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Describe key components of U.S. regulations affecting securities issued to the public (e.g.,
the ’40 Act, the U.S. Securities Act), including exemptions commonly applied to hedge funds

Recognize how variations in income tax conventions around the world affect investments and
investment decisions

Describe key components of European regulations affecting hedge funds (e.g., Undertakings
for Collective Investment in Transferable Securities [UCITS] directives, Markets in Financial
Instruments Directive [MiFID]), and recognize major European regulatory institutions

Demonstrate knowledge of liquid alternative investments.

Demonstrate knowledge of taxation of investments.

Describe key components of hedge fund regulations outside the United States and European
Union (e.g., Australia, Brazil, Canada, Japan, Singapore, South Africa, the United Arab
Emirates), and recognize major regulatory institutions in these regions

Describe the factors driving the growth of liquid alternative investments

Recognize regulatory constraints that affect liquid alternative investments

Chapter 3 -

Quantitative Foundations

Demonstrate knowledge of return and rate mathematics.

Define and calculate the IRR

Recognize complex cash flow patterns, and discuss their effect on the computation and
interpretation of IRRs

Define and apply return compounding

Recognize and apply the concept of forward contracts

Explain the distribution of cash waterfall provision of a limited partnership agreement

Define and apply the concepts of notional principal and full collateralization for forward
contracts

Define and calculate logarithmic returns

Discuss the challenges (e.g., scale differences) of comparing investments based on IRRs

Define and calculate the four types of IRR based on time periods for which cash flows are
available (i.e., lifetime, since inception, interim, and point-to-point) and their relationship to
valuation of alternative investments

Demonstrate knowledge of returns based on notional principal.

Demonstrate knowledge of the internal rate of return (IRR) approach to alternative investment analysis.

Discuss the difficulties of aggregating IRRs

Define and apply the return computation interval

Recognize terminology associated with the cash waterfall provision (e.g., carried interest,
hurdle rate, catch-up provision, vesting, clawback clause)

Discuss factors (e.g., management fees, incentive-based fees) to consider in a fund’s
compensation structure and the potential effects of decisions regarding compensation
structure

Aggregate returns over different time intervals

Discuss the reinvestment assumption inherent in the IRR and how it is addressed by the
modified IRR

Demonstrate knowledge of problems with the use of IRR in alternative investment analysis.

Demonstrate knowledge of the distribution of cash waterfall.

Compare and calculate time-weighted and dollar-weighted returns

Define and calculate arithmetic mean log returns and geometric mean returns

Calculate the log return to a fully collateralized derivatives position

Calculate the log return to a partially collateralized derivatives position

Discuss and calculate fund-as-a-whole carried interest and deal-by-deal carried interest

Define and apply clawback provisions

Compare and apply hard and soft hurdle rates and their sequences of distribution

Discuss the potential effects of incentive fees on decision-making, and their optionlike nature

Chapter 4 -

Statistical Foundations

Demonstrate knowledge of the characteristics of return distributions.

Recognize the importance of correlation in alternative investment portfolio management

Explain the first four raw moments of return distributions

Recognize ex ante and ex post return distributions

Define and explain return standard deviation (volatility)

Identify various measures used in time-series models (e.g., price levels, price variation, risk)

Recognize the three main reasons for non-normality observed in alternative investment returns
(i.e., autocorrelation, illiquidity, and nonlinearity), and discuss the effect of each on returns

Discuss tests for normality that use sample moments

Describe the properties of return variance and standard deviation

Recognize the importance of the normal distribution in statistical analysis

Explain the central moments of return distributions

Define and calculate covariance

Demonstrate knowledge of moments of return distributions (i.e., mean, variance, skewness, and kurtosis).

Demonstrate knowledge of various measures of correlation of returns.

Define and calculate correlation coefficient

Explain skewness of return distributions

Describe the characteristics of lognormal distributions

Calculate return variance and standard deviation

Define the concepts of heteroskedasticity and homoskedasticity

Recognize and apply the Jarque-Bera test

Recognize the key components of the generalized autoregressive conditional
heteroskedasticity (GARCH) method

Explain kurtosis and excess kurtosis of return distributions

Demonstrate knowledge of standard deviation (volatility) and variance.

Demonstrate knowledge of methods used to test for normality of distributions.

Describe the characteristics of platykurtic, mesokurtic, and leptokurtic distributions

Describe how the GARCH method is used to model risk evolution through time

Contrast the GARCH method with the autoregressive conditional heteroskedasticity (ARCH)
method

Demonstrate knowledge of time-series return volatility models.

Define and calculate the Spearman rank correlation coefficient

Discuss the role of correlation in portfolio diversification

Define and calculate beta in the context of the CAPM

Define and calculate autocorrelation

Define and apply the Durbin-Watson test

Chapter 5 -

Measures of Risk and Performance

Demonstrate knowledge of measures of financial risk.

Define and calculate semivariance and semistandard deviation

Apply a parametric approach to estimate VaR with normally distributed returns or with
normally distributed underlying factors

Define the risk-adjusted performance measure type

Define the ratio-based performance measure type

Define and calculate the Sharpe ratio

Recognize and calculate Jensen’s alpha, M2 (M-squared), and average tracking error

Describe methods for estimating volatility as an input for VaR calculations

Describe shortfall risk, target semivariance, and target semistandard deviation

Demonstrate knowledge of methods for estimating value at risk (VaR).

Demonstrate knowledge of ratio-based performance measures used in alternative investment analysis.

Describe methods for estimating VaR for leptokurtic positions

Define and calculate the Treynor ratio

Recognize and calculate the Sortino ratio, the information ratio, and return on VaR

Demonstrate knowledge of risk-adjusted performance measures used in alternative investment analysis.

Define the risk-adjusted performance measure type

Define and calculate tracking error

Describe and calculate drawdown

Define and interpret value at risk (VaR), and discuss its strengths and weaknesses as a risk
measure

Describe methods for estimating VaR directly from historical data

Describe how the Monte Carlo analysis can be used to estimate VaR

Define and interpret conditional value-at-risk (CVaR)

Discuss and apply the aggregation of portfolio-component VaRs to determine the VaR for a
portfolio under various assumptions (i.e., perfect correlation, zero correlation, and perfect
negative correlation)

Chapter 6 -

Foundations of Financial Economics

Demonstrate knowledge of the concept of informational market efficiency.

Define informational market efficiency

Describe the key characteristics of single-factor asset pricing models

Apply and interpret equations representing ex ante and ex post forms of multifactor asset
pricing models

Identify the two determinants of forward prices on a risky financial security

Describe arbitrage-free models

Recognize the key characteristics of long and short positions in an underlying asset

Recognize and describe the five most popular option sensitivities (i.e., delta, vega, theta, rho,
and gamma)

Recognize and apply the Black-Scholes call-option formula

Recognize and apply the Black forward option pricing model

Recognize the key characteristics of call and put exposures

Discuss applications of arbitrage-free models

Compare the pricing of forward contracts on financial securities and commodities

Distinguish between theoretically derived and empirically identified return factors

Recognize the capital asset pricing model (CAPM)

Recognize various forms of informational market efficiency

Demonstrate knowledge of single-factor asset pricing models and ex ante pricing.

Demonstrate knowledge of multifactor and empirical asset pricing models.

Describe the key characteristics of ex ante and ex post asset pricing models

Describe the steps typically involved in empirical modeling of returns

Apply the cost-of-carry model for pricing forward contracts on financial securities

Describe arbitrage-free pricing in spot markets

Discuss characteristics of option spreads

Recognize and apply the currency option pricing model

Define bull and bear spreads

Describe hedged and unhedged carry trades

Recognize the key components of the Fama-French and Fama-French-Carhart models, and
discuss the appropriate application of these models in alternative investing

Recognize the distinctions between ex ante asset pricing and ex post asset pricing

Discuss the differences between informational market efficiency in traditional and alternative
asset markets

Demonstrate knowledge of arbitrage-free financial models.

Demonstrate knowledge of the term structure of forward contracts.

Apply ex ante and ex post pricing in a single-factor framework

Discuss three key issues analysts should consider when using empirical multifactor models

Define forward contracts, and recognize their uses in hedging

Discuss option combinations

Discuss option sensitivities

Discuss the uses of option sensitivities in risk management

Define and apply the concept of put-call parity

Recognize and apply cost-of-carry models

Define systematic and idiosyncratic risk and return

Demonstrate knowledge of option exposures.

Demonstrate knowledge of option pricing models.

Discuss and apply binomial tree models

Demonstrate knowledge of option sensitivities.

Chapter 7 -

Benchmarking and Performance Attribution

Demonstrate knowledge of benchmarking and its role in the analysis of risk and return of investments.

Define benchmarking in the context of investing

Define normative and positive models, and compare their key characteristics

Recognize and describe multiperiod issues in CAPM analysis

Describe the characteristics of single-factor models

Demonstrate knowledge of various types of asset pricing models.

Demonstrate knowledge of various approaches to performance attribution.

Recognize and describe the limitations of CAPM analysis when applied to non-normal return
distributions in alternative investments

Define theoretical and empirical models, and compare their key characteristics

Recognize various types of benchmarks (i.e., peer returns and index returns)

Apply single-factor models to benchmarking

Demonstrate knowledge of the limitations of the CAPM approach for analysis of alternative investments.

Apply the concept of benchmarking

Define applied and abstract models, and compare their key characteristics

Describe the potential effect of illiquidity on returns of alternative investments

Interpret the results of single-factor benchmarking analysis

Discuss multifactor benchmarking

Describe the advantages and disadvantages of various types of models in the context of
alternative investments

Discuss considerations in benchmarking (appropriateness of the benchmark selected,
statistical significance of performance differences relative to a benchmark, reasons behind
performance differences relative to a benchmark)

Define cross-sectional and time-series approaches, and compare their key characteristics

Chapter 8 -

Alpha, Beta, and Hypothesis Testing

Demonstrate knowledge of beta and alpha.

Discuss the classification of assets into beta drivers and alpha drivers

Recognize the role of beta in the analysis of traditional and alternative investments

Define and apply the concept of ex ante alpha, and identify its key characteristics

Identify the steps involved in estimating ex ante alpha from historical performance

Calculate beta, ex ante, and ex post alpha

Recognize the characteristics of return persistence

Recognize the role of alpha in the analysis of traditional and alternative investments

Demonstrate knowledge of the concepts of ex ante and ex post alpha.

Demonstrate knowledge of empirical approaches to inferring ex ante alpha from ex post alpha.

Discuss the characteristics of beta drivers and their behavior over time

Recognize the three primary types of model misspecification (i.e., omitted systematic return
factors, misestimated betas, and nonlinear risk-return relationships) and their effects on return
attribution

Discuss challenges to empirical analysis of manager skill

Define and apply the concept of ex post alpha, and identify its key characteristics

Define abnormal return persistence

Demonstrate knowledge of return attribution.

Demonstrate knowledge of ex ante alpha estimation and return persistence.

Demonstrate knowledge of return drivers.

Discuss passive beta drivers as pure plays on beta

Distinguish between ex ante and ex post alpha

Describe various types of beta nonstationarity (i.e., beta creep, beta expansion, and market
timing) and their effects on return attribution

Discuss attribution of idiosyncratic returns to luck or skill

Demonstrate knowledge of statistical methods for locating alpha.

Demonstrate knowledge of sampling and testing problems.

Demonstrate knowledge of statistical issues in analyzing alpha and beta.

Discuss the characteristics of alpha drivers

Discuss how alpha and beta can become commingled

Discuss product innovators and process drivers

Identify the four steps of hypothesis testing (i.e., state the hypothesis, formulate an analysis
plan, analyze sample data, and interpret results)

Recognize the components of hypothesis statements (i.e., null hypothesis and alternative
hypothesis)

Describe the process of designing hypothesis tests

Describe the process of creating test statistics for use in analyzing sample data

Explain the decision-making process for rejecting or failing to reject the null hypothesis

Recognize the four common problems with using inferential statistics (i.e., misinterpretation
of high p-values, failure to distinguish between statistical significance and economic
significance, violation of distributional assumptions, and misinterpretation of level of
confidence)

Define and discuss type I and type II errors in hypothesis testing

Recognize the characteristics of unrepresentative data sets (e.g., selection bias, self-selection
bias, survivorship bias) and their effects on test results

Discuss data mining and data dredging, and recognize their effects on test results

Discuss backtesting and backfilling, and recognize their effects on test results

Discuss cherry-picking and chumming, and recognize their effects on test results

Recognize the effect of non-normality on the cross-sectional search for alpha

Identify the potential effects of outliers on reported results

Recognize issues involving biased testing in the search for alpha

Discuss the challenges of spurious correlation in beta estimation

Compare causality of values with true correlation of values

Recognize three major fallacies of alpha estimation and the lessons that arise from them

Recognize two major fallacies of beta estimation and the lessons that arise from them

Chapter 9 -

Regression, Multivariate, and Nonlinear Methods

Demonstrate knowledge of single-factor regression models.

Demonstrate knowledge of multifactor regression models.

Demonstrate knowledge of dynamic risk exposure models.

Demonstrate knowledge of methods for modeling changing correlation.

Demonstrate knowledge of approaches to analyzing hedge fund returns using multifactor models.

Demonstrate knowledge of estimating hedge fund performance persistence.

Discuss approaches to estimating hedge fund performance persistence

Recognize and describe the concept of conditional correlation

Describe the rolling window approach to modeling changing correlation

Describe the ex post version of the Fama-French model

Describe the problem that multicollinearity poses to multifactor regression analysis

Discuss the selection process of independent variables for multifactor regression analysis and
the potential shortcomings to the stepwise regression technique

Describe how style analysis and asset class groupings can be used to analyze fund
performance

Describe how performance of a fund can be analyzed using returns of funds with similar
strategies

Describe how marketwide factors can be used to analyze performance of a fund

Describe how specialized market factors can be used in hedge fund replication

Define nonlinear exposure

Discuss and apply the dummy variable approach to analyzing market-timing strategies

Discuss the separate regression approach to analyzing market-timing strategies

Discuss and apply the quadratic approach to analyzing market-timing strategies

Explain the use of ordinary least squares to estimate regression parameters

Describe the problem outliers pose to regression analysis

Describe the problem autocorrelation poses to regression analysis

Describe the problem heteroskedasticity poses to regression analysis

Interpret a regression’s goodness of fit

Evaluate the statistical significance of regression parameter estimates

Demonstrate knowledge of natural resources other than land.

Demonstrate knowledge of land as an alternative asset.

Demonstrate knowledge of timber and timberland as alternative assets.

Demonstrate knowledge of farmland as an alternative asset.

Demonstrate knowledge of valuation and volatility of real assets.

Demonstrate knowledge of historical performance of timber and farmland.

Recognize inferences that can be drawn from comparing definable characteristics of timber
and farmland investing with their historical stand-alone and portfolio performance

Discuss the smoothing of prices and returns

Determine the effect of smoothing on observed volatility

Describe how values and returns are managed

Discuss how appraisals contribute to smoothing of real asset prices

Compare smoothed returns with market returns

Discuss the characteristics of timber and timberland

Discuss the role of timberland investment management organizations (TIMOs)

Describe the risks and returns of timberland investments

Identify methods of timberland ownership

Discuss natural resources as an exchange option

Discuss the concept of moneyness as it pertains to the development of natural resources

Discuss why some in-the-money options should not be immediately exercised

Describe the relationship between the moneyness of natural resource options and short-term
financial risks

Discuss the characteristics of farmland investments

Calculate the value of farmland based on annual operating income and the cap rate

Discuss financial analysis of farmland investments

Discuss factors that affect farmland prices and returns

Describe farmland as a multiple use option

Identify methods of obtaining exposure to farmland

Define land banking

Describe the three types of land lots (i.e., paper lots, blue top lots, and finished lots)

Discuss investment in undeveloped land as a call option

Apply the binomial option pricing technique for valuing land as a call option

Describe the risks and returns of investing in land

Calculate the expected return of land investments

Chapter 11 -

Commodity Forward Pricing

Demonstrate knowledge of forward and futures contracts.

Demonstrate knowledge of the rolling futures positions.

Demonstrate knowledge of the term structure of forward prices on commodities.

Demonstrate knowledge of the concepts of backwardation, normal backwardation, contango, and normal contango.

Demonstrate knowledge of the characteristics of returns on futures and forward contracts.

Discuss futures and forward contracts as alpha and beta drivers

Define the law of one price

Describe the relationship between ex ante alpha and the shape of the term structure of
forward prices

Discuss informationally inefficient term structures of forward curves

Define and determine the basis of forward contracts

Describe calendar spreads, and discuss their risks and returns

Calculate returns to calendar spread positions

Define and compare backwardated markets and markets in contango

Discuss backwardation and contango in informationally efficient markets

Explain the process of maintaining long-term futures exposures through short-term futures
positions

Discuss the effects of rollover decisions on the returns of long-term futures exposures

Define and compare normal backwardation and normal contango

Discuss normal backwardation and normal contango in informationally efficient and
inefficient markets

Recognize the cost-of-carry model for commodity futures contracts

Calculate cost of carry for commodity futures contracts

Recognize arbitrage-free forward pricing for physical assets

Calculate arbitrage-free forward prices for physical assets

Recognize limitations to arbitrage-free forward pricing for physical assets

Discuss the effect of harvests, supply elasticity, and shifts in supply and demand on the term
structure of forward prices

Describe the trading differences between forward and futures contracts

Describe and apply the marking-to-market process for futures positions

Discuss the effect of marking-to-market on counterparty risk

Recognize the effect of marking-to-market and the time value of money on risk and prices

Define and calculate initial margin for futures positions

Define and calculate maintenance margin for futures positions

Chapter 12 -

Commodities: Applications and Evidence

Demonstrate knowledge of the diversification benefits of commodities.

Demonstrate knowledge of commodities as potential return enhancers.

Demonstrate knowledge of investing in commodities without futures.

Demonstrate knowledge of commodity investment through futures contracts.

Demonstrate knowledge of commodity indices.

Demonstrate knowledge of risks associated with commodity investments.

Demonstrate knowledge of the return characteristics of commodity investments.

Recognize inferences that can be drawn from comparing definable characteristics of
commodities with their historical investment performance

Discuss the process of construction of commodity futures indices

Discuss the characteristics of commodity indices given by S&P GSCI, BCOM, and CRB

Discuss the effect of event risk on returns from investments in commodities

Discuss the role of commodities as defensive investments

Discuss acceptance of commodity investments by institutional investors

Discuss potential return enhancement from idiosyncratic returns

Discuss potential return enhancement from systematic returns in efficient markets

Discuss potential return enhancement from systematic returns in inefficient markets

Discuss potential return enhancement from providing insurance through commodity futures

Explain the sources of potential diversification benefits offered by commodities

Discuss commodities in the context of equilibrium diversification

Discuss how market imperfections relate to determining allocations to commodities

Discuss commodities as a diversifier of inflation risk

Recognize characteristics of physical ownership of commodities

Recognize investments in commodities through related equity instruments

Recognize investments in commodities through exchange-traded funds (ETFs)

Recognize investments in commodities through commodity-linked notes

Apply option valuation methods to price commodity-linked notes

Recognize the basis risk and investments in commodities through futures contracts

Recognize the components of returns to futures positions (i.e., spot return, roll yield,
collateral yield, and excess return)

Describe roll yield for financial and physical commodity futures

Describe the two interpretations of rolling contracts

Relate roll yield to the slope of the forward curve

Discuss convergence and the relationship between futures and spot prices through time

Calculate the aggregated profit or loss for a futures position

Recognize rollover strategies and their effect on returns from futures investments

Recognize the three propositions regarding roll return

Chapter 13 -

Operationally Intensive Real Assets

Demonstrate knowledge of commodity producers.

Demonstrate knowledge of liquid alternative real assets.

Demonstrate knowledge of infrastructure as an alternative asset.

Demonstrate knowledge of intellectual property as an alternative asset.

Discuss the structure of master limited partnerships (MLPs) and characteristics of the MLP
sector

Identify the tax characteristics of MLPs

Discuss valuation of MLPs

Describe how commodity prices affect operating performance of firms that transform natural
resources into commodities

Describe the relationship between commodity prices and equity prices of commodityproducing
firms

Discuss intellectual property as an investment

Describe characteristics of intellectual property

Discuss the empirical evidence on the correlation between commodity prices and equity
prices of commodity-producing firms

Recognize the factors that contribute to returns of film projects

Define and apply the simplified model for valuing intellectual property

Recognize the seven characteristics that distinguish investable infrastructure from other assets

Contrast economic and social infrastructure

Discuss the influence of government on infrastructure investments

Describe investment vehicles for investing in infrastructure

Discuss the risks and rewards of infrastructure investments

Chapter 14 -

Liquid and Fixed-Income Real Estate

Demonstrate knowledge of real estate as an investment.

Demonstrate knowledge of residential mortgages in the context of alternative investments.

Demonstrate knowledge of commercial mortgages in the context of alternative investments.

Demonstrate knowledge of mortgage-backed securities.

Demonstrate knowledge of real estate investment trusts (REITs).

Demonstrate knowledge of historical performance of mortgage REITs.

Recognize inferences that can be drawn from comparing definable characteristics of
mortgage REITs with their historical stand-alone and portfolio performance

Describe characteristics of commercial mortgages

Identify, describe, and apply financial ratios (i.e., loan-to-value ratio, interest coverage ratio,
debt service coverage ratio, and fixed charges ratio) employed in the analysis of commercial
mortgages

Define a real estate investment trust (REIT)

List the key advantages of REITs

Discuss potential disadvantages of REITs as well as their main income restrictions

List five common attributes of real estate that encourage its inclusion in investment portfolios

Discuss heterogeneity, lumpiness, and illiquidity of real estate

Discuss and contrast core, value-added, and opportunistic real estate investment styles

Discuss residential mortgages and their prepayment options

Discuss and apply methods of measuring unscheduled prepayment rates

Describe and apply conditional prepayment rates (CPRs) and the resulting Public Securities
Association (PSA) benchmark

List prepayment factors not associated with changing interest rates

Identify and describe commercial mortgage-backed securities, and compare and contrast them
with residential mortgage-backed securities

Define mortgages, and differentiate between fixed- and variable-rate mortgages

Describe characteristics of fixed-rate mortgages, including amortization

Recognize the determinants of the monthly payment on a mortgage loan

Calculate monthly payments for fixed-rate and variable-rate mortgages

Calculate the outstanding mortgage balance

Describe the prepayment option embedded in fixed-rate mortgages

Describe characteristics of interest-only mortgages

Identify and apply the formula for valuation of interest-only mortgages

Describe characteristics of variable-rate mortgages

Identify and apply the formula for valuation of variable-rate mortgages

Describe other variations of mortgages

Calculate the monthly payments for a mortgage with a balloon payment

Describe default risk for residential mortgages

Chapter 15 -

Real Estate Equity Investments

Demonstrate knowledge of real estate development in the context of alternative investments.

Recognize inferences that can be drawn from comparing definable characteristics of equity
REITs with their historical stand-alone and portfolio performance

Demonstrate knowledge of valuation and risks of real estate equity.

Demonstrate knowledge of alternative real estate investment vehicles.

Describe and apply various methods of depreciation of real estate (i.e., without income
taxation, with depreciation disallowed for tax purposes, with economic depreciation allowed
for tax purposes, with accelerated depreciation allowed for tax purposes, and with expensing
of capital expenditures for tax purposes) in the analysis of returns

Demonstrate knowledge of depreciation of real estate.

Demonstrate knowledge of real estate equity risks and returns as represented by real estate indices.

Discuss real estate indices based on appraisals

Identify and describe data smoothing and its major effects

Demonstrate knowledge of historical performance of equity REITs.

Discuss real estate indices based on adjusted privately traded prices

Discuss real estate indices based on market prices

Recognize and apply the discounted cash flow approach (i.e., income approach) to valuing
real estate, including the calculation of net operating income and the discount rate

Discuss the use of comparable sale prices for valuing real estate

Describe the processes of developing real estate

Describe the valuing of real estate development as a string of real options

Apply a decision tree and backward induction to value real estate development projects

Identify and describe private equity real estate funds

Identify and describe commingled real estate funds

Identify and describe syndications

Identify and describe joint ventures

Describe limited partnerships, and apply the concepts of gearing and loan-to-value (LTV)
ratios

Identify and describe open-end real estate mutual funds

Discuss options and futures on real estate indices

Identify and describe exchange-traded funds based on real estate indices

Identify and describe closed-end real estate mutual funds

Demonstrate knowledge of the distinguishing features of hedge funds and their growth and concentration over time.

Identify and describe the three primary elements of hedge funds

Recognize typical hedge fund fee arrangements

Identify and describe equity strategies

List hedge fund strategies

Identify and explain the parameters that may be used in a hedge fund investment program

Describe hedge fund indices

Discuss the evidence regarding the market impact of hedge funds during the Asian currency
crisis of 1997

Discuss the evidence regarding the market impact of hedge funds during the crisis of 2007

Describe the challenges caused by management and incentive fees in constructing hedge fund
indices

Discuss three caveats that relate to the documented hedge fund investment performance and
diversification benefits

Contrast single-manager hedge funds, funds of funds, and multistrategy funds

Identify and describe event-driven and relative value strategies

Calculate annual hedge fund fees

Recognize the six investment flexibilities offered by hedge funds

Demonstrate knowledge of hedge fund fees.

Demonstrate knowledge of various types of hedge funds.

Discuss the reasons for hedge fund industry growth and concentration

Describe and apply high-water marks (HWMs) and hurdle rates

Identify and describe absolute return strategies

Describe the characteristics and potential benefits of opportunistic hedge fund investing

Recognize the challenges of including managed futures in hedge fund indices

Compare asset-weighted hedge fund indices and equally weighted hedge fund indices

Identify and describe diversified strategies

Discuss the potential effects of incentive fees on hedge fund manager behavior

Recognize events that led to the trend of consolidation within the hedge fund industry

Demonstrate knowledge of various hedge fund strategies.

Demonstrate knowledge of hedge fund investment programs.

Recognize and apply the annuity view of hedge fund fees

Discuss the role of the size of the hedge fund universe in the construction of a hedge fund
index

Recognize the concepts of representativeness and data biases (e.g., survivorship, selection,
instant history, liquidation) and their effects on hedge fund returns reported by databases

Recognize and apply the option view of incentive fees and its implications on manager
behavior

Demonstrate knowledge of the market impact of hedge funds.

Demonstrate knowledge of hedge fund indices.

Describe the empirical evidence regarding hedge fund fees and managerial behavior

Recognize the challenges involved in defining hedge fund strategies, and the effect of style
drift

Identify issues that determine investability of hedge fund indices

Chapter 17 -

Macro and Managed Futures Funds

Demonstrate knowledge of major distinctions within the category of macro and managed futures funds.

Distinguish between discretionary fund trading and systematic fund trading

Describe the key characteristics of global macro funds

Recognize inferences that can be drawn from comparing definable characteristics of macro
investing with its historical stand-alone and portfolio performance

Describe the key characteristics of managed futures funds

Describe the characteristics of trend-following strategies

Identify methods for and issues involved in deriving systematic trading rules

Discuss empirical evidence regarding managed futures returns and the downside risk
protection offered by managed futures

Recognize inferences that can be drawn from comparing definable characteristics of managed
futures and macro investing with their historical stand-alone and portfolio performance

Describe the reasons why managed futures might provide superior returns

Recognize key questions to ask when evaluating individual trading strategies

Define and apply simple moving averages, weighted moving averages, and exponential
moving averages

Discuss regulation, background, and organizational structures (i.e., public commodity pools,
private commodity pools, and individually managed accounts) of the managed futures industry

Be familiar with examples that illustrate the foundation of global macro trading strategies

Define technical analysis and fundamental analysis, and discuss the reasons for pursuing each

Demonstrate knowledge of global macro funds.

Demonstrate knowledge of the historical performance of macro investing.

Recognize the main risks (i.e., market, event, and leverage) of macro investing

Define and apply breakout trading rules

Describe key components of methods used to validate systematic trading rules and the
detection and effects of trading rule degradation

Describe the risks of managed futures funds

List the conclusions of research on the nature and efficacy of trend-following strategies

Demonstrate knowledge of managed futures.

Demonstrate knowledge of systematic trading.

Identify non-trend-following strategies and their trading signals

Describe the characteristics of relative value strategies

Demonstrate knowledge of systematic trading strategies.

Demonstrate knowledge of empirical research on managed futures.

Demonstrate knowledge of historical performance of managed futures and macro funds.

Chapter 18 -

Event-Driven Hedge Funds

Demonstrate knowledge of the sources of event-driven strategy returns.

Define activist investing, and identify the components of activist investment strategies

Distinguish between distressed debt strategies in hedge funds and in private equity

Recognize the characteristics of merger arbitrage

Describe key characteristics of event-driven multistrategy funds

Explain the insurance selling view of event-driven strategy returns

Explain and apply the binary option view of event-driven strategy returns

Recognize inferences that can be drawn from comparing definable characteristics of eventdriven
multistrategy funds with their historical stand-alone and portfolio performance

Recognize the characteristics of stock-for-stock mergers

Identify key components of the bankruptcy process

Identify the various roles in corporate governance

Demonstrate knowledge of activist investing.

Demonstrate knowledge of merger arbitrage.

Identify the five dimensions of shareholder activists and the key players in financial activism

Define a naked option position

Discuss and apply traditional merger arbitrage to stock-for-stock mergers

Discuss the effects of third-party bidders and bidding wars on merger arbitrage

Describe the risks and returns of short sales of distressed equities

Discuss agency costs and the conflicts of interest between shareholders and managers

Demonstrate knowledge of distressed securities hedge funds.

Demonstrate knowledge of event-driven multistrategy funds.

Recognize and discuss approaches commonly used by activist investors to generate alpha

Determine the effect of recovery values on annualized returns for a strategy of buying
undervalued debt during the bankruptcy process

Describe regulatory risk in the context of merger arbitrage

Describe financing risk in the context of merger arbitrage

Recognize activist approaches to investing in distressed securities

Recognize inferences that can be drawn from three types of activist agendas, comparing
definable characteristics of activist investing with its historical stand-alone and portfolio
performance

Describe the characteristics of capital structure arbitrage

Recognize inferences that can be drawn from comparing definable characteristics of merger
arbitrage with its historical stand-alone and portfolio performance

Explain the strategy of buying distressed firms using distressed securities

Recognize inferences that can be drawn from comparing definable characteristics of
distressed securities funds with their historical stand-alone and portfolio performance

Chapter 19 -

Relative Value Hedge Funds

Demonstrate knowledge of relative value strategies.

Define and describe the classic convertible bond arbitrage trade

Recognize the relative value strategy, and list four styles of relative value hedge funds

Discuss duration neutrality, leverage, and liquidity in the context of fixed-income arbitrage

Define and describe the concepts of vega and anticipated volatility

Describe key characteristics of relative value multistrategy funds, and recognize inferences
that can be drawn from comparing definable characteristics of relative value multistrategy
funds with their historical stand-alone and portfolio performance

Recognize instruments used by volatility arbitrage funds

Recognize types and characteristics of fixed-income arbitrage strategies

Describe the classic relative value strategy trade

Define convertible bonds, and apply the unbundling approach for pricing convertible bonds

Demonstrate knowledge of convertible bond arbitrage.

Demonstrate knowledge of volatility arbitrage.

Define busted, hybrid, and equity-like convertibles

Discuss the risks and returns of sovereign debt in fixed-income arbitrage strategies, and apply
the concept of modified duration to bond returns and volatility

Identify and apply the approach for determining the final payoff of a variance swap and a
volatility swap

Compare the risks of exchange-traded derivatives and over-the-counter (OTC) derivatives

Recognize the characteristics of asset-backed and mortgage-backed securities strategies

Define, describe, and apply the concept of delta

Demonstrate knowledge of fixed-income arbitrage.

Demonstrate knowledge of relative value multistrategy funds.

Define and describe the concept of gamma and theta

Discuss and determine the effects of prepayment risk and option-adjusted spreads on assetbacked
and mortgage-backed securities strategies

Recognize the types of volatility arbitrage strategies

Discuss the characteristics of market-neutral volatility funds

Analyze the risks of asset-backed and mortgage-backed securities arbitrage

Explain and determine the effects of gamma and volatility on the profitability of a deltaneutral
position

Discuss short selling in the context of convertible arbitrage

Recognize inferences that can be drawn from comparing definable characteristics of fixedincome
arbitrage with its historical stand-alone and portfolio performance

Recognize the challenges of estimating and forecasting dispersion

Discuss the characteristics of tail risk strategies and how their performance depends on
correlation among assets

Recognize the role complexity plays in making convertible bond arbitrage attractive to some
hedge fund managers

Identify the four reasons that issuers may continue to offer convertible bonds at attractive
prices

Discuss the characteristics of dispersion trades

Recognize inferences that can be drawn from comparing definable characteristics of volatility
arbitrage funds with their historical stand-alone and portfolio performance

Identify the components of convertible arbitrage returns

Recognize and discuss return drivers and risks of convertible bond arbitrage

Recognize inferences that can be drawn from comparing definable characteristics of
convertible arbitrage funds with their historical stand-alone and portfolio performance

Chapter 20 -

Equity Hedge Funds

Demonstrate knowledge of sources of return for equity hedge funds.

Describe the general design of an equity hedge strategy

Discuss how market efficiency tests are tests of joint hypotheses

Calculate and interpret the key components (i.e., breadth and the information coefficient) of
the FLOAM

Recognize methods for integrating anomalies using factor models

Recognize the mechanics of short selling

List major types of risk associated with equity hedge funds

Describe the key characteristics of short-bias hedge funds

Define pairs trading, and describe the steps involved in constructing the portfolio

Describe and determine how the FLOAM can be used to understand changes in the
information ratio

Identify issues involved in predicting persistence of market anomalies

Discuss providing liquidity as a source of return for equity hedge funds

Demonstrate knowledge of market anomalies.

Demonstrate knowledge of the Fundamental Law of Active Management (FLOAM).

Discuss providing informational efficiency as a source of return for equity hedge funds

Describe and apply accounting accruals as potential predictors of ex ante alpha

Recognize trade-offs involved in changing or maintaining the information ratio

Discuss the effect of short selling on reducing risk and increasing alpha

Recognize inferences that can be drawn from comparing definable characteristics of shortbias
hedge funds with their historical stand-alone and portfolio performance

Describe the key characteristics of equity long/short hedge funds

Describe the limits to arbitrage and their effect on market efficiency and investment strategies

Define nonactive bets, and recognize their role in the FLOAM

Define price momentum, and recognize its potential role in generating ex ante alpha

Discuss the process of using factor analysis to enhance returns for equity hedge funds

Demonstrate knowledge of approaches to implementing anomaly strategies.

Demonstrate knowledge of the three major strategies of equity hedge funds.

Define earnings momentum, and recognize its potential role in generating ex ante alpha

Recognize inferences that can be drawn from comparing definable characteristics of equity
long/short hedge funds with their historical stand-alone and portfolio performance

Describe the key characteristics of equity market-neutral hedge funds

Define net stock issuance, and recognize its potential role in generating ex ante alpha

Demonstrate knowledge of risk associated with equity hedge funds.

Define insider trading, and recognize its potential role in generating ex ante alpha

Recognize inferences that can be drawn from comparing definable characteristics of equity
market-neutral hedge funds with their historical stand-alone and portfolio performance

Chapter 21 -

Funds of Hedge Funds

Define funds of hedge funds

Demonstrate knowledge of the benefits and costs of diversification in hedge fund investing.

Identify advantages that funds of funds have over direct hedge fund investments

Evaluate and determine fee-related advantages of multistrategy funds

Contrast the fees associated with a fund of funds with those of a portfolio of single hedge
funds

Contrast liquid alternatives with a private alternative investment vehicle, such as hedge funds,
CTAs, and funds of funds

Recognize inferences that can be drawn from comparing definable characteristics of marketdefensive
funds of funds with their historical stand-alone and portfolio performance

Recognize inferences that can be drawn from comparing definable characteristics of
conservative funds of funds with their historical stand-alone and portfolio performance

Discuss areas where UCITS regulation is more strict than that for private placements

Discuss costs associated with hedge fund due diligence and minimum investment sizes

Evaluate flexibility and transparency in the context of multistrategy funds

Discuss empirical evidence regarding fund of funds returns and the potential for reduced
biases in reported performance

Demonstrate knowledge of investing in multistrategy funds.

Recognize how indices can serve as valuable tools in constructing hedge fund portfolios and
analyzing portfolio performance

Describe the functions of funds of hedge funds

Demonstrate knowledge of the process of investing in funds of hedge funds.

Recognize the varying investment objectives of funds of hedge funds

Evaluate potential advantages related to manager selection and operational risk management
by funds of funds

Discuss restrictions on ’40 Act funds

Recognize inferences that can be drawn from comparing definable characteristics of strategic
funds of funds with their historical stand-alone and portfolio performance

Recognize inferences that can be drawn from comparing definable characteristics of
diversified funds of funds with their historical stand-alone and portfolio performance

Compare and contrast relative value hedge funds, event-driven hedge funds, and macro and
managed futures funds in the context of the regulatory framework for liquid alternative
investments

Describe how funds of funds can act as venture capitalists

Demonstrate knowledge of building a portfolio of single hedge funds.

List the benefits to investing in funds of hedge funds

List the disadvantages to investing in funds of hedge funds

Demonstrate knowledge of multialternatives and other hedge fund liquid alternatives.

Discuss why multialternatives are popular as liquid alternatives

Discuss empirical evidence regarding historical returns of liquid alternatives

Demonstrate knowledge of historical performance of funds of hedge funds.

Evaluate how funds of hedge funds add value

Discuss and determine the relationship between the number of funds in a portfolio and the
level of diversification

Describe the process for identifying funds for an institutional portfolio or a fund of funds

Demonstrate knowledge of private equity terminology.

Recognize characteristics of venture capital and its role in business start-ups

Describe mezzanine debt, and explain why it is considered a type of private equity investment

Discuss secondary markets in the context of private equity

Describe business development companies (BDCs)

Recognize the structure of private equity funds and investments

Explain the roles of various entities involved in private equity investments

Calculate the premium (or discount) of closed-end fund prices

Describe private investment in public equity (PIPE), and compare it to other private equity
investments

Discuss distressed debt securities in the context of private equity investing

Discuss the prudent person standard in the context of venture capital

Demonstrate knowledge of the major forms of private equity investments that involve direct ownership of equity claims.

Demonstrate knowledge of the major forms of private equity that involve direct ownership of debt securities.

Recognize characteristics of buyouts and the role of debt in these transactions

Discuss the growth of the distressed debt marketplace

Recognize advantages that PIPEs offer investors

Recognize the effect of illiquidity on closed-end fund pricing

Discuss the diversification and return-enhancement potential of liquid private equity pools

Recognize and compare various types of PIPEs

Explain various types of debt covenants

Recognize characteristics of merchant banking and the benefits it offers financial institutions

Demonstrate knowledge of liquid alternatives in the private equity sector.

Demonstrate knowledge of trends and innovations in private equity markets.

Discuss leveraged loans in the context of private equity investing

Discuss hedge fund participation in private equity

Discuss other liquid investments in private equity

Contrast private equity funds and hedge funds

Discuss the growth of leveraged loans

Chapter 23 -

Equity Types of Private Equity

Demonstrate knowledge of the relationships between venture capital and leveraged buyouts.

Recognize the role of venture capital and leveraged buyouts as sources of funding for
corporations through their life cycle

Recognize characteristics of businesses underlying venture capital investment

Describe the main risks of venture capital investments (i.e., business risk, liquidity risk, and
idiosyncratic risk)

Define a venture capital fund

Describe the stages of the life cycle of venture capital funds and portfolio companies

Describe the structure of LBO funds and the role of various entities involved in LBO
transactions

Distinguish leveraged buyouts (LBOs) from traditional investments

Describe a management buyout (MBO)

Describe typical LBO fund fee structures

Explain the importance of financing stages in distinguishing among various venture capital
funds

Recognize how venture capital fund managers raise capital

Describe return persistence and vintage-year diversification as keys to successful venture
capital investment

List the types of securities used in venture capital

Demonstrate knowledge of the underlying businesses (portfolio companies) of venture capital.

Demonstrate knowledge of venture capital funds.

Explain why venture capital investing is similar to purchasing a call option

Recognize inferences that can be drawn from comparing definable characteristics of venture
capital investments with their historical stand-alone and portfolio performances

Recognize the terms of the partnership agreement of venture capital funds

Explain the compound option that is embedded in most venture capital investments

Calculate LBO fees

Contrast a management buy-in (MBI) with a buy-in management buyout, and describe the
agency issues of buyouts

Describe agency relationships, their associated costs, and their role as a potential source of
return to LBO transactions

Discuss the concept of the J-curve in the context of a start-up company

Describe typical venture capital fund fee structures

Describe the role of business plans and exit plans in venture capital investment

Demonstrate knowledge of the dynamics of investing in venture capital.

Demonstrate knowledge of the risk and return characteristics of venture capital investments.

Calculate venture capital fund fees

Describe general categories of LBO transactions and how they create value

Discuss the characteristics of portfolio companies of LBO funds

Demonstrate knowledge of types of buyout transactions.

Demonstrate knowledge of leveraged buyout (LBO) transactions.

Explain the appeal of a leveraged buyout to managers and investors of the target firm

Describe the call-option characteristics embedded in potential payouts of a leveraged buyout

Apply the constant growth model to the valuation of a leveraged buyout investment

Describe typical exit strategies of LBOs

Describe the concept of spillover of corporate governance to the public markets

Explain auction markets and club deals as alternatives to the single-sourced approach to
funding LBO transactions

Discuss why LBO funds tend to have less risk than venture capital funds

Chapter 24 -

Debt Types of Private Equity

Demonstrate knowledge of mezzanine debt.

Describe characteristics of mezzanine debt, including typical exit strategies

Recognize characteristics of distressed debt

Discuss the supply of distressed debt

Analyze how mezzanine debt affects company cost of capital

Demonstrate knowledge of distressed debt as a form of private equity investment.

Calculate the weighted average cost of capital of capital structures that include mezzanine
debt

Discuss the demand for distressed debt

Describe the three typical approaches to distressed debt investment

Compare and contrast mezzanine debt to leveraged loans and high-yield bonds

Describe seven typical examples of transactions that use mezzanine debt

Describe two major types of corporate bankruptcy processes

Identify the various terms and standards that relate to bankruptcy processes

Describe types of mezzanine debt investors, and recognize their motivations

Identify and describe eight characteristics that distinguish mezzanine debt from other types of
financing

Discuss business risk in the context of distressed debt investing

Discuss the relationship between financial structuring and the capital structure of the
corporate form of a business organization

Describe the capital structure of a typical business enterprise

State the primary direct motivation of the issuer

Describe the primary difference between CMOs and other investment pools

Recognize the optionlike nature of structured cash flows

Define and explain various tranches of a CDO

Discuss attachment points and detachment points

Recognize the intuition of Merton’s structural model

Describe sequential-pay CMOs

Discuss how market completion is a motivation for structuring

Explain how structured products can be used to design a hedge

Demonstrate knowledge of the major types of structuring.

Demonstrate knowledge of the primary economic role of structuring.

Explain the idea behind tranches

Define state of the world

Calculate cash flows to the tranches of a sequential-pay CMO

Apply the call-option and put-option views of capital structure

Calculate cash flows to different tranches of a CDO in the case of defaults of the underlying
instruments

Define a bull call spread and a bull put spread

Discuss the inherent conflict of interest between stockholders and bondholders

Define extension and contraction risk

Discuss how structured products are market completers

Discuss two examples of tailoring structured products

Demonstrate knowledge of collateralized mortgage obligations (CMOs).

Demonstrate knowledge of the structural approach to credit risk modeling.

Identify and describe other types of CMO structures and tranches (i.e., planned amortization
class, targeted amortization class, principal-only, and floating rate)

Define and apply put-call parity

Explain the relationship between option spreads, mezzanine tranches, and other tranches

Describe how the Black-Scholes option pricing model can be used to estimate the value of
debt that contains credit risk

List the two motivations for structured mortgage products

Demonstrate knowledge of the concept of structuring cash flows using collateralized debt obligations (CDO).

Discuss how interest rates and prepayments impact the valuation of a CMO

Discuss binomial tree models as an alternative to the Black-Scholes option pricing model

Discuss advantages and disadvantages of structural credit risk models

Discuss the role of CMOs in the financial crises of 1994 and 2004

Describe commercial CMOs and their default risk

Chapter 26 -

Credit Risk and Credit Derivatives

Demonstrate knowledge of credit risk.

List and discuss the three economic roles of credit derivatives

Compare and contrast credit default swaps and total return swaps

Explain the underpinnings of credit risk

Identify the difference between structural models and reduced-form models

Describe credit default swap index products

Discuss the risks of excessive credit exposure using off-balance-sheet derivatives, pricing risk
of over-the-counter derivatives, and liquidity risk of over-the-counter derivatives

Contrast credit default swaps and credit options

Recognize the terminology of credit options

Discuss the counterparty risk of over-the-counter credit default swaps and the basis risk of
credit default swaps

Define the three factors that determine the expected credit loss of a credit exposure

Discuss the standard ISDA agreement as a template for negotiated credit agreements

Recognize the three major methods for grouping credit derivatives

Demonstrate knowledge of approaches to credit risk modeling.

Demonstrate knowledge of credit derivatives markets.

Describe the four stages of the evolution of credit derivative activity

Explain and apply the mechanics of credit default swaps

Calculate expected credit loss

Explain the credit put option on a bond

Explain call options on credit default swaps

Describe two key characteristics of the risk-neutral modeling approach

Explain the mark-to-market adjustment when valuing credit default swap contracts

Demonstrate knowledge of credit default swaps.

Demonstrate knowledge of credit options and credit-linked notes.

Explain three methods for unwinding credit default swap transactions

Define risk-neutral probability

Describe credit-linked notes

Describe and apply the risk-neutral approach to pricing risky debt

Recognize typical credit default swap market participants and their swap transactions

Demonstrate knowledge of credit default swap indices.

Demonstrate knowledge of the five key risks of credit derivatives.

Identify and explain five typical motivations for using credit default swaps

Apply the risk-neutral approach to estimating credit spreads

Explain what it means to calibrate a model

List the advantages and disadvantages of the reduced-form model

Compare structural and reduced-form credit risk models

Chapter 27 -

CDO Structuring of Credit Risk

Discuss the purposes and attributes of balance sheet CDOs

Demonstrate knowledge of collateralized debt obligations (CDOs).

Identify the three direct financial motivations for a manager of an arbitrage CDO

Compare and contrast cash-funded CDOs and synthetic CDOs

Describe the history of CDOs

Describe the characteristics of cash flow CDOs

Recognize the risk of the underlying collateral

Define and discuss subordination as an internal credit enhancement

Describe distressed debt CDOs

Describe hedge fund CDOs

Discuss and apply overcollateralization

Recognize the financial engineering risk

Describe the characteristics of market value CDOs

Describe the general structure and life cycle of a CDO

Explain how a cash-funded CDO can be used to reduce required regulatory capital

Demonstrate knowledge of balance sheet CDOs and arbitrage CDOs.

Discuss the purposes and attributes of arbitrage CDOs

Describe and apply a typical arbitrage CDO structure

Demonstrate knowledge of the mechanics of and motivations for arbitrage CDOs.

Apply a typical cash-funded CDO structure

Explain the terminology and details of CDOs

Discuss the implications of high correlations among the underlying assets

Describe excess spread as an internal credit enhancement

Describe single-tranche CDOs

Discuss reserve accounts as a credit enhancement

Define risk shifting, and discuss its implications for CDOs

Describe the characteristics of synthetic CDOs

Demonstrate knowledge of cash-funded CDOs and synthetic CDOs.

Analyze the cash flows in a typical arbitrage CDO structure

Demonstrate knowledge of cash flow and market value CDOs.

Describe how CDO credit risk can be modeled

Describe external credit enhancements to CDOs

Demonstrate knowledge of credit risk and enhancement of CDOs

Demonstrate knowledge of new developments in CDOs.

Demonstrate knowledge of the risks of CDOs.

Chapter 28 -

Equity-Linked Structured Products

Describe equity-linked structured products

Compare and contrast simple options and exotic options

Demonstrate knowledge of structured products and types of wrappers.

Describe the tax effects of wrappers

Discuss the example of a U.S.-based structured product with multiple kinks

Identify the PDE approach to the pricing of structured products

Identify investor motivations for including structured products in a portfolio

Discuss tax-related motivations for investors

Discuss the advantages of the simulation approach over the PDE approach

Discuss the example of a France-based structured product with floors

Apply the equations in the chapter to demonstrate the tax effects of wrappers

Demonstrate knowledge of potential tax effects of wrappers.

Explain principal protected structured products

List distinguishing features of equity-linked structured products

Define a wrapper

Define the participation rate

Demonstrate knowledge of structured products with exotic option features.

Discuss the example of a German-based structured product with leverage

Contrast the PDE approach and the building blocks approach

Discuss the motivations of issuers of structured products

Explain the two principles of payoff diagram shapes and levels

Discuss the example of a U.K.-based absolute return structured product

Demonstrate knowledge of examples of global structured products.

Illustrate how a cash-and-call strategy is related to put-call parity

Describe the six types of wrappers

Identify path-dependent options and binary options

Demonstrate knowledge of structured product pricing.

Discuss the example of a Swiss-based absolute return structured product

Discuss the evidence on structured product prices

Discuss the example of a Japan-based structured product based on multiple currencies

Demonstrate knowledge of motivations of structured products.

Describe and apply barrier, knock-in, and active options

Describe the characteristics of in versus out and up versus down barrier options

Explain the advantages and disadvantages of liquid structured products

Define spread options and look-back options

Define a quanto option

Topic 7:

Risk Management and Portfolio Management moremoreless

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Chapter 29 -

Cases in Tail Events

Demonstrate knowledge of the effect of market forces in generating hedge fund losses..

Discuss the collapse of Amaranth Advisors, LLC; the due diligence issues related to it; and
lessons learned from the case

Discuss how the unwind hypothesis and crowded trades explain the Quant Meltdown of
August 2007.

Discuss the case of Bayou Management, the due diligence issues related to it, and lessons
learned from it

Discuss the lessons that emerge from the analysis of various types of hedge fund failures

Discuss the case of Bernie Madoff, the due diligence issues related to it, and lessons learned
from it

Discuss how a circuit breaker can help prevent a flash crash.

Discuss the collapse of Long-Term Capital Management (LTCM), the due diligence issues
related to it, and lessons learned from the case

Demonstrate knowledge of the impact of trading technologies in financial crises.

Demonstrate knowledge of major fund failures caused by fraud.

Discuss the collapse of Carlyle Capital Corporation, the due diligence issues related to it, and
lessons learned from the case

Discuss how technical issues at one large market participant can impact the financial markets

Discuss the case of Lancer Group, the due diligence issues related to it, and lessons learned
from it

Discuss the link between declining investment opportunities and use of leverage

Demonstrate knowledge of four major lessons from analysis of fund failures.

Apply the concepts of return on equity, return on assets, and leverage to evaluate levered
investment situations

Identify and describe behavioral biases and their potential effects on risk taking

Chapter 30 -

Investment Process, Operations, and Risk

Demonstrate knowledge of investment strategy and process.

Contrast the general and narrower definitions of market risk

Define investment activities

Discuss the two interpretations of operational risk

Describe how put-call parity can be applied to hedge a position

Explain how incentives can increase operational risk

Contrast a fund’s stated investment strategy and actual investment strategy

Contrast style drift with operational errors and fraud

Discuss how internal control procedures can detect and reduce operational risk

Discuss how option sensitivities can be used to analyze and hedge a position or portfolio

Identify and describe operational errors

Define operational activities

Discuss the causes of investment process risk and how it’s detected

Demonstrate knowledge of investment process and market risk.

Demonstrate knowledge of the three internal fund activities.

Describe the relationship between investment process risk and leverage

Define business activities

Identify and describe types of agency conflicts

Discuss how options can be used as a bet on volatility

Explain the importance of valuation procedures and independence in the valuation process

Describe the components and stages of the investment process

Define custody, and explain how it relates to operational risk

Identify and describe operational fraud

Discuss how these three internal fund activities impact a fund in combination

Describe how style drift relates to investment process risk

Demonstrate knowledge of operational risk.

Demonstrate knowledge of methods for controlling the operational risk of an investment.

Discuss potential interactions of market risk with other investment risks

Identify and describe the concept of fund culture and how it affects operational risk

Demonstrate knowledge of methods for controlling the risk of portfolios with options.

Chapter 31 -

Due Diligence of Fund Managers

Identify evidence for and organization of a due diligence process

Define and describe due diligence processes related to investigation of investment objectives
of hedge funds

Describe the main issues related to the review of a fund’s organization

Explain the importance of understanding the markets and securities in which a manager
invests

Demonstrate knowledge of due diligence evidence and organization.

Identify and discuss three important risk management questions

Discuss considerations in the review of the fund structure

Discuss the importance of due diligence on the ethical and legal history of fund employees

Describe the behavioral biases that can interfere with performance analysis

Discuss the role of the omega score in measuring operational risk

Discuss the process of conducting reference checks on service providers

Identify key questions to ask when conducting reference checks on other investors

Discuss the cost of fund manager due diligence

Identify and discuss three important questions to ask regarding all assets controlled by the
fund manager

Discuss the reasons for review of employee turnover

Discuss considerations in the review of the fund fees

Describe and apply the role of leverage in determining the total risk of a fund

Demonstrate knowledge of the three questions critical to understanding the nature of a manager’s investment program.

Discuss the issues related to benchmarking of fund returns

Discuss the master trust account structure, and recognize its uses by hedge funds

Define and describe due diligence processes related to investigation of investment processes
of hedge funds

Define and describe due diligence processes related to investigation of how hedge fund
managers add value

Explain the importance of reviewing fund managers’ organizational structures

Describe key considerations in the analysis of managers’ competitive advantages and sources
of investment ideas

Demonstrate knowledge of the due diligence of hedge fund structures.

Discuss the role of the chief risk officer (CRO)

Discuss considerations in the review of the lockup and redemption provisions, including gates
and hard and soft lockup periods

Discuss the ideal organization of investor relations

Discuss the analysis of drawdowns

Identify and discuss the five issues related to the use of past data to predict future
performance

Describe the importance of business continuity management

Discuss considerations in the review of the subscription amount

Demonstrate knowledge of the strategic review of fund managers in the due diligence process.

Describe key considerations in the review of managers’ current portfolio positions

Discuss separation of duties and how organizational charts can be used to evaluate it

Describe and contrast information gathering and information filtering

Recognize the importance of reviewing and documenting regulatory registrations

Describe key considerations in the review of the source of investment ideas

Demonstrate knowledge of the administrative review of funds.

Discuss the role of the advisory committee

Describe how the analysis of returns can be impacted by the investment horizon

Discuss issues related to subscriptions, redemptions, and volatility of assets under
management

Demonstrate knowledge of the procedure for conducting a performance review of a fund manager in the due diligence process.

Discuss investment strategy capacity in the context of evaluating structural risk

Describe evaluation and documentation of outside service providers, including the auditor,
attorneys, and the prime broker

Demonstrate knowledge of the procedure for conducting a portfolio risk review of a fund manager in the due diligence process.

Describe considerations in the review of the asset manager’s process for pricing securities in
a portfolio

Demonstrate knowledge of the procedure for conducting a legal review of a fund manager in the due diligence process.

Demonstrate knowledge of the procedure for conducting reference checks on service providers and other fund investors.

Demonstrate knowledge of the procedure for measuring operational risk.

Chapter 32 -

Portfolio Management, Alpha, and Beta

Demonstrate knowledge of smart beta strategies.

Recognize the distinguishing characteristics of smart beta strategies from active
alpha-based strategies

Discuss the challenges of estimating alpha and beta

Describe the concept of the separation of alpha and beta

Demonstrate how to transfer risk with appropriately sized positions in derivatives

Describe the process of traditional asset allocation

Explain strategic and tactical asset allocation

Apply the concept of notional value to determine futures positions designed to
transfer risk

Describe the objectives of smart beta strategies

Demonstrate knowledge of factors involved in the estimation of alpha and beta.

Demonstrate knowledge of the concept of separating alpha and beta.

Discuss how smart beta strategies can be used in portfolio management

Discuss the application of portable alpha using futures contracts

Describe the new investment model

Discuss active risk and active returns for traditional investment products

Apply the concept of portable alpha to portfolio management

Demonstrate knowledge of portable alpha.

Demonstrate knowledge of asset allocation using the concepts of alpha and beta.

Discuss challenges with porting alpha

Evaluate the proposition that alpha is a zero-sum game

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review questions posted by other CAIA clients and the corresponding responses, and

add content-specific comments to the discussion.

You may find that questions you have have already been posted by other CAIA candidates, so you can immediately read the responses and not have to wait. You may also benefit by reviewing questions and answers posted by your peers.

The sessions are broadcast through the Internet.

To hear the instructor, you simply need your computer speakers to be turned on.

To ensure that your computer meets the systems requirements to access the live office hours, visit this support link and Test a Meeting.

DSL, Cable, or similar high speed network connection.