cfa alternative assets

Asset Allocation Approaches

An approach to determining the desired allocation to the alternative asset classes is to make the initial asset allocation decision using only the broad, liquid asset classes and do a second iteration of the asset allocation exercise incorporating alternative assets. There are three primary approaches that investors use to approach this second iteration. Monte Carlo … Read more

cfa alternative assets

The Investment Opportunity Set

Traditional approaches to defining the investment opportunity set include classifying asset groups by liquidity or by how they perform over economic cycles.  Liquidity-Based Investment Opportunity Set shows how asset classes might be considered based on liquidity characteristics. Liquidity-Based Investment Opportunity Set Opportunity Set shows an example of an investment opportunity set that uses this approach. Economic Environment-Based Investment Opportunity … Read more

cfa alternative assets

Analysis of Hedge Fund Strategies

Following a practice-based risk factor perspective, a conditional linear factor model can be used to uncover and analyze hedge fund strategy risk exposures. A simple conditional linear factor model applied to a hedge fund strategy’s returns can be represented as: (Return on HFi)t = αi + βi,1(Factor 1)t + βi,2(Factor 2)t + … + βi,K(Factor K)t + Dtβi,1(Factor 1)t + Dtβi,2(Factor 2)t + … … Read more

cfa alternative assets

Multi-manager Strategies

 Three main approaches are used to combine individual hedge fund strategies into a portfolio: creating one’s own mix of managers by investing directly into individual hedge funds running different strategies fund-of-funds, which involves investing in a single fund-of-funds manager who then allocates across a set of individual hedge fund managers running different strategies multi-strategy funds, which … Read more

cfa alternative assets

Specialist Strategies

Portfolio managers for specialist hedge fund strategies use their knowledge of a particular market to pursue niche investment opportunities.  Volatility Trading Once an esoteric pursuit, volatility trading has evolved over recent years to become a recognized investable asset. Volatility trading hedge fund managers will trade volatility-related assets globally, across countries and across asset classes, in order to exploit perceived … Read more

cfa alternative assets

Opportunistic Strategies

Opportunistic hedge fund strategies are a broad class of investing approaches that attempt to extract profits using a wide range of techniques in a broad range of securities markets. Rather than being focused on individual securities, these strategies take a top-down approach to make macro investments on a global basis across regions, sectors, and asset classes. … Read more

cfa alternative assets

Relative Value Strategies

Relative value strategies attempt to exploit valuation differences between securities. The most common securities used in relative value strategies are hybrid convertible debt, as well as fixed-income securities. Fixed Income Arbitrage The idea behind fixed-income arbitrage strategies is to take advantage of temporary mispricing of fixed-income instruments, by going long comparatively undervalued securities, and going short comparatively overvalued … Read more