February 2008
- Alternative Viewpoints -"Réplication de fonds de couverture"
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Director's Comments
Anatomy of a Financial Crisis: Waiting for the Other Shoe to Drop
The world is now 49 days into the Gregorian new year, 11 days into the Chinese Year of the Rat, and 6 months into what will likely go down in history as the Subprime Crisis of 2007. With the US on the brink of (or, some say, in) a recession, the months ahead hold more uncertainty for the global financial markets. Though no one can foresee exactly how the first half of 2008 will unfold, one area of interest will surely be the US commercial real estate market: will it face the same headwinds as the residential market, and to the same degree; or will it come through the storm relatively unscathed?
Taking Stock
Conventional wisdom now suggests that easy money, in the form of low interest rates and enticing derivatives structures, was the fuel used to inflate the residential real estate bubble. As the credit cycle began to reverse, prices softened just as higher mortgage resets began to stress the ability of subprime borrowers to meet their monthly payments. Quickly, the market realized that the pools of mortgages that had been repackaged and sold throughout the world no longer warranted the ratings originally assigned to them. This caused prices of both the securities and the underlying properties themselves to fall precipitously and concurrently.
What happened next was quite severe, as the extent of these holdings, and thus the impact of the downgrades, became apparent. Bank inventories were hardest hit, resulting in massive writedowns from nearly all of the largest investment banks. The aggregate cost to these institutions has been compared to that associated with the savings & loan crisis that hit almost exactly 20 years before. But banks aren't alone. It's certain that institutional investors around the globe have also been affected, though the extent and severity of their losses is as yet unknown.
Segments of the credit markets, basically anything directly or indirectly associated with the mortgage and/or structured products markets, began to seize up as forced sales swamped the declining to non-existent demand. More recently, the continued viability of the monoline insurers has come into serious doubt, which, if borne out, would add significantly to the enormous write-offs already announced.
Commercial Real Estate
So what might this mean for the commercial real estate market? The bad news is that commercial real estate has gorged on some of the same excesses - namely low rates and attractive structures. With credit markets swooning, real estate LBOs have come under valuation and recapitalization pressures. Prices will arguably have to come down as sellers outnumber buyers.
But the extent of the impact on the commercial sector is far from clear. Fortunately, we don't have the same volume of office space overhang as we did back in 1990. Also of note, REIT yields have widened to 200 points over the 10 year US Treasuries, a level last seen in 2003 and perhaps enough to attract new capital. So potential losses on bank portfolios (as well as other investors) should be modest and pale in comparison to the CDO debacle, a good thing given the banks' fragile balance sheets.
In the long run, the commercial real estate sector is unlikely to experience the same severity or duration of retrenchment as it did in the 1990s. In the short-run, however, attracting the capital needed to restore normalcy to the credit markets may well depend upon restoring faith in the monoline insurers first. Here in Amherst, we'll be watching to see how the monoline canary fares in this coal mine.
Best regards,
E. Craig Asche
Executive Director
March 2008 Exam Registration Update
March 2008 Exam Registration is Now
Closed
Exam Appointment
Scheduling: CAIA candidates who have not yet
scheduled an exam appointment are encouraged to do so as soon as possible. All
exams are scheduled directly through Pearson VUE. If you encounter any
scheduling difficulties, please contact Pearson VUE immediately.
REMINDER -- CALCULATOR
POLICY:
Only the TI BA II Plus (as
well as the Professional model) or the HP 12C (as well as the Platinum edition)
are allowed during the CAIA exams. No other calculators are allowed in the testing
room. There are no exceptions to this policy. As in the past, exam proctors
will require that all calculator memory be cleared prior to the start of the
exam.
Identification
Requirements: You will not be allowed into the
testing room without the proper identification. Please review the ID policy here.
Registration for the next exam period (September 8 - 19) opens April 1, 2008.
Alternative Viewpoints - powered by CAIA
"Réplication de fonds de couverture", posted February 4 on AllAboutAlpha.com
Pierre Saint-Laurent, CFA, CAIA
-President of AssetCounsel Inc. and head of the Canadian chapter of the CAIA Association
-Vice President, Graystone Research, Morgan Stanley
From AllAboutAlpha.com: As we pointed out in a posting a couple of weeks ago, there seems to be a little je ne sais quoi in the water in Montréal that breeds hedge fund replication providers. Montréal-based Pierre Saint-Laurent... weighs in on why the city founded by sailors in 1642 is now making waves in the hedge fund world.
Alternative investments, and hedge funds in particular, have raked in the assets so far in the 21st century because of low returns from traditional strategies, pension fund deficits, an urge to diversify (and maintain low correlations even when all traditional asset classes spike, such as in the tech meltdown) and somewhat of a 'nothing works anymore' mindset.
Indeed, investors seem to like alternatives so much that they are willing to deal with lower transparency, hard-to-explain strategies, and (arguably) higher fees. There's a reason for all that: alternative asset managers, and hedge fund managers in particular, need the secrecy and privacy to move quickly and efficiently.
AllAboutAlpha.com's column, Alternative Viewpoints, aims to provide the thoughtful and reasoned opinions typical of CAIA members on the various topics covered by AllAboutAlpha.com. AllAboutAlpha.com is read by over 10,000 unique readers each month in the hedge fund and greater asset management industry.
CAIA Chapters Continue Unprecedented Growth
As the CAIA Association continues to enjoy unprecedented
growth, CAIA members worldwide have been gathering to network and to discuss recent
research and industry trends. We expect
the addition of several new chapters by the end of 2008. The following is a recap of recent chapter activities
and a preview of coming events:
CAIA London
kicked off the New Year on January 23rd with a presentation by author and investor Hilary Till based on a new book she
co-authored entitled Intelligent
Commodity Investing. Shortly thereafter, CAIA London
also hosted a presentation by Mark Anson
of Nuveen Investments, entitled "The
Beta Continuum" on January 29th. The events were well-attended by
candidates and members in the
CAIA Chicago is
set for its official chapter launch
on Tuesday, February 19th at the Chicago
Mercantile Exchange Club. Hilary
Till of Premia Capital Management and EDHEC-Risk will reprise her recent
CAIA Switzerland will also be
hosting its next event in
CAIAA's chapters continue to offer exceptional networking and educational opportunities, and as the number of global chapters increases, we look forward to their expansion in new and exciting directions.
CAIAA's Global Travel Schedule
CAIAA's recent focus on small-scale private presentations has been a successful strategy to introduce the CAIA program and designation to uninitiated organizations. In January, we benefited greatly from meetings with our colleagues in Brazil and South Africa which is giving us a renewed focus for our 2008 schedule. We are keen to continue visiting burgeoning alternatives markets, such as Scandinavia as well as well-established areas like London and Paris.
In early March, Executive Director Craig Asche will arrive in Sweden, Norway and Denmark to meet with industry professionals and regulators. If you would like to schedule a private event for your firm to learn more about the CAIA program, please email us at info@caia.org.
In mid-February Mr. Asche will be wrapping up a visit to San Francisco and Seattle. During this visit, he will meet with both private organizations and governmental agencies. Given the enthusiastic interest among CAIA members and candidates in the region, we are already planning our return visit to these thriving AI communities.
Next month, we'll briefly review CAIAA's travel and outreach schedule for the next several months. Stay tuned for more exciting news as CAIAA continues to expand its global reach.