, 512–513 partially collateralized Cash-and-call strategy, 837–838 Certificates, as wrappers, 832 positions, 59–60 Cash burn rate, 639 CFO (collateralized fund preservation of, 720 Cash collateral, 822–823 obligation), 824 Collateralized debt obligations Cash flows: CFTC (Commodity Futures (CDOs), 768 appropriation of excess, 720 Trading Commission), arbitrage, 813–816 collateralized debt 461 attachment points, 771 obligations, 770–771 Change in the prudent person balance sheet, 812–813 exposure to, with funds of standard, 642 cash flow, 820 funds, 612 Chapter 7 bankruptcy, 723 cash-funded, 816–820 growth equity, 649 Chapter 11 bankruptcy, credit enhancements, for income approach, 723–724 821–823 397–398 Cherry-picking, 241 credit-related benefits, inflation indexed, 335 Chumming, 241–242 809–810 of infrastructure investments, Claims, prioritization of, default risk and cash flows, 333 753–754 770–771 of intellectual property, Classic dispersion trade, 561 detachment points, 771 341–344 Classic relative value strategy distressed debt, 823–824 stochastic, duration for trade, 535–536 general structure, 811 securities with, 140–141 Classification of claims, 724 hedge fund, 824 through CMO structures, Classification of hedge fund investor motivations for 755–756 strategies, 431–433 structured products, 810 Cash flow CDOs, 820 Clawback(s), 78, 81–83 market value, 820–821 Cash flow J-curve, 676 Clawback escrow agreement, option collars and mezzanine Cash-for-stock mergers, 517 681 tranches, 771–772 Cash-funded CDOs, 816–817 Clawback provisions, 681–682 option spreads and mezzanine and regulatory capital, CLN. See Commodity-linked tranches, 772–773 817–818 note (CLN) risks of, 824–829 synthetic CDOs vs., 819–820 CLNs (credit-linked notes), single-tranche CDOs, 824 Cash market. See Spot market 803–804 as structured products, 8 Cash positions, synthetic, 801 Closed-end funds: stylized example, 769–770 Cash settlement, 796 business development synthetic, 819–820 Cash waterfall distribution, companies as, 694–696 terms and details, 811–812 77–78 illiquid alternative priced like, Collateralized fund obligation aggregating profits and losses, 696–697 (CFO), 824 80–81 Closed-end infrastructure funds, Collateralized mortgage clawbacks and alternating 331 obligations (CMOs), 375 profits and losses, 81–83 Closed-end mutual fund, 46 cash flows through, 755–756 compensation scheme, 78–79 Closed-end real estate mutual CMO tranches, 755 hard hurdle rates, 83 fund, 407–408 commercial, 760–761 incentive-based fees, 80, Closet indexers, 429 default-free, 759 84–85 Club deal, 692–693 floating-rate tranches, 758 soft hurdles and catch-up CMBS (commercial interest-only tranches, provision, 83–84 mortgage-backed 757–758 Catch-up provision, 78, 83–84 securities), 379–380 motivations, 758–759 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 861

planned amortization class Commodity futures indices: Conditional value-at-risk tranches, 757 construction and use of, (CVaR), 197 principal-only tranches, 312–313 Confidence interval, 106, 235 757–758 market-liquidity-weighted Conflicts of interest: prioritization of claims long-only, 314 consultant compensation, 31 within, 753–754 production-weighted with risk in structuring, 763 sequential-pay, 754–755 long-only, 313–314 Conglomerates, 658 systemic risk, 759–760 tier-weighted long-only, 314 Conservatism: targeted amortization class Commodity Futures Trading accounting convention, 75–76 tranches, 757 Commission (CFTC), 461 excessive, 424 Collateralized positions, 58–60, Commodity-linked note (CLN), Conservative funds of funds, 296 286 629 Collateral yield, 297 advantages and disadvantages Consolidation, in hedge fund Commercial bank, 32 of, 286 industry, 418–419 Commercial CMOs, 760–761 example with, 286–288 Constrained clones, 44 Commercial mortgage-backed Commodity pools, 463 Consultants as outside service securities (CMBS), Commodity pool operator providers, 31–32 379–380 (CPO), 461 Contagion, 276 Commercial mortgage loans: Commodity prices: and biases, 275–277 characteristics, 372 and equity prices of operating and price indices, 275–277 default risk, 373–374 firm, 320–321 , 291 financial ratios for, 374–375 and institutional investing and , 292 Commercial real estate, 734 demand, 316–317 for forward contracts on Commercialrealestateequity, long-run changes in, 310 commodities, 291–292 390 and operating-firm equity in imperfect market, 292–293 Commercial real estate returns, 321–322 normal, 303–304 properties, 354 and returns on futures Continuous compounding, 55, Commingled real estate funds, contracts, 311–312 714 404 Commodity producers, implied forward rates with, Commitment risk, 677 319–322 129–130 Committed capital, 680–681 Commodity-related equities, for returns computations, 55 Commodity(-ies), 5 284–285 Contracting, optimal, 424 backwardation and contango, Commodity trading advisers Contraction risk, 755 302–307 (CTAs), 26, 463 Contract size, ISDA, 795 costs of carry, 288–290 Comparable sales prices Control, with funds of funds, direct investment in, 281–284 approach, 390–391 613 expected returns, 310–312 Compensation scheme, 78–79 Convenience yield, 165 exposure and diversification, agent, 509 Convergence, 535 307–310 as target of shareholder Convertible arbitrage funds, forward prices of, 166–167 activism, 512–513 547–548 historical returns on, 318 Compensation structures: Convertible arbitrage returns: as real assets, 5 for alternative vs. traditional components, 543–545 risk attributes, 314–317 investments, 17 drivers of, 547–548 rolling forward and futures consultants, 31 historical, 549–550 contracts on, 296–302 Complete market, 751–753 sources of, 542–543 term structure of forward Completing the market, 752 Convertible bond arbitrage: prices, 288–296 Complex cash flow pattern, background, 541–542 without futures, 281–288 64–66 busted, equity-like, and Commodity ETFs, 285–286 Complexity premium, 541 hybrid convertibles, 538 Commodity ETNs, 285 Components of convertible convertible bond pricing, Commodity forward curves: arbitrage returns, 543–545 536–537 option-based models of, Compounding, 55, 714–715 defining convertible bonds, 306–307 Compound options, 647–648 536 and storage costs/inventory Conditionally heteroskedastic, delta, 538–539 variation, 305 115 details, 545–547 Commodity forward prices, Conditional prepayment rate gamma, 539 305–306 (CPR), 377 historical returns, 549–550 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

862 INDEX

Convertible bond arbitrage Covenants, 373 Credit-linked notes (CLNs), (Continued) in credit risk analysis, 803–804 illustration of, 539–541 718–720 Credit options: return drivers, 547–549 risk controlled by, 720–721 American, 802 returns components, 543–545 Covenant-lite loans, 718 call option on CDS, 803 and short selling, 541 , 182 credit default swaps vs., sources of returns, 542–543 Covered call exposures, 801–802 theta, 539 182–183 European, 802 Convertible bonds, 536 CPO (commodity pool put options on bond prices, busted, 538 operator), 461 802–803 equity-like, 538 CPR (conditional prepayment term of, 802 hybrid, 538 rate), 377 Credit protection buyer, 793, pricing, 536–537 Cramdown, 725 794 Convertible preferred stock, Credit: Credit protection seller, 640 motivations for CDOs related 793–794 Convexity, 143 to, 809–810 Credit ratings, 715–716 Copula approach, 828–829 referenced, 797 Credit reference, CDS, 797 Core real estate, 357–358 Credit default swaps (CDSs), Credit risk: Corporate equity, 343 793 about, 775–776 Corporate event risk, 501–502 call options on, 803 in CDOs, 828–829 Corporate governance: credit options vs., 801–802 expected loss due to, 777 in activist investing, 510–512 mechanics of, 795–798 with hedge fun strategies, 437 background, 505–506 motivations, 800–801 reduced-form models, leveraged buyouts, 663 participants, 799–800 776–783 for private equity, 705–706 and total return swaps, structural models, 761–766 in private funds, 38 793–795 Credit risk analysis: Publicly traded PE firms, unwinding a transaction, capital structure in, 721–722 705 798–799 covenants, 718–721 Corporations, 34, 800 valuing, 798 credit ratings, 715–716 Correlation: Credit derivatives, 783 credit spreads, 717 and CDO tranches, 826–827 CDS indices, 804–805 financial ratios, 715–716 short correlation trades, 561 credit default swaps, 793–801 and probability of default, spurious, 244 credit-linked notes, 803–804 717–718 Correlation coefficient, 88–89 credit options, 802–803 recovery rates, 722–723 Correlations go to one, 560 economic roles of, 783–784 yields, 715–716 Correlation products, 826. funded, 785 Credit spreads, 717 See also Collateralized debt groupings, 784–785 in credit risk analysis, 717 obligations (CDOs) hedging with, 750 risk-neutral approach, Correlation risk, 557, 826 interest rate swaps, 786–793 779–780 Cost approach, 391 market participants, 799–800 Crisis at maturity, 174 Cost of capital, 730 multi-name, 784 Critical property of Cost of carry, 165 on nonsovereign entities, infrastructure, 326 and backwardation/contango, 785 Cross-collateral provisions, 292 risks of, 805–807 373–374 for commodities, 288–290 single-name, 784 Cross-sectional searches, Cost-of-carry model, 165 on sovereign entities, 785 242–243 Counterparty risk, 453 stages of activity, 785–786 CTAs (commodity trading with credit derivatives, as structured products, 8 advisers), 26, 463 806–807 unfunded, 784–785 Currency hedging, 611 and interest rate options, Credit enhancements: Currency option pricing model, 768 cash collateral/reserve 188 marking-to-market, 173–174 accounts, 822–823 Custodians, 32 Countertrend strategies, 473 external, 823 CVaR (conditional Coupon, credit default , internal, 821 value-at-risk), 197 797 overcollateralization, 822 Coupon bonds, 126–127 spread enhancement, 822 Data, stale, 271–272 Covariance, 95, 96 subordination, 821–822 Data dredging, 240 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 863

Data mining, 240 inelastic, 333 Distant contracts, 178 Data processing, 479 for institutional investing, Distressed debt, 7, 737 Data sets, unrepresentative, 316–317 and bankruptcy process, 239–240 for leveraged loans, 727 723–725 Data sources, 476–477 Dependent variables, 220 credit risk analysis, 715–723 DCF (discounted cash flow) Deposits, structured, 832 demand for, 739 method, 397 Depository(-ies), 32 describing, 738 Death spiral of toxic PIPEs, 702 Depository Trust Company expected default losses on, Debt: (DTC), 32 739–741 risky, Black-Scholes model for Depreciation, 400 fixed-income analysis, valuing, 764–765 Derivatives, 783 711–715 sovereign, 567–569 credit (see Credit derivatives) investment strategies, 741 Debt instruments, 353 forward contracts, 151–155 as private equity, 7 Debtor-in-possession (DIP) (see also Forward private equity security as, financing, 725 contracts) 636–637 Debt securities, 8 forward contracts on assets, risks of, 742 Debt service coverage ratio 165–170 supply of, 738–739 (DSCR), 374 forward contracts on equities, vulture investing, 742–743 Decision node, 388 157–165 Distressed debt CDOs, 823–824 Decision trees, 387–389 forward contracts on rates, Distressed debt hedge funds, Deduction, tax, 835 155–157 524 Default: forward contracts vs. futures activist investors, 528–529 as CDS trigger event, 796 contracts, 171–178 bankruptcy and stock prices, exposure at, 777 numerical methods for 530 loss given, 777 pricing, 852 bankruptcy process, 524–525 probability of, 777 option exposures, 180–186 capital structure arbitrage, Default-free CMOs, 759 option pricing models, 529–530 Default losses, expected, 186–188 estimated returns from 739–741 option sensitives, 188–190 undervalued securities, Default rate, on distressed debt, Detachment point, 771 527–528 739–740 Deviations: historical returns, 531–532 Default risk: semistandard, 194 recovery value, 527 and CDO cash flows, standard deviation and, searching for distressed 770–771 104–105 (see also Standard securities, 527 and commercial CMOs, deviation) short sales, 526–527 760–761 target semistandard, 195 Distressed securities: commercial mortgages, Dilution, 542–543 buying firms using, 530 373–375 DIP (debtor-in-possession) estimating returns from, fixed-income analysis, 712 financing, 725 527–528 residential mortgages, Direct investment, in recovery value of, 527 371–372 commodities, 281–284 undervalued, searching for, Defensive investments, 315–316 Direct lending, 727–728 527 Deferral, tax, 834–835 Discounted cash flow (DCF) Distribution rate, 324 Deferred contracts, 178 method, 397 Distribution to paid-in (DPI) Degradation, 466 Discount rate, for income ratio, 73–74 Deliverables, in exchange approach, 398–401 Diversification: options, 253 Discrete compounding, 55 as benefit of managed futures, Delivery: Discretionary fund trading, 483 , 796 453–454 benefits and costs of, forward contracts, 151–152 Dispersion: 607–609 Delta, 538–539 challenges of estimating, 558 with commodities, 307–310 Delta hedging, dynamic, classic dispersion trade, 561 commodities for, 307–310 546–547 profit and loss on dispersion correlation coefficient and, Demand: trades, 561–563 88–89 for agricultural products, 266 Dispersion trades: with funds of funds, 610, for commodities, 290–291 classic, 561 614–615 for distressed debt, 739 profit and loss on, 561–563 with hedge funds, 451 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

864 INDEX

Diversification (Continued) hedging a long-short portfolio Entrepreneurship stimulators, liquid private equity pools for, with, 142–143 658 697 as longevity of zero-coupon Environment of alternative of private credit, 743–744 bond of equivalent risk, investments: in private equity, 706 141 financial markets, 40–42 private equity funds of funds managing, for long-only bond fund structures, 36–40 for, 699 portfolio, 139–140 liquid alternatives, 43–47 real estate style analysis for, modified, 569 (see also Liquid 361 for securities with stochastic alternatives) return characteristics, 11–12 cash flows, 140–141 participants, 25–33 return diversifier, 20 traditional, 137 regulatory environment, of venture capital risk, Duration-neutral position, 568 42–43 (see also Regulation) 687–690 Duration of a fixed-coupon short selling, 49–52 Diversified funds of funds, 629 bond, 138 structures, 33–36 Diversified pools, 619–621 Durbin-Watson test for taxation, 47–49 (see also Diversified strategies (hedge autocorrelation, 104 Taxation) fund), 434, 438 Dynamic delta hedging, Equal dollar risk allocation, Diversity score, 812 546–547 482 Divestitures, 514–515 Dynamic hedging, 850–852 Equally weighted hedge fund Dividends: indices, 444–445 and forward curves of EAD (exposure at default), 777 Equal risk contribution, 482 financial prices, 162–165 Early-stage venture capital, 643 Equity(-ies): stock with, 161–162 Earnings: commodity-related, 284–285 stock with no, 157–158 post-earnings-announcement forward contracts on, substitute, 50 drift, 588 157–165 Dividend irrelevancy, 50–51 standardized unexpected, Equity hedge funds: Dividend policy, 513–514 587–588 commonalities, 579–580 Dollar-weighted returns, 72–73 Earnings momentum, 587–588 informational efficiency, Domestic real estate, 354 Earnings surprise, 587 582–583 Double taxation, 323 EBITDA, 645–646 liquidity, 580–582 Down options, 841 EBITDA multiples, 646 long/short funds, 579, Downside risk protection, Economic downturns, 334 599–601 485–486 Economic infrastructure, market anomalies, 584–594 Downstream operations, 322 326–327, 340 market-neutral funds, 579, DPI (distribution to paid-in) Economic lives, of infrastructure 602–604 ratio, 73–74 investments, 334 profit opportunities, 583–584 Drawdown, maximum, Economic policy, 457–458 return sources, 580–584 195–196 Economic reasoning, 21–22 risks, 605 Drawdown funds, 710 Economic significance, 237 short-bias funds, 579, Dry powder, 671, 709 Economies of scale, 611 595–598 DSCR (debt service coverage Economy: short selling process, 594–595 ratio), 374 credit derivatives in, 783–784 Equity instruments, 353 DTC (Depository Trust structured products in, Equity kickers, 636 Company), 32 751–753 Equity-like convertibles, 538 Dual-currency notes, power Educational role, 611 Equity-linked structured reverse, 850 Effective duration, 570 products, 831 Due diligence: Effective gross income, 398 EUSIPA classification, by FoF manager, 610 Efficiency, 13 844–848 operational, 610 Efficiency buyouts, 658 with features, Duration, 137, 566 Efficiently inefficient markets, 835–843 for bond portfolio, 138–139 119–120 global cases, 848–850 effective, 570 Efficient market theory, 13 motivations, 854–855 extensions of, 143 Empirical analysis, 21, 46–47 tax effects of wrappers, and fixed-income arbitrage, Endowment, 26 832–835 566 Enforcement, of patents, types, 843–844 floating rates vs. fixed rates, 347–348 valuation, 850–854 713–714 Enterprise value, 645 wrappers, 831–835 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 865

Equity long/short funds, 579 Events, binary call option view binary options, 840 basics, 599–600 of, 504–505 look-back options, 843 historical returns, 600–601 Event-driven hedge funds: quanto options, 843 Equity market-neutral funds, activist investing, 505–517 spread options, 842–843 579 distressed securities funds, structured products without, basics, 602–603 524–532 836–839 historical returns, 603–604 merger arbitrage, 517–524 Expected bond prices: Equity prices, of operating firm, multistrategy funds, 532–534 and forward prices, 154–155 320–321 returns, 501–505 and term structure theories, Equity real estate investment Event-driven multistrategy 154–155 trusts (REITs), 381, funds, 532–534 Expected default losses, 408–409 Event-driven strategies, 739–741 historical returns for, 434–437 Expected loss, due to credit risk, 410–411 binary option view of returns, 777 illiquidity premium for, 502–504 Expected returns, on 409–410 insurance-selling view of commodities, 310–312 private vs. public, 409 returns, 502 Expected spot prices, 154 real estate equity investments, returns from, 501–505 Expenses: 409–411 Event risk, 459 in film production and returns on, 409–410 for commodities, 315 distribution, 342–343 Equity residual approach, 402 corporate, 501–502 fixed, 398 Equity risk premium (ERP), 232 and insurance contracts, operating, 333, 398 Equity risk premium puzzle, 232 436–437 in private equity, 39 Equity securities, 8 and volatility, 435–436 variable, 398 Equity strategies (hedge fund), Evergreen funds, 331 risks, 349 434 Evolution of the buyout market, Exponential moving average, Equity tranche, 770 657 468–470, 469 ERP (equity risk premium), 232 Ex ante alpha, 217–218 Ex post alpha, 218–220, Error: empirical analysis of, 225 225–226 average tracking, 214 inferring, from ex post alpha, Ex post asset pricing model, in hypothesis testing, 236 225–226 146–148, 147 nonlinear risk-return relation, and return persistence, Ex post returns, 87–88 228 230–231 Exposure: tracking, 195 Ex ante asset pricing model, call and put, 182–183 type I, 237, 238 145–146 to farmland returns, 267 type II, 237–238 Ex ante returns, 87–88 of options, 180–186 Estimated return persistence, Excessive conservatism, 424 to timber returns, 263 231 Excessive risk taking, 805 of two-position combinations, Estimated returns, from Excess kurtosis, 92–93 183–185 undervalued securities, Excess return, 147 of two-position spreads, 183 527–528 Exchange options, 252–253 Exposure at default (EAD), 777 ETFs. See Exchange-traded Exchange rates, 456–457 Extension risk, 755 funds (ETFs) Exchange-traded derivatives, External credit enhancements, European credit options, 802 555–556 823 EUSIPA (European Structured Exchange-traded funds (ETFs): Investment Products commodity ETFs, 285–286 Factor models, 590–591 Association) classification, on real estate indices, 407 Failure to pay, 795 844 Exchange-traded notes (ETNs), Family office, 26 capital protection structured 285 Farmland, 6 products, 845–846 Excludable goods, 336 exposure to returns on, 267 leverage structured products, Exclusive responsibilities, 347 historical returns of, 278 847–848 Exhibition of films, 342 investment in, 266–267 participation structured Exit plan, 647 management of, 265–266 products, 846, 847 Exit strategies, 662–663 multiple-use options, yield enhancement structured Exotic options, 836 267–268 products, 846 Asian options, 839–840 ownership of, 265–266 EUSIPA Map, 845 barrier options, 840–842 valuation, 264–265 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

866 INDEX

FAS (Financial Accounting Financial engineering risk, option-adjusted spread, Standard) 157, 76 825–826 571–572 Favorable mark, 270 Financial markets: prepayment risk, 570–571 Fees: hedge funds’ effects on, risks, 572–573 with funds of funds, 611, 441–442 sovereign debt, 567–569 612 primary capital markets, strategy types, 566–567 hedge fund (see Hedge fund 40–41 Fixed-income arbitrage fees) secondary capital market, strategies: incentive (see Incentive fees) 41–42 asset-backed, 569–570 management (see Financial market segmentation, core of, 565–566 Management fees) 530 historical returns, 574–575 negotiated, 611 Financial platforms, 31 mortgage-backed, 569–570 performance, 612 Financial ratios: sovereign debt, 567–569 performance-based, 78 in credit risk analysis, types, 566–567 private equity funds, 715–716 Fixed interest rates: 680–687, 704–705 default risk and, 374–375 duration, 713–714 private equity funds of funds, Financial software, 31 interest rate risk, 712–713 698 Financial structuring. See Fixed rate, credit default swap, Feeder funds, 35–36 Structuring 797 Fee netting, 616–617 Financing: Fixed-rate mortgages, 363–367 Fiduciary duty, 657 bridge, 734 Floating interest rates: Field-of-use provision, 347 debtor-in-possession, 725 duration, 713–714 Film financing, 343–344 film, 343–344 interest rate risk, 712–713 Film production and gap, 343 Floating-rate tranches, 758 distribution: mezzanine, 731–735 Floors, 767–768 expenses, 342–343 refinancing, 662 Floorlet, 767 revenues, 341–342 slate equity, 343 Followers, 507 Film profitability, 344 straight refinancing, 662 Forced sale remedy, 650 Financed positions, 158 stretch, 736 Foreign exchange risks, 484 Financial Accounting Standard super gap, 343 Foreign presales, 343 (FAS) 157, 76 Financing costs, 401–402 Form 13D, 510 Financial activists, 506 Financing risk, 522 Form 13F, 511 Financial assets, 6 Finished lots, 257 Form 13 G, 511 benefits and costs of Firms, distressed securities to ’40 Act funds (mutual funds), 27 ownership of, 165 buy, 530 Forward contracts, 151 forward curves of prices of, First deferred contracts, 178 on assets, 165–170 162–165 First-order autocorrelation, basis of, 293–294 forward prices of, 160 102 with benefits and costs of forward prices on, 167–168 First-stage venture capital, 643 carry, 165–166 Financial crises, 275 Fisher effect (Fisher equation), calendar spreads, 294 Financial data providers, 31 124 delivery and settlement of, Financial economics: Fixed charges ratio, 374 151–152 arbitrage-free models, Fixed-coupon bond, duration on equities, 157–165 131–134 of, 138 and expected spot prices, 154 binomial tree models, Fixed expenses, 398 futures contracts vs., 171–178 134–137 Fixed-income analysis: with nonzero market value, forward interest rates, bonds vs. loans in, 712 170 129–131 distressed debt, 711–712 on rates, 155–157 informational market interest rate risk, 712–713 and risk neutrality, 154 efficiency, 117–122 private credit, 711–712 rolling contracts, 296–302 single-factor default-free Fixed-income arbitrage, 565 term structure of, 288–296 bond models, 137–143 asset-backed securities, of zero-coupon bonds, single-factor equity pricing 569–573 152–154 models, 143–148 core of strategy, 565–566 zero starting value, 57–58 term structure of interest historical returns, 574–575 price: rates, 127–128 mortgage-backed securities, and accrued funding costs, time value of money, 122–127 570–573 158–159 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 867

of stock with dividends, benefits and costs of Gains, recognition of, 299 161–162 diversification, 607–609 Gamma, 539 of stock with no dividends, benefits of investing in, Gap financing, 343 157–158 610–611 GARCH (generalized Forward curves: conservative, 629 autoregressive conditional commodity, 305–307 disadvantages of investing in, heteroskedasticity), of financial assets prices, 612–613 114–115 162–165 diversification with, 614–615 Gates, 332 Forward interest rates, implied, diversified, 629 Gearing, 405, 686 129–131, 156 as diversified pools, 619–621 General collateral stocks, 51 Forward prices: funds for institutional Generalized autoregressive of commodities, 166–167 portfolio and, 615–616 conditional commodity, 305–306 historical returns, 628–630 heteroskedasticity and expected bond prices, investing in, 619–622 (GARCH), 114–115 154–155 investment objectives, 621 General partners (GPs): and expected spot prices, liquid alternatives, 624–628 initial private equity fund 154 management functions, investment, 685 on financial and physical 609–610 and limited partners, in assets, 167–168 market-defensive, 628–629 private equity, 677–680 of financial assets, 160 multimanager funds, 491 General partnership, in private no-arbitrage approach to multistrategy funds, 616–619 equity funds, 703–704 determining, 152 portfolios of single hedge Geometric mean return, 57 and riskless interest rate, funds, 622–623 Germany: 159–160 private equity, 698–699 structured product case and risk neutrality, 154, as private investment pools, example, 849–850 159–160 26 universal banks, 32 and term structure theories, strategic, 629 Global financial crisis 154–155 value added by FoF (2007–2009), 792–793 Forward rates, extensions and, managers, 613–614 Global macro funds, 455–456 157 as venture capitalists, bonds, 457 Forward rate agreements 621–622 economic policy, 457–458 (FRAs), 155–156 Funds of fund managers: exchange rates, 456–457 Foundation, 26 functions of, 609–610 macro and micro strategies, Fourth markets, 42 value added by, 613–614 458–459 Free rider, 507 Fundraising stage, 674 risks of, 459 Friendly activists, 507 Fund size, 38–39 thematic investing, 458 Front month contract, 178 Fund structures, 36–40 Golden parachute, 657 Front office operations, 29 Fund terms, 38–39 Good-leaver clause, 686 FTSE NAREIT US Real Estate Futures: Goodness of fit, 223–224 Index Series, 410 commodities without, Government intervention, 796 Fulcrum securities, 711 281–288 GPs. See General partners (GPs) Full market cycle, 230 on real estate indices, Greenfield phase, 330 Fully amortized assets, 364 406–407 Greenfield project, 326 Fully collateralized, 58–59 dollar risk, 481 Growth equity, 648–651 Fully collateralized position, Futures contracts: describing, 649 58–59, 296 basis of, 293–294 to initial public offering, Fully taxed wrappers, 833–834 forward contracts vs., 638–639 Funds, as wrappers, 832 171–178 protective provisions, 649 Fund administrator, 30 and initial , 176 redemption rights, 649–650 Fundamental analysis, 454–455 managed futures funds, 460 valuation of, 650–651 Funded credit derivatives, 785 rolling contracts, 296–302 Growth equity default remedies, Funding costs, accrued, Futures returns: 650 158–159 and commodity price Growth equity redemption Funding risk, of private equity, expectations, 311–312 sources, 650 677 components of, 296–298 Growth equity redemption Fund mortality, 433 spot return vs., 296 value, 650 Funds of funds, 432 Futurization, 461 Growth equity securities, 649 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

868 INDEX

Hard hurdle rate, 83 managed futures in, 444 relative value strategies, Harvests, supply elasticity and, management and incentive 434–435 290–291 fees, 443–444 relative value volatility, Hazard rate, 783 representativeness, 445 564–565 Headline risk, 441 size of hedge fund universe, short-bias, 597–598 Hedges, static, 853 445 , 564–565 Hedge funds, 6 strategy definitions, 448 Hedge fund strategies. See also as alternative investments, style drift, 448, 450 Activist investment strategy 4–6 Hedge fund industry, 418–419 absolute return, 434, 437–438 as alternative vs. traditional Hedge fund managers. See also classification of, 431–433 investments, 9 Funds of fund managers diversification in, 607–609 classification, 431–433 access to, 611 diversified, 434, 438 credit behavior of, 422, 424, equity, 434 participation, 799 429–431 event-driven, 434–437, diversification and risk selection of, 614, 618 501–505 management with, 451 Hedge fund programs, 433, fixed-income arbitrage, elements, 415–416 438–441 565–570, 574–575 event-driven (see Event-driven opportunistic, 439–441 FoF manager selection of, hedge funds) parameters, 438–439 609 fees (see Hedge fund fees) performance research, 439 grouping by systematic risk, financial markets and, Hedge fund replication, 45 433–434 441–442 Hedge fund returns: illiquid/leveraged, and funds of (see Funds of funds) absolute return strategies, multialternatives, 627 hedge fund replication, 45 437–438 market anomaly, 590–594 infrastructure, 31 activist funds, 516–517 relative value, 434–436, for institutional portfolios vs. and asset allocation, 433–438 535–536 funds of funds, 615–616 convertible arbitrage funds, tail risk, 559–560 investment flexibilities used 547–548 volatility arbitrage, 556–557 by, 416–418 distressed funds, 531–532 Hedging: multistrategy, 432 diversified fund strategies, carry trades, 133–134 performance research, 439 438 with credit derivatives, 750 portfolios of single, 622–623 equity, 580–584 dynamic, 850–852 as private investment pools, equity long/short, 600–601 dynamic delta, 546–547 26 equity market-neutral funds, of long-short portfolio with regulation of, 42–43 603–604 duration, 142–143 single-manager, 432 equity strategies, 434 Hedonic pricing method size of hedge fund universe, event-driven multistrategy, (HPM), 394 445 533–534 Heterogeneous (term), 300 Hedge fund CDOs, 824 event-driven strategies, Heteroskedasticity, 114, Hedge fund fees, 419–431, 434–435, 501–505 222–223 704–705 event risk and insurance Higher-order autocorrelation, computation of, 420–421 contracts, 436–437 102–104 and manager behavior, 422, event risk and volatility, High-water mark (HWM), 424 435–436 421–422 and manger behavior, fixed-income arbitrage Historical data, estimating VaR 429–431 strategies, 574–575 directly from, 201–202 and option theory, 427–429 funds of funds, 628–630 Historical returns: present value of a hedge fund grouping strategies by of activist hedge funds, fee annuity, 424–427 systematic risk, 433–434 516–517 through time, 421–423 and manager behavior, of commodities, 318 Hedge fund fee annuity, 429–430 of convertible arbitrage funds, 424–427 merger arbitrage funds, 547–548 Hedge fund indices: 523–524 of equity long/short funds, asset- vs. equally weighted relative value multistrategy, 600–601 returns, 444–445 576–577 of equity market-neutral data biases, 445–449 relative value multistrategy funds, 603–604 investability, 450–451 funds, 576–577 of equity REITs, 410–411 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 869

of event-driven multistrategy in patent investment, 349 production-weighted, funds, 533–534 return characteristics, 12–13 313–314 of farmland, 278 Illiquid strategies, engineering, Thomson Reuters/ of fixed-income arbitrage 627 CoreCommodity CRB, 314 strategies, 574–575 Immunization: tier-weighted long-only of funds of funds, 628–630 interest rate, 568 commodity, 314 of liquid alternative vehicles, against interest rate shifts, Inefficiency, 13 628 141 Inefficient markets, 119–120 of macro funds, 499 of long-short portfolio, Inelastic demand, 333 of merger arbitrage funds, 142–143 Inelastic supply, 290 523–524 Imperfect markets, 292–293 Inferential statistics, 236–237 of mortgage REIT, 382–383 Implied forward interest rates, Inflation, 124 of relative value multistrategy 156 commodities as diversifiers funds, 576–577 Implied forward rates, 129 against, 309–310 of relative value volatility with annual and continuous and intellectual property, 339 funds, 564–565 compounding, 129–130 Inflation indexed cash flows, of short-bias funds, 597–598 term structure of, 131 335 and stale pricing, 272–275 , 540 Inflation rate, anticipated, 124 of systematic fund trading, Improvement provision, 347 Inflation risk, 310 499 Incentives, perverse, 424, 684 Information, value of, 698–699 of timberland, 278 Incentive fees, 78, 80, 84–85 Informational efficiency, 13, of visual works of art, asymmetric, 424 582 344–346 at-the-money approximation, of buyout markets, 656–657 of volatility arbitrage funds, 428 for equity hedge funds, 564–565 hedge fund indices, 443–444 582–583 Homoskedasticity, 114 and manager behavior, 422, Informational market efficiency, Hostile activists, 507 424 117–122 Hotelling’s theory, 282–283 multistrategy fees, 616–617 in alternative asset markets, HPM (hedonic pricing method), option view of, 427 121–122 394 Incentive fee option value, definitions, 117–118 Humped curve, 306 427–428 and efficient inefficiency, Hurdle rates, 78 Income approach, 393 119–120 and carried interest, 682–684 cash flows for, 397–398 factors driving, 120–121 hard hurdle rates, 83 illustration of, 402–403 semistrong form, 118 soft hurdles, 83–84 real estate equity investments, strong form, 118 HWM (high-water mark), 393, 397–403 weak form, 118 421–422 real estate valuation, 393 Information asymmetries, 18 Hybrid convertibles, 538 taxes and financing costs in, alternative vs. traditional Hypotheses, 234 401–402 investments, 18 alternative, 235 Income taxation, 47–48 with funds of funds, 611 null, 235, 236 Incomplete markets, 18 Information ratio, 209–210 Hypothesis testing, 234–236 Incurrance covenants, 719 Infrastructure investments, 6 Indenture, 719 determinants of, 332–335 Idiosyncratic prepayment Independent variables, 220 economic vs. social, 326–327 factors, 378 Indexers, closet, 429 elements of, 325–326 Idiosyncratic return, 146 Index rate, 368 opportunities and allocation Idiosyncratic risk, 146–147 Indices: in, 335–336 of commodity-related asset-weighted hedge fund, other asset classes vs., 337 equities, 284–285 444–445 public-private partnerships in, infrastructure investments, CDS, 804–805 327–328 335 commodity futures, 312–314 as real assets, 6, 325–337 Illegal insider trading, 589 Hedge fund, 442–451 regulatory risk, 329–330 Illiquidity, 12 investable, 312 risk and return, 329–330 equity REITs, 409–410 long-only commodity, stages of, 330 mutual fund constraints, 45 313–314 types of, 332 non-normality source, market-liquidity-weighted vehicles for investment, 111–112 long-only commodity, 314 330–332 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

870 INDEX

Infrequent transactions, Interest-only mortgages, 367 complex cash flow patterns, 271–272 Interest-only (IO) tranches, 64–66 Initial margin, 176 757–758 computing, 61–63 Initial public offering (IPO): Interest rates: defining, 61 buyouts, 638–639 forward, 129–131 dollar-weighted return, growth equity, 638–639 and forward curves of 72–73 as LBO exit strategy, 662 financial prices, 162–165 interim IRRs, 63 venture capital, 637–639 implied forward, 156 lifetime IRRs, 63 Initial valuation, interest rate normal, 124 measurement intervals, 63–64 swap, 788–790 real, 124 modified IRR, 68–72 Initiators, 507 riskless, 159–160 reinvestment rate assumption, Innovation, 18 short-term, 124 68 In options, 841 term structure of (see Term since-inception IRRs, 63 In-sample data, 465 structure of interest rates) time-weighted return, 72–73 Insider trading: from zero-coupon bond International real estate illegal, 589 prices, 123 investing, 354 legal, 589 Interest rate cap, 369 International Swaps and and market anomalies, 589 Interest rate floors, 767–768 Derivatives Association Instant history bias, 446 Interest rate immunization, 138, (ISDA), 795–796 Institutional investing demand, 568 Interval funds, 710 316–317 Interest rate options: In-the-money options, 255–256 Institutional investors, 670–671 caps, 766–767 Intracurve arbitrage positions, Institutional portfolios, and counterparty risk, 768 566 615–616 floors, 767–768 Inventory, variation in, 305 Institutional-quality investment, Interest rate risk: Inventory shrinkage, 289 3 fixed-income analysis, 712 Inverse floater tranche, 758 Institutional structure, 17–18 floating rates vs. fixed rates, Investability, of hedge fund Insurance, portfolio, 559 712–713 indices, 450–451 Insurance companies: Interest rate swaps, 786 Investable index, 312 credit derivatives market and global financial crisis Investable infrastructure, participation, 800 (2007–2009), 792–793 325–326 as investors in mezzanine initial valuation, 788–790 Investing stage, 674–675 debt, 736 mechanics of, 787–788 Investments, 3 Insurance contracts: payers and receivers, 786 comparing IRRs, 66–67 and event risk, 435–436 pension funds use of, regulation of, 42–43 volatility and, 435 786–787 return characteristics, 11–14 Insurance-selling view of risks associated with, 792 Investment bank, 32 returns, 502 simple, 786 Investment objective, 38–39 Intangible assets, 338 valuation of existing, Investment objectives, of funds Intellectual property (IP), 338, 790–792 of funds, 621 349–350 Interim IRR, 63 Investment pools, private, 26 characteristics of, 338 Interlocking boards, 512 Investment Products in the film financing, 343–344 Intermediation: EUSIPA Derivative Map, film production and efficient incentives, 672 845 distribution, 341–343 forms of, 672–673 Investment strategy, for film profitability, 344 functions of, 672 distressed debt, 741 overview of, 336, 338 life cycle of venture capital Investment structures, 640 R&D patents, 346–349 fund, 673–675 Investors: and real assets, 339–340 private equity funds, 671–672 institutional, 670–671 simplified model of, 340–341 private equity funds of funds in mezzanine debt, 735–736 visual works of art, 344–346 for, 699 risk-neutral, 778 Intercept, 221 Internal credit enhancements, Investor motivations: Intercreditor agreement, 737 821 for arbitrage CDO, 816 Intercurve arbitrage positions, Internal rate of return (IRR), 61 for collateralized debt 567 averaging, 67–68 obligations, 809–810 Interest, simple, 55 comparing investments, for collateralized mortgage Interest coverage ratio, 374 66–67 obligations, 758–759 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 871

for credit default swaps, Late-stage/expansion venture Limited partnership agreement 800–801 capital, 643–644 (LPA), 37 for equity-linked structured LBOs. See Leveraged buyouts Limit orders, 41 products, 854–855 (LBOs) Limits to arbitrage, 593–594 for structured products, 810, LBO auction markets, 692 Linear regression, 220–221 854–855 Legal insider trading, 589 Linear risk exposure, 232 IO (interest-only) tranches, Legal risks, in patent Liquid alternatives, 43, 624–625 757–758 investment, 349 business development IP. See Intellectual property (IP) Leptokurtosis, 93, 94, 200–201 companies, 694–696 IPO. See Initial public offering Leverage, 459 closed-end fund pricing, (IPO) with funds of funds, 611 696–697 IRR. See Internal rate of return mutual fund restrictions, 45 constraints on, 45–46 (IRR) Leveraged buyouts (LBOs), emergence, 624–625 ISDA (International Swaps and 652 empirical analysis of Derivatives Association), benefits of, 659 performance, 46–47 795–796 categories of, 658–659 funds registered under ’40 Islamic wrappers, 832 corporate governance, 663 Act, 625–626 Issuance of new stock, 588 exit strategies, 662–663 growth factors, 44–45 history of, 655–656 liquid private equity pools, Japan: key issues of, 656–657 697–698 city banks, 32 mezzanine financing, 734 multialternatives, 627 keiretsu, 32 as private equity, 7 performance, 628 structured product case valuation of, 659–662 private equity, 693–698 example, 850 Leveraged buyout funds: private placements vs., 46 Jarque-Bera test, 113–114 agency costs, 691–692 products, 43–44 J-curve: auction markets, 692 real assets, 322–324 of private equity funds, and club deals, 692–693 strategy availability, 626–627 675–676 fees, 690–691 UCITS framework, 625 for private equity projects, structure of, 689–690 Liquidation, of private equity 644–645 and venture capital risks, 693 funds, 675 Jensen’s alpha, 210–211 Leveraged loans, 725 Liquidation bias, 447 Joint hypotheses test, 584–585 demand for, 727 Liquidation process, 525 Joint ventures, 404 growth in, 726–727 Liquidity: Junior debt, 343 private equity security as, 637 as benefit of managed futures, Leveraged strategies, 484 Keiretsu (Japan), 32 engineering, 627 with credit default swaps, 801 Key externalities of arbitrage Leverage structured products, for equity hedge funds, activities, 132 847–848 580–582 Keynes, John Maynard, LGD (loss given default), 777 with funds of funds, 611 304–305 Licensing strategies, 346–347 and leveraged loans, 727 Key-personnel clause, 685 Life insurance policies, as in private equity, 706 Knock-out option, 841 wrappers, 832 providing, 581 Lifetime IRR, 63 taking, 580 Lack of trends risk, 489 Limited liability, 33–34 Liquidity-based replication Lambda, 190 Limited liability companies products, 44 Land, 6 (LLCs), 34 Liquidity preference theory in anticipation of Limited partners (LPs), 677–680 (liquidity premium theory), development, 256–257 Limited partnerships: 127–128 as binomial option, master limited partnerships, Liquidity premium theory, 258–260 27 127–128 farmland (see Farmland) in private equity funds, 703, Liquidity risk, 489 as option, 257–258 704 with credit derivatives, as real asset, 6 private limited partnerships, 805–806 risk and return, 260–261 26 fixed-income analysis, 712 timberland (see Timberland) for real estate equity of private equity, 677 Land banking, 256 investments, 405 Liquid private equity pools, Large dealer banks, 28 structures, 34–35 697–698 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

872 INDEX

Listing of a security, 706 Lumpiness, 357 Management fees, 78 Litigation, related to patents, Lumpy assets, 12 in cash waterfalls, 78 347–348 hedge fund indices, 443–444 LLCs (limited liability M2 approach, 211–213 in private equity, 39, 680–681 companies), 34 Macroeconomic risk, 349 Management fee offsets, 78 Loans: Macro funds: Managerial coinvesting, 424 bonds vs., 712 global macro funds, 455–459 Managers (business): residential mortgage, 363 historical returns, 499 as maximizers of shareholder Loan portfolios, bank, 799 returns of, 497, 498 wealth, 508–509 Loan-to-own investments, strategies for, 453–455 misalignment of shareholders, 710–711 Maintenance covenants, 509–510 Loan-to-value (LTV) ratio, 719–720 Managing returns, 430–431 372 Maintenance margin, 176–178 Margins: Lock-in effect, 430 Maintenance margin initial margin, 176 Logarithmic returns, 56 requirement, 177 maintenance, 176–178 Lognormal distribution, 88–89 Managed accounts, 463 Marginal market participant, Log returns, 56, 88–89 managed futures with, 168 Long binary call option, 503 491–492 Margin call, 177 Long binary put option, 503 and platforms, 489–490 Margin rate, 368 Longevity, of CMO tranches, Managed futures, 459–460 Marked-to-market, 172 755 access to, 462–463 Market(s): Long-only bond portfolio, alpha, 485 alternative asset, 121–122 139–140 benefits of, 483–485, 493, buyout, 657 Long-only commodity indices, 495 complete, 751–752 313–314 data sources for, 476–477 financial (see Financial Long-run returns, 179–180 downside risk, 485–486 markets) Long/short funds. See Equity futures contracts, 460 fourth, 42 long/short funds in hedge fund indices, 444 imperfect, 292–293 Long-short portfolio, hedging, implementation style, 477 incomplete, 18 142–143 industry structure, 461 inefficient, 119–120 Long-Term Capital managed accounts, 489–492 LBO auction, 692 Management (LTCM), 436 mechanical managed futures perfect (see Perfect markets) Look-back options, 843 indices, 486 primary, 40–41 Loss(es): multimanager funds, 490–491 primary real estate, 355 aggregation of profits and, organization of, 462 secondary, 40–42, 703–704 80–81 platforms, 489–490, 493, sideways, 471 clawbacks and alternating, 494 spot, 133 81–83 portfolio construction, third, 42 on dispersion trades, 561–563 479–483 winner-take-all, 664 due to credit risk, 777 purpose of, 461–462 Market access, 483 expected default, 739–741 regulation, 462 Market allocation, 482 recognition of, 299 returns, 486–488, 496–498 Market anomalies, 584 Loss given default (LGD), 777 risks of, 488–489 accounting accruals, 585–586 Lower attachment point, 771 strategies for, 453–455 earnings momentum, Low-hanging-fruit principle, strategy focus, 477–478 587–588 255 time horizon, 478 with factor models, 590–591 LPA (limited partnership Managed returns, 270 implementing strategies, agreement), 37 Management: 590–594 LP Advisory committee (LPAC), of farmland, 265–266 insider trading, 589 38 of private equity funds, 675 limits to arbitrage, 593–594 LP–GP relationship: of timberland, 261–262 market efficiency tests as joint phases of, 678–680 Management buy-ins (MBIs), hypotheses, 584–585 in private equity, 677–678 652–653, 657 net stock issuance, 588–589 LPs (limited partners), 677–680 Management buyouts (MBOs), with pairs trading, 591–592 LTCM (Long-Term Capital 653, 734 predicting persistence of, 585 Management), 436 Management company price momentum, 586–587 LTV (loan-to-value) ratio, 372 operating agreement, 37 short selling, 592–593 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 873

Market capacity weighting, Maturity: Midstream operations, 322 482 credit default swap, 797 Milestone, 648 Market completeness, 18 yield to, 124 Minimum royalty provision, Market-defensive funds of Maximum drawdown, 195–196 346 funds, 628–629 MBIs (management buy-ins), MIRR (modified IRR Market efficiency, 13 652–653, 657 approach), 68–72 Market efficiency tests, 584–585 MBOs (management buyouts), Misestimated betas, 228 Market impact, 593 653, 734 Misidentified (omitted) systemic Market imperfections, 309 MBS. See Mortgage-backed return factors, 228 Market linking, 801 securities (MBS) MLPs. See Master limited Market-liquidity-weighted Mean, as first raw moment, 90 partnerships (MLPs) long-only commodity Mean neutrality, 602 Model manipulation, 270 indices, 314 Mean-reverting, 466 Model misspecification, 226, Market makers, 581 Mechanical managed futures 228–229 Market making, 41 indices, 486 Model risk, 488 , 270 Medium-term notes, 832 Modified duration, 569, Market microstructure, 458 Merchant banking, 663 714–715 Market-neutral volatility funds, Mergers: Modified Fisher equation, 124 557–558 cash-for-stock, 517 Modified IRR approach Market participants, 25–33 due to shareholder activism, (MIRR), 68–72 Market prices, 275 514–515 Moments of return Market risk, 459, 677 stock-for-stock, 517 distributions: Market segmentation Merger arbitrage, 434–435, 517 central moments, 91–92 hypothesis, 305–306 bidding wars, 519–520 excess kurtosis, 92–94 Market segmentation theory cash-for-stock, 517 normality tests, 112–113 (preferred habitat theory), financing risk, 522 raw moments, 90–91 128 regulatory risk, 521 skewness, 92 Market size, 355 risks of, 520–521 Momentum, 466 Market takers, 41 stock-for-stock, 517, 518–519 earnings, 587–588 Market value CDOs, 820–821 traditional, 517 price, 586–587 Market weight, 144 Merger arbitrage funds, Money, time value of, 122–127 Marking-to-market: 523–524 , 253–255, 538 counterparty risk, 173–174 Merton, Robert, 761–764, 766 Monopolistic market positions, and maintenance margin, Merton’s structural model: 333 176–178 advantages and Monte Carlo analysis: mechanics of, 172–173 disadvantages, 766 structured product pricing, time value of money and intuition of, 761–763 852 prices, 175–176 mechanics, 763–764 VaR estimation, 202 time value of money and risk, Mesokurtosis, 93, 94 Moral hazard, 18 174–175 Mezzanine debt, 7 Moratorium, 796 Marking-to-market pricing, advantage of, 730–734 Mortality, of fund, 433 556 characteristics of, 736–737 Mortgages, 353 Marking-to-model pricing, 556 investors in, 735–736 commercial, 372–375 Mark-to-market (MTM) and mezzanine financing, fixed-rate, 363–367 adjustment, 798 734–735 interest-only, 367 Massaging returns, 430–431 as private equity, 7 option adjustable-rate, 370 Master-feeder funds, 35 private equity security as, prime, 371 Master limited partnerships 636 residential, 363–372 (MLPs), 27 structures of, 728–730 subprime, 371 as buy side participants, 27 Mezzanine financing, 731–735 variable-rate, 363, 367–370 distribution rates, 324 Mezzanine funds, 735–736 Mortgage-backed securities structure of, 322–323 Mezzanine IP lending, 348 (MBS): taxation, 323–324 Mezzanine tranches, 770 commercial, 379–380 valuation, 324 and option collars, 771–772 fixed-income arbitrage Master trust, 35 and option spreads, 772–773 strategies, 569–570 Mature intellectual property, Mezzanine venture capital, 644 pass-through, 375 338 Middle office operations, 29 prepayment options, 375–376 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

874 INDEX

Mortgage-backed securities Natural resource prices, standard deviation, 105–107 (MBS) (Continued) 319–320 testing for, 111–114 PSA rates for pricing, NAV J-curve, 676 Normal interest rates, 124 378–379 NCREIF Property Index (NPI), Normally distributed returns, residential, 375 395–396 198–200 unscheduled prepayment Negative amortization, 370 Normally distributed rates, 376–378 Negative costs, 342 underlying, 200 Mortgage-backed securities Negative covenants, 719 Notes: arbitrage, 570 Negative pickup deal, 343 barrier, 844 and option-adjusted spread, Negative returns, 429–430 commodity-linked, 286 571–572 Negative survivorship bias, 260 credit-linked, 803–804 and prepayment risk, Negotiated fees, 611 medium-term, 832 570–571 Negotiations, with senior power reverse dual-currency, risks of, 572–573 creditors, 737 850 Mortgage REITs, 381, 382–383 Net lease, 400 Notional amount, 797 Mount Lucas Management Net operating income (NOI), Notional principal, 57–60, 58 Index, 486 397 Novation, 798 Moving average, 466–467, Net sale proceeds (NSP), 397 NPI (NCREIF Property Index), 470–471 Net stock issuance, 588–589 395–396 MTM (mark-to-market) Neutrality: NSP (net sale proceeds), 397 adjustment, 798 mean, 602 Null hypothesis, 235 Multialternative funds, 627 risk, 778–779, 781–782 error in accepting, 236 Multimanager funds, 490–491 variance, 602 rejecting, 236 Multi-name instruments, 784 NFA (National Futures Numerical methods for Multiple-factor scoring models, Association), 461 derivative pricing, 852 590–591 No-arbitrage approach, 152 Multiple sign change cash flow NOI (net operating income), OAS (option-adjusted spread), pattern, 64 397 571–572 Multiple-use options, 267–268 Nominal price, 307 Obligation, referenced, 797 Multistrategy CTAs, 478 Nonlinearity, 112 Obligation acceleration, 796 Multistrategy funds, 432 Nonlinear risk-return relation Obligation default, 796 event-driven, 532–534, error, 228 Obsolescence, 349 616–619 Non-normality of returns: Off-balance-sheet risk, flexibility, 617–618 for alpha, 242–243 435–436 incentive fees, 616–617 alternative vs. traditional Offsetting position, 798–799 investing in, 616–619 investments, 13 Omega, 190 manager selection, 618 causes of, 111–112 Omitted (misidentified) systemic operational risks, 618–619 structures that cause, 13–14 return factors, 228 relative value, 575–577 Nonsovereign entities, 785 One-off transactions, 525 transparency, 617–618 Nonstationarity, beta, 229–230 Open-end real estate mutual Mutual funds (’40 Act funds), Nontraditional bond funds, 627 funds, 405–406 27 Non-trend following strategies, , 171 473–475 Operating expenses, 333, 398 option, 526–527 Nonzero market value, 170 Operating firm: Naked option, 182 Normal backwardation, 303 commodity prices and equity National Futures Association interpreting, 303–304 prices of, 320–321 (NFA), 461 John Maynard Keynes on, equity return correlations, Natural gas, futures prices for, 304–305 321–322 169 Normal contango, 303–304 natural resource prices as Natural hedger, 487 Normal distribution, 88 driver of performance of, Natural resources, 251 and binomial tree models, 319–320 developing, 254–255, 319 134–135 Operating income, 645–647 economic roles, 251–252 Jarque-Bera test for, 113–114 Operating risk, 339 as exchange options, 252–253 lognormal distribution, 88–89 Operations, of private equity of options on, non-normality sources, funds, 675 255–256 111–112 (see also Operational due diligence, 610 moneyness, 253–255 Non-normality of returns) Operational efficiency, 654–655 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 875

Operationally focused real Ordinary least squares Patent sale license-back (PSLB), assets, 5 regression, 221 348 Operational risk: OTC (over-the-counter) Path-dependent option, multistrategy funds, 618–619 contracts, 832 839–840 in patent investment, 349 OTC derivatives, 555–556 Pattern recognition system, Opportunistic hedge fund Outliers, 243 474 investing, 439–441 and alpha, 243 Payers, , 786 Opportunistic real estate, for regression, 221–222 Payment due date obligations, 358–359 Out-of-sample data, 465 347 Optimal contracting, 424 Out options, 841 Payment in kind (PIK) toggle, Options: Outside service providers: 733 in, 841 accountants and auditors, Payoff diagram level, 853–854 Asian, 839–840 30 Payoff diagram shape, 853 barrier, 839, 840–842 attorneys, 30 Payout, of venture capital, 641 binary, 802, 840 consultants, 31–32 PD (probability of default), binary call, 838 depositories and custodians, 717–718, 777 credit, 801–803 32 PDE (partial differential down, 841 fund administrators, 30 equation) approach, exotic, 835–843, 836 prime brokers, 29–30 851–852 exposures, 180–186 Overcollateralization, 822 Pearson correlation coefficient, interest rate, 766–768 Overfitting, 240 95 knock-out, 841 Overreacting, 582 Peer group, 203 land as, 257–258 Over-the-counter (OTC) Peer-to-peer lending, 728 look-back, 843 contracts, 832 Pension funds, 786–787 out, 841 Ownership: Perfect linear negative path-dependent, 839–840 of farmland, 265–266 correlation, 96 on a portfolio, 187–188 forms of, 323 Perfect linear positive quanto, 843 private vs. public structures correlation, 96 on real estate indices, of, 665 Perfectly elastic supply, 290 406–407 of timberland, 261–262 Perfect markets: sensitivities, 188–190 backwardation and contango simple, 836 Pacifists, 506, 508 in, 292 spread, 842–843 PAC (planned amortization commodities as diversifiers in, up, 841 class) tranches, 757 308–309 Option adjustable-rate Pairs trading, 591–592 Performance: mortgages (ARMs), 370 Paper lots, 257 as benefit of managed futures, Option-adjusted spread (OAS), Parallel shift (in ), 483 571–572 568 of private credit, 743–744 Option-based models, 306–307 Parametric VaR, 198–199 requirements for, 720 Option collars: Partial autocorrelation, Performance attribution (return and mezzanine tranches, 103–104 attribution), 203 771–772 Partial differential equation Performance-based fee, 78. and put-call parity, 185–186 approach (PDE approach), See also Carried interest; Option pricing models, 186–188 851–852 Incentive fee Black forward option, 188 Partially collateralized position, Performance fees, 612 Black-Scholes call and put, 59–60 Performance measures: 187–188 Participation bias, 447–448 benchmarking, 203–204 currency option pricing, 188 Participation rate, 837 ratio-based, 204–210 option on portfolio, 187 Participation structured ratios as, 73–74 Option risk exposure diagrams, products, 846, 847 real estate style analysis, 359 180 Partnership agreement, 37 risk-adjusted return measures, Option spread, 183, 772–773 Partnership documents, 37–38 210–214 Option , 183 Passive activists, 507–508 Permanent cropland, 265 Option , 183, 185 Passive beta driver, 233 Perpetual option, 253 Option theory, 427–429 Passive investments, 33–34 Perpetuity valuation approach, Option view of incentive fees, Pass-through MBS, 375 391–393 427 Patents, 346–349 Perverse incentive, 424, 684 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

876 INDEX

Physical assets: Prepackaged bankruptcy filing, direct lending, 727–728 forward prices on, 167–168 724 diversification, 743–744 short selling of, 169–170 Prepayment option: drawdown funds, 710 Physical settlement, 796 for fixed-rate mortgages, 366 fixed-income analysis, PIK (payment in kind) toggle, idiosyncratic factors, 378 711–715 733 residential mortgages, fulcrum securities, 711 PIPE. See Private investment in 375–376 funds with loan-to-own public equity (PIPE) Prepayment risk, 570–571 objective, 710–711 Plain vanilla interest rate swaps, Present value, 424–427 interval funds, 710 786 Pre-tax discounting approach, leveraged loans, 723–727 Planned amortization class 401 performance, 743–744 (PAC) tranches, 757 Prices: Private equity, 6 Plan of reorganization, 723–724 credit default swap, 797 as alternative investment, 4–7 Plan sponsor, 25–26 nominal, 307 as alternative vs. traditional Platforms: real, 307 investments, 9 and managed accounts, structured product, 853 buyouts as, 651–653 489–490 and time value of money, 122 buyouts of private companies, managed futures with, 493, zero-coupon bond, 122–123 653–655 494 Price indices, 275–277 carried interest, 680–684 Platykurtosis, 93, 94 Price momentum, 586–587 and clawback provisions, PME (Public Market Price revelation, 784 681–682 Equivalent) method, 74–75 Price transparency, 556 distressed debt as, 636–637 Point value, 481 Pricing: diversification, 706 Political infrastructure risk, 330 convertible bond, 536–537 dynamics of, 663–665 Political risk, 265–266 risky bonds, 778–779 growth equity as, 648–651 Portfolios: Pricing methods, numerical, 852 hurdle rates, 682–684 bank loan, 799 Pricing models: to initial public offering, construction of, by FoF absolute, 133 637–639 manager, 610 arbitrage-free, 131–134 investment process, 668 reference, 811 marking-to-market, 556 J-curve for, 644–645 of single hedge funds, marking-to-model, 556 leveraged buyouts as, 622–623 relative, 132 655–663 Portfolio insurance, 559 RMBS, 378–379 leveraged loans as, 637 Portfolio management: single-factor equity, 143–148, liquid alternatives, 693–698 active management, 18–19 220–224 liquidity, 706 alternative vs. traditional Pricing risk, 556, 805 management fees, 680–681 investments, 16 Primary markets, 40–41 merchant banking as, 663 return diversifier, 20 Primary real estate market, 355 mezzanine debt as, 636 return enhancer, 20 Prime broker, 29–30 private equity securities, Position sizing, 479–481 Prime mortgages, 371 635–636 Post-earnings-announcement Principal-agent relationship, regulation, 706 drift, 588 508–509 risks of, 677 PO (principal-only) tranches, Principal-only (PO) tranches, strategies, 653 757–758 757–758 venture capital as, 639–648 Power reverse dual-currency Principal payments, Private equity firms, 668–670 note (PRDC), 850 unscheduled, 365–366 Private equity funds: PPP (public-private Principal protected absolute covenants, – 686–687 partnership), 327–328 return barrier note, 844 fees and terms, 680–687, PRDC (power reverse Principal-protected structured 704–705 dual-currency note), 850 products, 836–837 funds of funds, 698–699 Preferred habitat theory, 128 Prioritization: GP’s initial contribution to, Preferred return, 78. See also in capital structure, 721–722 685 Hurdle rate of claims, 753–754 for institutional investors, Premiums: of tranches, 814–815 670–671 CDS, 795 Private commodity pools, 463 as intermediaries, 671–677 complexity, 541 Private credit, 709–710 J-curve of, 675–676 credit default swap, 797 credit risk analysis, 715–723 key-person provision, 685 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 877

leveraged buyout funds, on dispersion trades, 561–563 returns based on notional 689–693 equity hedge fund principal, 57–60 liquid alternatives, 693–698 opportunities for, 583–584 Quanto options, 843 LP–GP relationships in, Profitable months, number of, 677–680 430–431 Ramp-up period, 811 organizational structure of, Profit approach, 391 Ratio-based performance 667–668 Progressive taxation, 47 measures, 73–74, 204–210 perverse incentives from fees, Proprietary trading, 28 information ratio, 209–210 684 Protective provisions in growth return on VaR, 210 private equity firms, 668–670 equity, 649 Sharpe ratio, 205–207 private equity portfolio , 182 Sortino ratio, 208–209 companies, 670 Protective put exposures, Treynor ratio, 207–208 as private investment pools, 182–183 , 183 26 Providing liquidity, 581 Raw moments, 90–91 public equity, 699–703 Proxy battle, 506 Real assets, 4 secondary markets, 703–706 Prudent person standard, as alternative investments, termination and divorce, 641 4–6 685–686 PSA benchmark, 377–378 benefits and costs of venture capital funds as, PSLB (patent sale license-back), ownership of, 165 687–689 348 commodities as, 5 (see also Private equity funds of funds, Public firms, 664–665 Commodities) 698–699 Publicly traded PE firms, 705 commodity producers as, Private equity portfolio Public Market Equivalent 319–322 companies, 670 (PME) method, 74–75 financial assets vs., 6 Private equity real estate funds, Public-private partnership infrastructure investments as, 403–404 (PPP), 327–328 6, 325–337 (see also Private equity securities, Public real estate investment, Infrastructure investments) 635–636 355 and intellectual property, Private funds, 38 Pure arbitrage, 19–20, 132 339–340 Private investment in public Pure asset gatherers, 429 liquid alternatives, 322–324 equity (PIPE), 699–700 Pure expectations theory, 127, operationally focused, 5 buyer and seller motivations 128 real estate as, 5–6 (see also for, 700–701 Put-call parity, 185–186 Real estate) securities issued through, 700 Put exposures, 182 smoothing of valuation, 268 toxic, 702–703 Put options: valuation and volatility of, traditional and structured, credit, 802–803 268–272 701–702 long binary, 503 Real estate, 5 Private investment pools, 26 Put option view of capital advantages of, 356 Private limited partnerships, structure, 762–763 as alternative vs. traditional 26 p-value, 236 investments, 9–10 Private placements, 46 categories, 353–355 Private real estate, 355 Qualified majority, 38 commercial mortgages, Private real estate equity, 355 Quantitative foundations: 372–375 Private wealth, 26 accounting conservatism, as debt vs. equity instruments, Privatization, 327 75–76 353 Probability of default (PD), cash waterfall distribution, disadvantages of, 356–357 717–718, 777 77–85 domestic vs. international, Probity, 34 compounding, 55 354 Process drivers, 233 internal rate of return, 60–73 mortgage-backed securities, Product innovators, 233 J-curve, 76–77 375–380 Production-weighted indices, log returns, 56 private vs. public, 355 313–314 mathematics required, 55–57 as real asset, 5–6 Profits: notional principal, 57–60 residential mortgages, aggregation of losses and, Public Market Equivalent 363–372 80–81 method, 74–75 residential vs. commercial, clawbacks and alternating, ratios as performance 354–355 81–83 measures, 73–74 styles of investing, 357–361 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

878 INDEX

Real estate appraisal, 390 via perpetuity valuation infrastructure investments, Real estate equity investments: approach, 391–393 333 alternative vehicles for, via profit approach, 391 managed futures funds, 462 403–409 Real interest rate, 124 mutual fund constraints, 45 closed-end real estate mutual Realization risk, 677 in private equity, 706 fund, 407–408 Realized volatility, 540 Regulatory capital, 816–817 commingled real estate funds, Real option, 385–387 Regulatory risk, 329, 489 404 Real price, 307 of infrastructure investing, decision trees, 387–389 Rebate, short selling, 50 329–330 development as real options, Recapitalizations, 734 with merger arbitrage, 521 385–387 Receivables, 253 in patent investment, 349 equity REITs, 408–411 Receivers, 786 Regulatory structure, 42–43 joint ventures, 404 Recognition of gain or loss, Reinvestment provision, 675 limited partnerships for, 299 Reinvestment rate assumption, 405 Recombining binomial tree, 68 NCREIF Property Index 134–135 REITs. See Real estate (NPI), 395–396 Recourse, 373 investment trusts (REITs) open-end real estate mutual Recovery rates, 722–723 Relative pricing model, 132 funds, 405–406 Recovery value, 527 Relative return product, 437 private equity real estate Redemption rights, 649–650 Relative return standard, 19 funds, 403–404 Redemption triggers, 650 Relative strength index (RSI), real estate indices, 406–407 Redemption value, 650 473–475 syndications, 404 Reduced-form credit model, 776 Relative value hedge funds: transaction-based vs. advantages and convertible bond arbitrage, appraisal-based models, disadvantages, 782–783 536–550 394–395 credit spreads, 779–780 fixed-income arbitrage, valuation, 389–396 expected loss due to credit 565–575 valuation via comparable sale risk, 777 historical returns, 564–565 approach, 390–391 intuition of, 776 multistrategy, 575–577 valuation via income and risk-neutral approach strategies, 535–536 approach, 393, 397–403 models, 778–779 volatility arbitrage, 551–565 valuation via perpetuity with risk neutrality, 781–782 Relative value multistrategy valuation approach, structural models vs., 783 (RVMS) funds: 391–393 Reduced integration in the historical returns, 576–577 valuation via profit approach, forest products industry, rationale of, 575 391 262 Relative value strategies, 434, valuation via Referenced asset, 797 436, 475–476 transaction-based models, Reference portfolio, 811 Reorganization process, 525 394 Reference rate, 155 Repeat-sales method (RSM), Real estate indices: Refinancing, as LBO exit 394 exchange-traded funds on, strategy, 662 Replacement capital, 653 407 Refinancing burnout, 379 Replication: futures on, 406–407 Regression: hedge fund replication, 45 options on, 406–407 autocorrelation, 222 liquidity-based replication Real estate investing, goodness of fit, 223–224 products, 44 international, 354 heterskedasticity, 222–223 skill-based replication Real estate investment trusts ordinary least squares, 221 products, 44 (REITs), 381 outliers, 221–222 Reporting due date obligations, equity (see Equity real estate t-test on parameters, 224 347 investment trusts [REITs]) Regulated pricing, 329 Reporting requirements, 720 mortgage, 381, 382 Regulation: Representativeness, 445 Real estate joint ventures, 404 for alternative vs. traditional Repudiation, 796 Real estate style boxes, 361–363 investments, 17 Rescue capital, 653 Real estate valuation, 389 with funds of funds, 611 Research and development via comparable sale and fund structures, 39–40 patents, 346–349 approach, 390–391 and infrastructure investing, Reservation of rights provision, via income approach, 393 329–330 347 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 879

Reserve accounts, 822–823 roll (see Roll yield) of commodities, 314–317 Residential mortgage-backed spot, 296, 297 contraction, 755 securities (RMBS), 375, systematic, 146 convertible bond arbitrage, 378–379 on timber, 263 548–549 Residential mortgage loans, 363 venture capital funds, corporate event, 501–502 with balloon payments, 687–689 correlation, 557, 826 370–371 and volatility, 270 counterparty, 768, 806–807 and default risk, 371–372 zero value positions, 57–58 credit (see Credit risk) fixed-rate, 363–367 Return attribution, 203 , 805–807 interest-only, 367 beta nonstationarity, 229–230 default (see Default risk) option adjustable-rate, 370 commingling of alpha and of distressed debt, 742 prepayment options, 375–376 beta, 230 equity hedge fund, 605 variable-rate, 367–370 model misspecification, event (see Event risk) Residential real estate, 354 228–229 exchange-traded vs. OTC Residual value to paid-in (RVPI) numerical example of alpha, derivatives, 555–556 ratio, 74 227–228 expiration, 349 Restructuring, 795–796 Return distributions: extension, 755 Returns: ex ante, 87–88 financial engineering, absolute, 19 ex ante vs. ex post returns, 825–826 active return, 19 87–88 financing, 522 based on notional principal, ex post, 87–88 fixed-income arbitrage, 57–60 Return diversifier, 20 572–573 benchmark return, 19 Return drivers: foreign exchange, 484 on calendar spreads, 294–295 alpha, 233 funding, 677 characteristics of, 11–14 beta, 232–233 futures contract dollar, 481 computation methods for, convertible arbitrage, of global macro funds, 459 14–15 547–548 headline, 441 computations as log returns, process, 233 idiosyncratic (see 56 Return enhancer, 20 Idiosyncratic risk) computations on notional Return expectations, 301 inflation, 310 principal, 57–60 Return measures, risk-adjusted, with interest rate swaps, 792 direct commodity, 282–284 210–214 lack of trends, 489 diversification, 11–12 Return of capital, 323 of land, 260–261 ex ante vs. ex post, 87–88 Return on notional principal, legal, 349 excess, 147 58 liquidity (see Liquidity risk) expected, 310–312 Return on VaR (RoVaR), 210 macroeconomic, 349 on farmland, 267 Return persistence: of managed futures, 488–489 on futures contracts, 296–298 abnormal, 231 market, 459, 677 idiosyncratic, 146 estimated, 231 merger arbitrage, 520–522 illiquidity, 12–13 identifying alpha with, 231 model, 488 inefficiency, 13 Revenue, valuation based on, of mortgage-backed securities on land, 260–261 650–651 arbitrage, 572–573 liquid private equity pools, Revolving period, 811 off-balance-sheet, 435–436 697–698 Rho, 188 operating, 339 managed, 270 Riding the yield curve, 567–568 operational, 349, 618–619 managed futures, 486–488, Risk(s): political, 265–266 496–498 active, 19 political infrastructure, 330 normal distribution, 13–14, of asset-backed securities prepayment, 570–571 88 (see also Return arbitrage, 572–573 pricing, 556, 805 distributions) basis (see Basis risk) of private equity, 677 operating-firm equity, business, 720 realization, 677 321–322 of buyouts, 693 regulatory (see Regulatory relative, 19 of , 295–296 risk) return computation interval, capacity, 488–489 shortfall, 194–195 56–57 collateralized debt obligation, short selling to reduce, return diversifier, 20 824–829 592–593 return enhancer, 20 commitment, 677 in structuring, 763 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

880 INDEX

Risk(s) (Continued) Risk premium approach, Secondary buyout (SBO), 653 systematic (see Systematic 398–399 Secondary market, 40–42, risk) Risk-return relation error, 703–704 systemic, 42, 759–760 nonlinear, 228 Second deferred contracts, 178 technology, 334, 349 , 185 Second-stage/expansion venture transparency, 488 Risk shifting, 826–827 capital, 643–644 vega, 551 Risk-taking behavior, 429–430 Section 1256 contracts, 48 volatility, 557 Risky bonds, 778–779 Sector risks, in patent volatility arbitrage, 563 Risky debt, 764–765 investment, 349 Risk-adjusted return measures, RMBS (residential Securitization, 41, 348 210–214 mortgage-backed Security(-ies): average tracking error, 214 securities), 375, 378–379 growth equity, 649 for hedge funds, 430–431 Robustness, 465 issued through private Jensen’s alpha, 210–211 Rolling contracts, 178, 296–302 investment in public equity, M2 approach, 211–213 alpha, 301–302 700 Risk decomposition, 800 components of futures private equity, 635–636 Risk exposures: returns, 296–298 with stochastic cash flows, investments in patents, 349 interpretations of, 298–299 duration for, 140–141 linear, 232 and returns on futures vs. venture capital, 640–641 Riskless interest rate, 159–160 spot return, 296 Seed capital stage, 642–643 Risk management: roll yield, 299–300, 302 Seeding funds, 621–622 active risk, 19 Rolling down (the yield curve), Segmentation, 530, 656–657 by FoF manager, 610 568 Selection bias, 239 with hedge funds, 451 Rollover transactions, 179–180 Selective appraisals, 270 option sensitivities, 190 Roll yield (roll return), 297–298 Self-selection bias, 239 pure arbitrage, 19–20 and alpha, 300 Selling insurance, 502 Risk measures, 193–214 and basis, 300 Sell-side, 28–29 drawdown, 195–196 and carrying costs, 300 Semiannual compounding, 714 semistandard deviation, 194 interpretations of, 298–299 Semistandard deviation, 194 semivariance, 193–194 propositions regarding, 302 Semistrong form informational semivolatility, 194 and slope of forward curve, market efficiency, 118 shortfall risk, 194–195 299–300 Semivariance, 193–194, 195 smoothing to reduce, 269 Rotation, 262 Semivolatility, 194 target semistandard deviation, RoVaR (return on VaR), 210 Senior lenders, as investors in 195 RSI (relative strength index), mezzanine debt, 736 target semivariance, 195 473–475 Senior secured debt, 343 tracking error, 195 RSM (repeat-sales method), 394 Senior tranche, 770 value at risk (VAR), 196–203 r-squared value, 223 Separately managed accounts Risk-neutral investors, 778 Russia, bond default in, 436 (SMAs), 26–27 Risk neutrality: RVMS funds. See Relative value Sequential-pay collateralized and expected spot prices, 154 multistrategy (RVMS) mortgage obligation, and forward prices, 154, funds 754–755 159–160 RVPI (residual value to paid-in) Settlement: and riskless interest rate, ratio, 74 cash, 796 159–160 credit default swap, 796 Risk-neutral modeling Safe harbor, 416 of forward contracts, approach, 136, 778 Sampling: 151–152 credit spreads, 779–780 backtesting and backfilling, physical, 796 key characteristics, 778 240–241 Setup costs, of infrastructure nature and power of, cherry-picking and investments, 333 136–137 chumming, 241–242 Seven challenges to pricing risky bonds with, data mining vs. data dredging, international real estate 778–779 240 investing, 354 reduced form models with, unrepresentative data sets, Share buyback program, 588 781–782 239–240 Shareholders: Risk-neutral probability, 258 SBO (secondary buyout), 653 managers as maximizers of Risk premiums, 688–689 Scale differences, 66 wealth for, 508–509 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 881

misalignment of managers Single-factor default-free bond Social infrastructure, 326–327 and, 509–510 models: Soft hurdle rate, 83–84 Shareholder activism, 505 for bond portfolio, 138–139 Sortino ratio, 208–209 capital structure as target of, duration as longevity of Sourcing investments, 674 513–514 zero-coupon bond of Sovereign debt, 567–569 CEO or board of directors as equivalent risk, 141 Sovereign entities, credit target of, 512–513 extensions of traditional derivatives on, 785 corporate governance battles duration, 143 Sovereign wealth funds, 26 in, 510–511 for fixed-coupon bond, 138 Spearman rank correlation, dimensions of, 506–507 hedging a long-short portfolio 97–98 dividend policy as target of, with duration, 142–143 Special purpose entities (SPEs), 513–514 managing duration of 35 mergers or divestitures due to, long-only bond portfolio, Special purpose vehicles (SPV), 514–515 139–140 35 strategies of, 507–508 for securities with stochastic Special situation funds, 532 Sharpe ratio, 205–207 cash flows, 140–141 Special stock, 51 Short-bias funds, 579 traditional duration, 137 Speculation, 583–584 basics, 595–597 Single-factor equity pricing SPEs (special purpose entities), mechanics of short selling, models: 35 594–595 autocorrelation, 222 Spin-offs, 515 returns of, 597–598 ex ante asset pricing, 145–146 Split estate, 251 Short correlation trades, 561 ex post asset pricing, 146–148 Spoilage cost, 289 Shortfall risk, 194–195 heteroskedasticity, 222–223 Sponsor of the trust, 811 Short interest, 582 ordinary least squares Spot market (cash market), 133 Short positions, synthetic, regression, 221 Spot prices, 310–312 800–801 outliers, 221–222 Spot return, 296, 297 Short selling, 49–52 performing a t-test, 224 Spreads: and convertible bond regression’s goodness of fit, bull call, 772–773 arbitrage, 541 223–224 bull put, 772–773 of equity from distressed firm, simple linear regression and, calendar, 293–296 526–527 220–221 CDS, 795, 797 institutional mechanics of, single-factor asset pricing, credit, 779–780 49–50 143–145 and mezzanine tranches, with market anomalies, Single-manager hedge fund, 432 772–773 592–593 Single-name credit derivatives, option, 772–773 mechanics of, 594–595 784 option-adjusted, 571–572 of physical assets, 169–170 Single-tranche CDO, 824 weighted average, 812 to short sellers, 50–51 Size factor, managed futures Spread enhancement, 822 special situations involving, and, 484 Spread options, 842–843 51–52 Skewness, as central moment, Springing board remedy, 650 Short squeeze, 52 92, 93 Springing subordination, 737 Short-term interest rates, 124 Skill-based replication products, Spurious correlation, 244 Short volatility exposure, 435 44 SPV (special purpose vehicles), Sideways market, 471 Slate equity financing, 343 35 Significance level, 235 , 464 Staggered board seats, 511–512 Simon, Julian, 283–284 Slope, of forward curve, Stale appraisal effect, 394 Simple interest, 55 299–300 Stale data, 271–272 Simple linear regression, Slope coefficient, 221 Stale pricing, 406 220–221 SMAs (separately managed on historic mean returns, Simple moving average, accounts), 26–27 272–273 466–468, 467 Smoothing, 268 model of, 272 Simple options, 836 appraisals, 270–271 on volatility, 274–275 Simulation, valuing structured of real asset values, 268–269 Standard deviation: products with, 852 reliance on infrequent deviations and, 104–105 Since-inception IRR, 63 transactions or stale data, normally distributed returns, Single-factor asset pricing 271–272 105–107 models, 143–145, 144 Social activists, 506 properties of, 108–111 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

882 INDEX

Standard ISDA agreement, Stock: global cases, 848–850 795–796 binomial tree example, investor motivations for, 810 Standardized unexpected 135–136 Japanese-based, 850 earnings (SUE), 587–588 Convertible preferred, 640 leverage, 847–848 Standard & Poor’s GSCI, with dividends, 161–162 as market completers, 313–314 general collateral stock, 51 752–753 Start-up stage venture capital, with no dividends, 157–158 mortgage, 758–760 (see also 643 special stock, 51 Collateralized debt State of the world, 752 Stock-for-stock merger obligations (CDOs)) Static hedge, 853 arbitrage, 518–519 participation, 846, 847 Statistical analysis: Stock-for-stock mergers, 517 prices of, 853 for alpha, 234–239 Stock issuance: principal-protected, 836–837 alternative vs. traditional net, 588–589 states of the world within, investments, 15 new stock, 588 752 autocorrelation, 100–104 (see Stock-out, 305 U.S.-based, 848–849 Autocorrelation) Storage costs, 166, 305 valuation, 850–854 backtesting and backfilling, Straight refinancing, as LBO without exotic options, 240–241 exit strategy, 662 836–839 beta, 99–100 Strategic allocations, to hedge yield enhancement, 846 biased testing, 243–244 fund styles, 613 Structuring, 749 cherry-picking and Strategic funds of funds, 629 about, 749–750 chumming, 241–242 Strategy definitions, 448 for alternative vs. traditional common problems with, Street name, 49 investments, 17 236–237 Stretch financing, 736 collateralized debt correlation coefficient, 95–96 Strong form informational obligations, 768–773 correlation coefficient and market efficiency, 118 collateralized mortgage diversification, 98–99 Structural credit risk models, obligations, 753–761 covariance, 95 761 conflict of interest regarding cross-sectional searches, advantages and risk in, 763 242–243 disadvantages, 766 creating structured products, data mining vs. data dredging, binomial trees, 765–766 751 240 Black-Scholes option pricing, economic role of, 751–753 erroneous conclusions from, 764–765 hedging with credit 238–239 conflict of interest with risk in derivatives, 750 error of accepting a structuring, 763 interest rate options, 766–768 hypothesis, 236 Merton’s model, 761–764 of sequential-pay CMOs, fallacies of alpha and beta reduced-form models vs., 783 754–755 estimation, 245–246 Structured deposits, as structural model approach to hypothesis testing steps, wrappers, 832 credit risk, 761–766 234–236 Structured PIPEs, 701–702 with tranches, 750–751 moments of distribution, Structured products, 7 types, 750–751 90–94 absolute return, 843–844 Style drift, 448 normality testing, 111–114 as alternative investments, 4, hedge fund indices, 448, 450 outliers, 243 5, 7–8 real estate style analysis to return distribution, 87–89 as alternative vs. traditional monitor, 359, 361 Spearman rank correlation investments, 9, 10 Styles of real estate investing, coefficient, 97–98 binomial trees and valuation 357 spurious correlation, 244 of, 765–766 core real estate, 357–358 standard deviation, 104–111 capital protection, 845–846 differentiating, 359–361 time-series return volatility creating, 751 opportunistic real estate, models, 114–115 economic roles, 751–753 358–359 type I errors, 237–238 equity-linked (see purposes of analyzing, 359, type II errors, 237–238 Equity-linked structured 361 unrepresentative data sets, products) value-added real estate, 358 239–240 EUSIPA classification, Subordination, 737, 821–822 variance, 107–108 844–848 Subprime mortgages, 371 Stochastic cash flows, 140–141 German-based, 849–850 Subscription agreement, 37 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 883

Subscription lines, 684 and normal contango/ Term structure theories: Substitute dividends, 50 backwardation, 304 and expected bond prices, SUE (standardized unexpected Systemic return factors, 228 154–155 earnings), 587–588 Systemic risk, 42, 759–760 and forward prices, 154–155 Super gap financing, 343 Test of joint hypotheses, Supply: Tactical allocations, to hedge 584–585 of agricultural products, 266 fund styles, 613 Test statistic, 235 of distressed debt, 738–739 TAC (targeted amortization Thematic investing, 458 inelastic, 290 class) tranches, 757 Theta, 539 Supply elasticity, 290–291 Tail risk strategies, 559–560 Third markets, 42 Survivorship bias, 239–240 Takeout provision, 737 Third-party bidders, 519–520 Swap, 157 Taking liquidity, 580 Third-party equity, 343 Swaps, 786 Targeted amortization class Thomson Reuters/ credit default, 793–801 (TAC) tranches, 757 CoreCommodity CRB interest rate, 786–793 Target semistandard deviation Index, 314 total return, 794–795 (TSSD), 195 Tier-weighted long-only variance, 552–553 Target semivariance, 195 commodity indices, 314 volatility, 553–555 Taxation: Timberland, 6 Swap rate, 788 differences in, 35–36 historical returns of, 278 Swap rate curve, 788 double, 323 management of, 261–262 Syndications, 404 with funds of funds, 612 ownership of, 261–262 Synthetic cash positions, 801 income, 47–48 Timberland investment Synthetic CDOs, 816–817, in income approach, 401–402 management organizations 819 master limited partnerships, (TIMOs), 262 cash-funded vs., 819–820 323–324 Time horizon: mechanics of, 819 Section 1256 contracts, 48 managed futures, 478 Synthetic hedge funds, 450 unrelated business income in private equity, 664 Synthetic shorts, 800–801 tax, 324 Time series, of hedge fund Systematic fund trading, and withholding, 48–49 returns, 430–431 453–454 and wrappers, 832–835 Time-series models, 114–115 breakout strategies, 471–472 Tax credits or grants, 343 Times revenue method, 650 degradation, 465–466 Tax deduction, 835 Time value of an option, 255 evaluating, 464–465 Tax-deduction wrappers, 835 Time value of money, 174–176 exponential moving averages Tax deferral, 834–835 interest rates from in, 468–470 Tax-deferral wrappers, 834–835 zero-coupon bond prices, for futures portfolio, 479–483 Tax-free wrappers, 833 123 historical returns, 499 Technical analysis, 454–455, short-term interest rates, non-trend-following 475–476 124 strategies, 473–475 Technology risk: term structure of interest rates relative value strategies, of infrastructure investments, and coupon bonds, 475–476 334 126–127 returns, 498 in patent investment, 349 term structure of interest rates simple moving averages in, TENs (exchange-traded notes), and zero-coupon bonds, 466–468 285 124–125 technical analysis, 475–476 Termination, of CDS contract, yield curve, 125–126 trading rules for, 464 799 zero-coupon bond prices trend-following analysis, Term structure of forward from, 122–123 472–473 contracts, 288–296 Time-weighted returns, 72–73 with two moving averages, Term structure of implied TIMOs (timberland investment 470–471 forward rates, 131 management validation of, 465–466 Term structure of interest rates, organizations), 262 weighted moving averages in, 124, 566 Total return swaps, 794–795 468–470 from coupon bonds, 126–127 Toxic PIPE, 702–703 Systematic return, 146 theories of, 127–128 Tracking error, 195 Systematic risk, 146 and yield curve, 566 Trading: hedge fund strategies by, from zero-coupon bonds, asynchronous, 582 433–434 124–125 by banks, 799 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

884 INDEX

Trading (Continued) 2x2 framework, 22 Upstream operations, 322 insider, 589 Two keys to successful VC Uptick rule, 596 pairs, 591–592 investing, 648 U.S. See United States (U.S.) Trading activity, 314 Type I error, 237, 238 Trading differences, 171–172 Type II error, 237–238 Vacancy loss rate, 398 Trading execution, 482–483 Validation, 465 Trading strategies, 17 UBIT (unrelated business Valuation: Traditional investments, 3, income tax), 324 alternative vs. traditional 8–10, 16–18 UCITS (Undertakings for investments, 15–16 Traditional merger arbitrage, Collective Investment in credit default swaps, 798 517 Transferable Securities), 27 of default-free CMOs, 759 Traditional PIPEs, 701 UCITS funds, 625 of growth equity, 650–651 Traditional senior lenders, 736 Unbiased expectations theory interest rate swap, 788–792 Tranche(s), 753–754 (pure expectations theory), of leveraged buyouts, arbitrage CDO, 814–815 127, 128 659–662 equity, 770 Unbundled intellectual property, master limited partnerships, floating-rate, 758 338 324 interest-only, 757–758 Unconstrained bond funds, 627 of real assets, 268–272 inverse floater, 758 Unconstrained clones, 44 of risky debt, with longevity characteristics, 755 Underlying assets, 180–182 Black-Scholes model, mezzanine, 770, 771–773 Underlying collateral, 824–825 764–765 planned amortization class, Underreacting, 582 structured products, 757 Undertakings for Collective 765–766, 850–854 principal-only, 757–758 Investment in Transferable of venture capital companies, prioritization of, 814–815 Securities (UCITS), 27 645–647 risk shifting and correlation Undervalued securities, Value-added real estate, 358 effects on, 826–827 527–528 Value at risk (VaR), 196 senior, 770 Undrawn capital commitments, aggregating, 202–203 structuring with, 750–751 676–677 conditional, 197 targeted amortization class, Undrawn commitment, 671 estimating for leptokurtic, 757 Unexpected earnings, 200–201 Tranche width, 812 standardized, 587–588 estimating from historical Transaction-based models: Unfunded credit derivatives, returns, 201–202 appraisal-based vs., 394–395 784–785 estimating via Monte Carlo real estate equity investments, Unicorn, 664 analysis, 202 394 United Kingdom (UK): estimating volatility for, 200 Transaction-based real estate clearing banks, 33 estimating with normally valuation methods, 394 merchant banks, 33 distributed returns, Transparency, 488 United States (U.S.): 198–200 as benefit of managed futures, commercial banks, 32 estimating with underlying 483 declining numbers of public normality, 200 with funds of funds, 612 firms, 664–665 parametric, 198–199 multistrategy funds, 617–618 investment banks, 32 return on, 210 price, 556 structured product case strengths and weaknesses, Transparency risk, 488 example, 848–849 197–198 Trend-following strategies, 466, U.S. Investment Company Act Variables: 472–473 (1940), 27, 625–626 dependent, 220 Treynor ratio, 207–208 Unitranche debt, 722 independent, 220 Trigger events of CDSs, Universal banking, 32 Variable expenses, 398 795–796 Unrelated business income tax Variable-rate mortgages, 363, Trust, sponsor of, 811 (UBIT), 324 367–370 TSSD (target semistandard Unscheduled prepayment rates, Variance: deviation), 195 376–378 properties of, 107–108 t-stastic, 224 Unscheduled principal as second central moment, 91 t-test, 224 payments, 365–366 Variance neutrality, 602 Turnaround strategy, 659 Up options, 841 Variance swaps, 552–553 20-bagger, 641 Upper attachment point, 771 VC. See Venture capital (VC) JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in

Index 885

VC exits, 640 exchange-traded vs. OTC Well-diversified portfolio, 206 Vega, 551–552 derivatives, 555–556 Whipsawing, 471 Vega notional value, 553–554 historical returns, 564–565 Windup, of private equity funds, Vega risk, 551 instruments used, 552–555 675 Venture capital (VC), 637, market-neutral, 557–558 Winner-take-all markets, 664 639–640 profit and loss on dispersion Withholding taxes, 484 business plans, 647 trades, 561–563 Wolf pack, 511 and buyout managers, 689 risks, 563 Working curve, 305 and buyout risks, 693 strategies, 556–557 Wrappers, 831 as , tail risk strategies, 559–560 fully taxed, 833–834 647–648 vega, 551 tax-deduction, 835 history of, 641–642 volatility defined, 551–552 tax-deferral, 834–835 to initial public offering, Volatility arbitrage funds: tax effects, 832–835 637–639 instruments used by, tax-free, 833 J-curve for, 644–645 552–555 types, 831–832 option-like payout of, 641 market-neutral, 557–558 as private equity, 7 Volatility asymmetry, 307 Yield(s): securities used, 640–641 Volatility risk, 557 collateral, 297 stages of, 643–644 Volatility swaps, 553–555 in credit risk analysis, valuation of, 645–647 Volatility targeting, 479–480 715–716 Venture capital business plans, Vulture investors, 742–743 infrastructure investments, 647 335 Venture capital firms, 736 WACC (weighted average cost Yield curve, 566 Venture capital fund, 673–675 of capital), 730–731 approximation of, 125–126 Venture capitalists, 621–622 WARF (weighted average rating parallel shift in, 568 Venture capital securities, 640 factor), 811–812 riding, 567–568 Vesting, 78 Warrants, 728, 832 rolling down, 568 Vintage year, 674 WAS (weighted average spread), and term structure of interest Visual works of art as IP, 812 rates, 566 344–346 Waterfall, 77. See also Cash Yield enhancement structured Volatility: waterfall distribution products, 846 anticipated, 551 of arbitrage CDO, 815–816 Yield to maturity, 124 defined, 551–552 using hurdle rate, 683 effect of stale pricing on, Weak form informational Zero-coupon bonds: 274–275 market efficiency, 118 duration as longevity of, estimating, for VaR, 200 Wealth, of shareholder, 141 and event risk, 435–436 508–509 forward contract price of, implied, 540–541 Weighted average cost of capital 152–154 of real assets, 268–272 (WACC), 730–731 prices of, 123–124 realized, 540 Weighted average rating factor and term structure of interest semivolatility, 194 (WARF), 811–812 rates, 124–125 short, 435 Weighted average spread (WAS), and time value of money, Volatility arbitrage, 551 812 123–124 dispersion estimation, 558 Weighted moving average, time value of money and dispersion trades, 561 468–470, 469 prices of, 122–123 JWBT2494-IND JWBT2494-CAIA February 13, 2020 8:5 Printer Name: Trim: 7in × 10in