March 2008
- Alternative Viewpoints -"Liquidity Insurance"
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Director's Comments:
Unwinding - It's Not Just for Weekends Anymore
Unless you've just returned from an extended period of deep sea exploration, you've no doubt noticed that the news coming out of the financial markets has been getting progressively worse. For example, below are a few headlines from just the last two weeks:
- Gloom set to worsen as threat of spiral grows
- Little changing in prime brokerage
- US corporate bond spreads approach widest levels on record
- Kleinwort says diversified investment not as effective in crisis
- Citigroup to cut mortgage exposure by $45bln
- Bank of Canada sees more subprime losses globally
- US credit crisis worsens as Carlyle and Thornburg default on loans
- ZAIS asset-backed-debt fund halts redemptions
- Credit crunch: the winners and losers
I would like to suggest that the worst is behind us, that the recent liquidity enhancements offered by global regulators will stabilize the current imbalances and allow for the credit markets to return to normalcy. Unfortunately I don't believe we're there just yet.
While most savvy investors had their risk management systems in place, what most of us didn't realize was how interdependent our entire economic system has become when it comes to liquidity. When cities are no longer able to depend on the viability of auction markets to refinance their municipal bond structured products, liquidity matters. When banks are no longer willing to lend to each other, liquidity matters. And when the international investor begins to question the integrity of the financial markets, liquidity most certainly matters.
Leverage is a dual-edged sword. It's a wonderful return enhancer when credit is cheap and prices rise, but just as swift a destroyer of value when liquidity dries up and prices fall.
To date, we've witnessed the impact that the credit crunch has had on many of the world's largest financial institutions, but chances are very good that the liquidity drought has yet to fully play out in the hedge fund space. Those hedge funds that rely on leverage to maintain their positions have a very real chance of entering a vicious cycle of de-leveraging as banks pull back and access to credit dries up.
Witness the current conundrum faced by Carlyle Capital. As prices fall and credit lines shrink, others similarly exposed may face a similar fate. The result: still more de-leveraging. Given that hedge funds have long been seen as a source of liquidity, when hedge funds are de-leveraging, the overall liquidity problem only worsens.
In the absence of new buyers of structured mortgage debt (and who beyond perhaps the deep-pocketed sovereign wealth funds, if they were so inclined, might that be?), the financial authorities will have to tackle the valuation pressures brought on by a sellers-only market, or risk throwing good money after bad.
Allowing the security holders access to capital to fund their positions is certainly helpful, but this alone may not be enough to prevent a pricing "death-spiral". Without an accounting moratorium of sorts, prices will continue to fall until buyers and sellers are brought back into equilibrium.
As those familiar with the philosophy of the CAIA program know, we believe that the markets are only growing more intertwined; the products more complex. It is tempting to engage in finger pointing, and thus avoid the difficult task of understanding what has happened while preparing for the next wave of this storm.
However, whether we choose to blame the Central Banks for supplying the incendiary material in the form of cheap credit, or the financial institutions for marketing it through overly aggressive lending practices, or the rating agencies for failing to properly assess the risks, or even individuals for igniting the whole mess by overextending themselves, we will all feel the ramifications of this bubble burst for years to come.
This credit crunch maelstrom has given us some difficult lessons, and my hunch is that there are a few more yet to come.
Best regards,
E. Craig Asche
Executive Director
March 2008 Exam Notes
March 2008 Exams In Session
The March exams are now underway. We wish the best of luck to the over 3000 individuals who have registered for this exam cycle.
Grade Release Information
Grading will commence AFTER the examination window closes on March 21st. Please do not contact the Association for grades at this time. An announcement will appear on the homepage when grades are available. Examinees will also be notified via email.
Level I grades are expected to be released approximately two weeks from the last examination day. Level II, which includes essays, takes more time and these grades are generally available between four and five weeks after the last examination day.
For more information about the grading process, please visit the Grading FAQs.
Registration for the next exam period (September 08 - 19, 2008) opens April 1, 2008.
Alternative Viewpoints - powered by CAIA
"Liquidity Insurance", posted March 3 on AllAboutAlpha.com
Konstantin Danilov, CAIA
Bank of America
Liquidity is a topic that is brought up often in the wake of a financial crisis. The crash of 1987, LTCM, Amaranth, and the current sub-prime crisis are all examples of the devastating impact of illiquidity. Unfortunately, it is a factor that eludes the most risk management tools and risk/return models in modern financial theory. For example, Value-at-Risk (VAR) and "portfolio insurance" largely ignored illiquidity (or "assumed" it away) and we were left with the consequences.
However, illiquidity in a less extreme form affects market participants on a daily basis in the form of everyday transaction costs. Returns on a stock position that exist on paper can quickly disappear when a manager attempts to sell it to capture a profit, especially if the stock is thinly traded.
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.
Meet a CAIA Member
Gonzalo Alcalá-Galiano, CAIA
Analyst, Business Management, Global Treasury
Santander Global Banking & Markets
When listing the reasons for devoting so much time to industry education, investment professionals often cite the need for baseline credibility among their peers. While enhancing his knowledge of alternative investment strategies might have been a primary reason why Gonzalo Alcalá-Galiano, CAIA, registered for the Chartered Alternative Investment Analyst (CAIA) Program, he now views the recognition the CAIA designation affords him with his colleagues as a substantial benefit as well.
Staying abreast of the ever-changing dynamics of alternative investing is a formidable task, but for Mr. Alcalá-Galiano, a business management and global treasury analyst with Santander Global Banking & Markets in Madrid, Spain, it is a necessity. "In my job, I have to deal with a lot of people across a range of specialty areas," he said. "I work with traders, sales teams, structures, risk managers, and controllers who work across all types of asset classes from interest rates and equity to credit derivatives, commodities, and property derivatives." In working with professionals who are trained through securities analysis to be skeptical, it is not enough to have just a passing familiarity with the complex financial instruments that they utilize every day, according to Mr. Alcalá-Galiano. "Since our Treasury offers innovative solutions to our clients, I felt the need to expand my knowledge to better understand the risks and opportunities that are related to alternatives and, thus, to bring added value to my job."
The CAIA designation "clearly identifies your knowledge of the industry as well as your professionalism related to ethics," said Mr. Alcalá-Galiano. He believes the CAIA Program has made a positive impact on his career with its comprehensive focus on alternative investments. "It has been a very good educational experience, and the fact that you can obtain the designation in one year is one of the most valuable things."
Having earned the CAIA designation in October of 2007, Mr. Alcalá-Galiano now is hard at work with his colleagues in Madrid to form a local membership chapter of the CAIA Association. "Education is the only asset that you can keep forever in your own personal balance sheet," he said, "and in an industry that changes constantly, you need to have a good understanding of the basics and the drivers of the industry if you want to be innovative and provide ideas and solutions."
Emeric Uhring, CAIA
Product Specialist, Hedge Funds
Société Générale Asset Management
If you were to survey a population of CAIA Association members, you would find at least two distinct reasons why investment professionals initially registered for the CAIA Program. First, there are those who already had been working in the alternatives business and who were looking to earn recognition for their expertise. Second, there are those who were new to the alternatives business, who wished to develop a working knowledge of alternative investment strategies.
When Emeric Uhring, CAIA, first entered the world of alternative investments four years ago, he fell into the latter category. "When I joined Unigestion in 2004, its main activities were funds of funds, mainly hedge funds and private equity," he said. "I realized I needed a deeper insight of these strategies. With its comprehensive coverage of the alternative investment space, registering for the CAIA Program was a natural move for me."
Earning the CAIA designation in 2005, Mr. Uhring credits the background and understanding he cultivated in the CAIA Program as a major contributor to his subsequent success as a hedge fund specialist at Société Générale Asset Management in Paris. "The CAIA Program brought a thorough understanding of alternative strategies," he said. "It's hard to pin down a specific example as to what I apply in my job because the CAIA curriculum touches about every aspect of my current position."
For Mr. Uhring, this work includes "serving as a source of hedge fund expertise for SGAM's management and sales force, participating in the development of new products and corresponding marketing strategy, and working collaboratively with fund management teams."
As for what he found most difficult in the CAIA Program, Mr. Uhring points to the breadth of the material. "It's a real challenge to have to juggle different strategies, especially with real estate," he said. "The American approach to real estate is so different from the continental European approach that it was really the most exotic strategy to me."
For those considering the CAIA Program, Mr. Uhring strongly encourages it. "I see two compelling reasons," he said. "First, the quality of the curriculum, which was a natural complement to the designation I received from the Société Française des Analystes Financiers, which is a long-only focused training program with a strong basis in traditional investments. Second, is the recognition you receive from colleagues in the alternatives industry," which Mr. Uhring suggests will take on additional significance as awareness and understanding of the CAIA designation continues to spread across Europe and beyond.
Next Stop for CAIA Chapters?: The San Francisco Bay Area
Current CAIA LI and LII candidates are invited to join CAIA members in the San Francisco Bay Area at their first social event on March 25th. For more information about this event, or to register, click here.
March has been a very active month for CAIA chapters- in addition to the Bay Area social, members have hosted events in Madrid, Boston, and London and plans are under way for meetings in Canada, Switzerland, Singapore, New York, and Hong Kong over the next few months. With the recent addition of CAIA Chicago, we expect to double our chapters in 2008.
The enthusiasm from our members is building worldwide and we continue to look forward to great things from all of our current - and future - chapters.
CAIAA's Global Travel Schedule
CAIAA is excited to announce our travel schedule for the next few months. In 2008, we are focusing on cities with emerging AI markets as well as those where CAIAA has an established and active presence. Below are some of the locations we plan to visit this spring.
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2008 Spring Travel
Schedule
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May
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13th & 14th
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15th
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16th
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June
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2nd & 3rd
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4th-6th
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*Please note that these dates are subject to
change.
If you would like to schedule a private presentation for your firm to learn more about the CAIA program, please email us at events@caia.org.
Stay tuned for more exciting news as CAIAA continues to expand its global reach. We look forward to seeing you on the road!