CAIA UPDATED EXAMS SCRIPT ALL QUESTIONS
AND ANSWERS SURE A+
✔✔Alpha Drivers - ✔✔Exposures to active return factors.
Seek to add returns that are unrelated to benchmark exposures.
✔✔Type I Error - ✔✔Occurs when rejecting a true null hypothesis
✔✔Type II Error - ✔✔Occurs when failing to reject an untrue null hypothesis.
✔✔Market Netural Hedge Fund Strategy - ✔✔Attempts to match long and short
positions in related securities to eliminate market risk. Individual security selection is the
determinant of the return.
✔✔Commingled real estate fund (CREF) - ✔✔CREFs are a specific type of private
equity real estate funds. CREFs consist of privately placed commingled (i.e., pooled)
capital that is invested in real estate. Negotiable ownership certificates, which are not
exchange traded, represent the investor's proportional share of ownership in the
underlying commercial properties. They are generally closed-end in structure and are
often sold to pension funds by banks, investment companies, and insurance companies.
✔✔Omega Score - ✔✔Proposed by Brown, Goetzmann, Liang and Schwartz; predicts
future operational risk using the fund's age, size, fees, volatility and historical
performance. Method is likely to predict is a fund is likely to fail.
,Study concluded that funds with high operational risk also have high financial risk.
✔✔Information Coefficient - ✔✔Measures managerial skill as the correlation between
actual realized and forecasted managerial returns.
IR=IC x √breadth
FLOAM is used to analyze the changes in IR when there is a change in either breadth
(# of active trades in a year) or IC - MUST MULTIPLY x12 if not given on an annual
basis)
✔✔Performance review of due diligence - ✔✔1. How long has the manager been
running a hedge fund (tenure)?
2. Have performance results shown persistency over time?
3. Are performance results the same or different for each fund the manager manages
(dispersion)?
✔✔Stages of the Due Diligence Process - ✔✔1. Structural Review
2. Strategic review
3. Administrative Review
4. Performance Review
5. Risk Review
6. Legal Review
7. Reference Review
✔✔Understanding the investment process due diligence - ✔✔1. What is the funds
investment objective?
2. What is the fund manager's investment process?
3. What is the fund managers competitive advantage?
Understanding the investment objective:
1. What is the fund manager's investment universe?
2. What is the general investment strategy of the fund?
3. Does the fund manager have a benchmark? If so, what is it?
✔✔Structural review of due diligence - ✔✔Defines how the fund is organized as a
business entity and to identify the structures of the fund manager's operations.
- Organization:
1. Where is the fund manager located?
2. What is the organizational structure of key personnel?
3. What is the educational background and prior experience of principals of the Firm?
4. How did the manager learn to short stocks?
- Separation of duties
- Regulatory regulations
, - Outside service providers- auditors, level counsel, prime broker
✔✔Strategic review of due diligence - ✔✔Involves documenting the style, target
markets, and securities that a manager invests in for the purpose of understanding the
manager's investment strategy.
- Documentation of investment style (top down three step approach):
1. Document the type of fund strategy
2. document the approach used within the strategy
3. Document how the manager implements the approach
- Current Portfolio Positions:
1. Long/short exposure
2. How much cash is kept on hand
3. How many securities are held
4. How is the portfolio positioned relative to current mkt conditions
- Idea generation (process for idea generation is critical for competitive advantage)
- Capacity
✔✔Administrative review of due diligence process - ✔✔Looks at operational issues that
may affect the fund manager and the manager's relationship with clients. Trying to gain
insight into the manager's character and to uncover time consuming legal and
regulatory issues. Review includes:
1. Background checks
2. Employee turnover research
3. Review of IR team
4. Business continuity planning
✔✔Performance review of due diligence process - ✔✔1. How long has the fund
manager been actively managing a fund?
2. Have performance results for the fund shown persistency over time?
3. Are the performance results the same or different for each fund the manager
manages?
✔✔Risk review of due diligence process - ✔✔1. What is the risk level and risk types of
the fund strategy?
2. What risks are measured, monitored, and managed by the fund manager?
3. How does the fund manager measure, monitor, and manage risk?
Look at active risk, short vol risk, and counterparts risk
✔✔Legal review of due diligence process - ✔✔Looks at rules that a fund has in place
that must be followed by investors. Rules include feeds paid to the fund manager,
lockup periods and minimum subscription amounts.
✔✔Reference review of due diligence process - ✔✔Sources of references include
outside service providers and existing clients (best option).
AND ANSWERS SURE A+
✔✔Alpha Drivers - ✔✔Exposures to active return factors.
Seek to add returns that are unrelated to benchmark exposures.
✔✔Type I Error - ✔✔Occurs when rejecting a true null hypothesis
✔✔Type II Error - ✔✔Occurs when failing to reject an untrue null hypothesis.
✔✔Market Netural Hedge Fund Strategy - ✔✔Attempts to match long and short
positions in related securities to eliminate market risk. Individual security selection is the
determinant of the return.
✔✔Commingled real estate fund (CREF) - ✔✔CREFs are a specific type of private
equity real estate funds. CREFs consist of privately placed commingled (i.e., pooled)
capital that is invested in real estate. Negotiable ownership certificates, which are not
exchange traded, represent the investor's proportional share of ownership in the
underlying commercial properties. They are generally closed-end in structure and are
often sold to pension funds by banks, investment companies, and insurance companies.
✔✔Omega Score - ✔✔Proposed by Brown, Goetzmann, Liang and Schwartz; predicts
future operational risk using the fund's age, size, fees, volatility and historical
performance. Method is likely to predict is a fund is likely to fail.
,Study concluded that funds with high operational risk also have high financial risk.
✔✔Information Coefficient - ✔✔Measures managerial skill as the correlation between
actual realized and forecasted managerial returns.
IR=IC x √breadth
FLOAM is used to analyze the changes in IR when there is a change in either breadth
(# of active trades in a year) or IC - MUST MULTIPLY x12 if not given on an annual
basis)
✔✔Performance review of due diligence - ✔✔1. How long has the manager been
running a hedge fund (tenure)?
2. Have performance results shown persistency over time?
3. Are performance results the same or different for each fund the manager manages
(dispersion)?
✔✔Stages of the Due Diligence Process - ✔✔1. Structural Review
2. Strategic review
3. Administrative Review
4. Performance Review
5. Risk Review
6. Legal Review
7. Reference Review
✔✔Understanding the investment process due diligence - ✔✔1. What is the funds
investment objective?
2. What is the fund manager's investment process?
3. What is the fund managers competitive advantage?
Understanding the investment objective:
1. What is the fund manager's investment universe?
2. What is the general investment strategy of the fund?
3. Does the fund manager have a benchmark? If so, what is it?
✔✔Structural review of due diligence - ✔✔Defines how the fund is organized as a
business entity and to identify the structures of the fund manager's operations.
- Organization:
1. Where is the fund manager located?
2. What is the organizational structure of key personnel?
3. What is the educational background and prior experience of principals of the Firm?
4. How did the manager learn to short stocks?
- Separation of duties
- Regulatory regulations
, - Outside service providers- auditors, level counsel, prime broker
✔✔Strategic review of due diligence - ✔✔Involves documenting the style, target
markets, and securities that a manager invests in for the purpose of understanding the
manager's investment strategy.
- Documentation of investment style (top down three step approach):
1. Document the type of fund strategy
2. document the approach used within the strategy
3. Document how the manager implements the approach
- Current Portfolio Positions:
1. Long/short exposure
2. How much cash is kept on hand
3. How many securities are held
4. How is the portfolio positioned relative to current mkt conditions
- Idea generation (process for idea generation is critical for competitive advantage)
- Capacity
✔✔Administrative review of due diligence process - ✔✔Looks at operational issues that
may affect the fund manager and the manager's relationship with clients. Trying to gain
insight into the manager's character and to uncover time consuming legal and
regulatory issues. Review includes:
1. Background checks
2. Employee turnover research
3. Review of IR team
4. Business continuity planning
✔✔Performance review of due diligence process - ✔✔1. How long has the fund
manager been actively managing a fund?
2. Have performance results for the fund shown persistency over time?
3. Are the performance results the same or different for each fund the manager
manages?
✔✔Risk review of due diligence process - ✔✔1. What is the risk level and risk types of
the fund strategy?
2. What risks are measured, monitored, and managed by the fund manager?
3. How does the fund manager measure, monitor, and manage risk?
Look at active risk, short vol risk, and counterparts risk
✔✔Legal review of due diligence process - ✔✔Looks at rules that a fund has in place
that must be followed by investors. Rules include feeds paid to the fund manager,
lockup periods and minimum subscription amounts.
✔✔Reference review of due diligence process - ✔✔Sources of references include
outside service providers and existing clients (best option).
