Laura Fritsch, Wayne Lim, Alexander Montag, Martin C. Schmalz
Led by the growth of direct lending, private debt assets under management almost tripled over the past decade. What do we know about this shift and why it has happened? Using a proprietary dataset, the authors present new empirical facts about direct lending funds and investigate the demand and supply drivers that likely have contributed to their growth. They identify the following contributing factors to the growth of direct lending: reduced capital supply by banks due to M&As and regulation; financial innovation; changing borrower needs; changing borrower types; and a low-interest-rate environment.
{"title":"Direct Lending: Evidence from European and US Markets","authors":"Laura Fritsch, Wayne Lim, Alexander Montag, Martin C. Schmalz","doi":"10.3905/jai.2021.1.150","DOIUrl":"https://doi.org/10.3905/jai.2021.1.150","url":null,"abstract":"Led by the growth of direct lending, private debt assets under management almost tripled over the past decade. What do we know about this shift and why it has happened? Using a proprietary dataset, the authors present new empirical facts about direct lending funds and investigate the demand and supply drivers that likely have contributed to their growth. They identify the following contributing factors to the growth of direct lending: reduced capital supply by banks due to M&As and regulation; financial innovation; changing borrower needs; changing borrower types; and a low-interest-rate environment.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43986549","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The impact of the Great Financial Crisis on operational risk includes the birth of structural due diligence. Since the crisis, institutional investors have demanded more transparency and better governance in the hedge fund space. This demand has resulted in the growth of several different types of structures, including liquid alternatives via 40-ACT or UCITS funds, funds-of-one, managed accounts, and managed account platforms. Operational due diligence has extended beyond examining the noninvestment risks to include the best way structurally to access a specific hedge fund investment. The different structures have varying advantages and disadvantages, which translates to different types of operational risks. This article presents a matrix of the advantages and disadvantages of the structural forms and the concept of a structural alpha. The author examines managed account platforms (MAPs) and how to evaluate them.
{"title":"Structural Due Diligence, Operational Risks, and the Evaluation of Managed Account Platforms","authors":"R. Bhaduri","doi":"10.3905/jai.2021.1.149","DOIUrl":"https://doi.org/10.3905/jai.2021.1.149","url":null,"abstract":"The impact of the Great Financial Crisis on operational risk includes the birth of structural due diligence. Since the crisis, institutional investors have demanded more transparency and better governance in the hedge fund space. This demand has resulted in the growth of several different types of structures, including liquid alternatives via 40-ACT or UCITS funds, funds-of-one, managed accounts, and managed account platforms. Operational due diligence has extended beyond examining the noninvestment risks to include the best way structurally to access a specific hedge fund investment. The different structures have varying advantages and disadvantages, which translates to different types of operational risks. This article presents a matrix of the advantages and disadvantages of the structural forms and the concept of a structural alpha. The author examines managed account platforms (MAPs) and how to evaluate them.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44087195","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Despite the overwhelming focus of researchers on quantitative analysis to measure manager skill or alpha generation, managers and investors still employ qualitative information and narrative as key decision support tools for investment manager selection. Both parties allocate significant time and effort reviewing and explaining investment processes through pitchbooks, meetings, and nonquantitative communication. This article explores the use of qualitative information linked to narrative, the description and interpretation of facts to tell a compelling story on manager skill, as a key forward-looking signal mechanism that supports asset management allocation decisions. We focus on how and why narrative is an important part of the due diligence process for transmitting and receiving unobservable information outside of performance track records and a means for providing skill explanation.
{"title":"Narrative, Storytelling, and Qualitative Due Diligence","authors":"Mark S. Rzepczynski","doi":"10.3905/jai.2021.1.148","DOIUrl":"https://doi.org/10.3905/jai.2021.1.148","url":null,"abstract":"Despite the overwhelming focus of researchers on quantitative analysis to measure manager skill or alpha generation, managers and investors still employ qualitative information and narrative as key decision support tools for investment manager selection. Both parties allocate significant time and effort reviewing and explaining investment processes through pitchbooks, meetings, and nonquantitative communication. This article explores the use of qualitative information linked to narrative, the description and interpretation of facts to tell a compelling story on manager skill, as a key forward-looking signal mechanism that supports asset management allocation decisions. We focus on how and why narrative is an important part of the due diligence process for transmitting and receiving unobservable information outside of performance track records and a means for providing skill explanation.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-10-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46125038","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
While investor surveys have been conducted by accounting firms, banks, and consultants to assess the choices for a specific alternative investment style, the general focus of these surveys has not been on the process of manager selection. What is missing from these surveys is how decisions are made. To fill that gap, we conducted an extensive survey of alternative investment investors and managers who are members of the Chartered Alternative Investment Analyst Association (CAIA) that focused on the alternative investment manager selection process. Our research surveyed investors and managers to gain insight on the key variables they employ to support manager selection and better understand how they conduct due diligence across alternative investments. Manager skill assessment for alternative investments is more difficult than selecting traditional investment managers and requires greater qualitative analysis of the philosophy, culture, and processes of the manager.
{"title":"Alternative Investment Due Diligence: A Survey on Key Drivers for Manager Selection","authors":"Mark S. Rzepczynski, Keith Black","doi":"10.3905/jai.2021.1.147","DOIUrl":"https://doi.org/10.3905/jai.2021.1.147","url":null,"abstract":"While investor surveys have been conducted by accounting firms, banks, and consultants to assess the choices for a specific alternative investment style, the general focus of these surveys has not been on the process of manager selection. What is missing from these surveys is how decisions are made. To fill that gap, we conducted an extensive survey of alternative investment investors and managers who are members of the Chartered Alternative Investment Analyst Association (CAIA) that focused on the alternative investment manager selection process. Our research surveyed investors and managers to gain insight on the key variables they employ to support manager selection and better understand how they conduct due diligence across alternative investments. Manager skill assessment for alternative investments is more difficult than selecting traditional investment managers and requires greater qualitative analysis of the philosophy, culture, and processes of the manager.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-10-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48083668","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-09-30DOI: 10.3905/jai.2021.24.2.001
Hossein Kazemi
The authors rule out several possible reasons for this lack of performance, concluding that increased flow of capital into the space in recent years and lack of investment opportunities may have led VC/PE managers to overpay for these portfolio companies. The contract typically entitles VC funds to receive preferred stock with additional cash flow rights, resulting in a higher return to VC funds than the yield to other stakeholders. [...]according to the author, the current post-money valuation method is an overvaluation of the true price of all outstanding securities.
{"title":"Editor’s Letter","authors":"Hossein Kazemi","doi":"10.3905/jai.2021.24.2.001","DOIUrl":"https://doi.org/10.3905/jai.2021.24.2.001","url":null,"abstract":"The authors rule out several possible reasons for this lack of performance, concluding that increased flow of capital into the space in recent years and lack of investment opportunities may have led VC/PE managers to overpay for these portfolio companies. The contract typically entitles VC funds to receive preferred stock with additional cash flow rights, resulting in a higher return to VC funds than the yield to other stakeholders. [...]according to the author, the current post-money valuation method is an overvaluation of the true price of all outstanding securities.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41938275","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines a sample of global hedge funds and focuses on analyzing characteristics consistently predictive of being GIPS compliant. Hedge fund data are merged with the CFA Institute’s list of GIPS-compliant firms. The authors find that smaller funds, with less experienced managers and those not denominated in US currency, are more likely to be compliant. They also find that firms with a strong internal control mechanism, defined as having one of the big four accounting firms as an auditor, are more likely to claim compliance. Turning to some core elements of the investor–fund relationship, they find performance fees are lower in firms claiming compliance, but past performance is insignificantly different. Collectively, the results suggest that GIPS compliance is useful to smaller and riskier firms that want to display confidence and transparency in their performance, thus supporting the notion that compliance is an additional certification agent. There is also some evidence to suggest a benefit to the investor in lower fees. Key Findings ▪ The minority number of hedge funds that chose to be compliant prior to the revised GIPS standards of 2020 are typically relatively smaller, have less-experienced managers, and are based in non-US currency. ▪ Compliant firms have smaller performance fees, resulting in a lower overall fee structure, compared to their noncompliant counterparts. ▪ Results are consistent with the notion that funds that chose compliance are those that could benefit from the additional certification it could provide.
{"title":"GIPS and Hedge Funds: Is Compliance a Certification Agent?","authors":"Luke Foster, T. Ngo, M. Pyles","doi":"10.3905/jai.2021.1.140","DOIUrl":"https://doi.org/10.3905/jai.2021.1.140","url":null,"abstract":"This study examines a sample of global hedge funds and focuses on analyzing characteristics consistently predictive of being GIPS compliant. Hedge fund data are merged with the CFA Institute’s list of GIPS-compliant firms. The authors find that smaller funds, with less experienced managers and those not denominated in US currency, are more likely to be compliant. They also find that firms with a strong internal control mechanism, defined as having one of the big four accounting firms as an auditor, are more likely to claim compliance. Turning to some core elements of the investor–fund relationship, they find performance fees are lower in firms claiming compliance, but past performance is insignificantly different. Collectively, the results suggest that GIPS compliance is useful to smaller and riskier firms that want to display confidence and transparency in their performance, thus supporting the notion that compliance is an additional certification agent. There is also some evidence to suggest a benefit to the investor in lower fees. Key Findings ▪ The minority number of hedge funds that chose to be compliant prior to the revised GIPS standards of 2020 are typically relatively smaller, have less-experienced managers, and are based in non-US currency. ▪ Compliant firms have smaller performance fees, resulting in a lower overall fee structure, compared to their noncompliant counterparts. ▪ Results are consistent with the notion that funds that chose compliance are those that could benefit from the additional certification it could provide.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45713934","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The authors examine price discovery and informational flow between the industry sector-based subindices of the Markit CDX.NA.IG Index and matched portfolios of stocks to ascertain whether they differ from the composite index and one another, possibly due to differing business risk and exposure to systematic factors or investor preferences. They find that although neither market leads the other in pricing in new information in the systematic markets, sector-based matched equity portfolios persistently lead CDS subindices in capturing this information. The only exception is the technology, media, and telecommunications sector, where they observe a two-way interactive effect. They attribute the effect to the comparatively greater growth prospects in this sector and related investor attention. These findings suggest that investors may trade sector-based CDS indices very differently than systematic indices. Key Findings ▪ Price discovery and informational flow between the industry sector-based subindices of the Markit CDX.NA.IG Index and matched portfolios of stocks differs from the composite index as well as within the sectors themselves. Investors trade sector-based CDS indices very differently than systematic indices, a finding with implications for stakeholders who use CDS indices for their informational content. ▪ Although neither market leads the other in pricing in new information in the systematic markets, four of the five sector-based matched equity portfolios lead their respective CDS subindices in capturing this information. ▪ There is a two-way interactive information flow within the technology, media, and telecommunications sector, suggesting more investor interest relative to the other sectors.
{"title":"Do Investors Trade Industry Sector-Based Credit Risk Differently Than Systematic Credit Risk?","authors":"William J. Procasky, Brian Petrus","doi":"10.3905/jai.2021.1.139","DOIUrl":"https://doi.org/10.3905/jai.2021.1.139","url":null,"abstract":"The authors examine price discovery and informational flow between the industry sector-based subindices of the Markit CDX.NA.IG Index and matched portfolios of stocks to ascertain whether they differ from the composite index and one another, possibly due to differing business risk and exposure to systematic factors or investor preferences. They find that although neither market leads the other in pricing in new information in the systematic markets, sector-based matched equity portfolios persistently lead CDS subindices in capturing this information. The only exception is the technology, media, and telecommunications sector, where they observe a two-way interactive effect. They attribute the effect to the comparatively greater growth prospects in this sector and related investor attention. These findings suggest that investors may trade sector-based CDS indices very differently than systematic indices. Key Findings ▪ Price discovery and informational flow between the industry sector-based subindices of the Markit CDX.NA.IG Index and matched portfolios of stocks differs from the composite index as well as within the sectors themselves. Investors trade sector-based CDS indices very differently than systematic indices, a finding with implications for stakeholders who use CDS indices for their informational content. ▪ Although neither market leads the other in pricing in new information in the systematic markets, four of the five sector-based matched equity portfolios lead their respective CDS subindices in capturing this information. ▪ There is a two-way interactive information flow within the technology, media, and telecommunications sector, suggesting more investor interest relative to the other sectors.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49448104","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article analyzes three key trends that have emerged among institutional investors performing operational due diligence (ODD) on cryptocurrency and digital asset funds. The first trend is enhanced crypto-specific ODD specialization as compared to other alternative asset classes. The second trend is an institutional focus on crypto custody arrangements. The third trend is a rapid movement toward integrating ODD and investigative due diligence processes in the crypto space.
{"title":"Operational Due Diligence on Cryptocurrency and Digital Asset Funds","authors":"Jason A. Scharfman","doi":"10.3905/jai.2021.1.146","DOIUrl":"https://doi.org/10.3905/jai.2021.1.146","url":null,"abstract":"This article analyzes three key trends that have emerged among institutional investors performing operational due diligence (ODD) on cryptocurrency and digital asset funds. The first trend is enhanced crypto-specific ODD specialization as compared to other alternative asset classes. The second trend is an institutional focus on crypto custody arrangements. The third trend is a rapid movement toward integrating ODD and investigative due diligence processes in the crypto space.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-09-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41413440","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
1. Keith Black 1. is a managing director at the FDP Institute in Amherst, Massachusetts. (kblack{at}caia.org) 1. To order reprints of this article, please contact David Rowe at d.rowe{at}pageantmedia.com or 646-891-2157. The CAIA Association and The Journal of Alternative
{"title":"The Art and the Science of Manager Due Diligence","authors":"Keith Black","doi":"10.3905/jai.2021.1.145","DOIUrl":"https://doi.org/10.3905/jai.2021.1.145","url":null,"abstract":"1. Keith Black\u0000 1. is a managing director at the FDP Institute in Amherst, Massachusetts. (kblack{at}caia.org)\u0000\u0000\u0000 \u0000\u00001. To order reprints of this article, please contact David Rowe at d.rowe{at}pageantmedia.com or 646-891-2157. \u0000\u0000The CAIA Association and The Journal of Alternative","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-09-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49543066","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Adam Zaremba, J. Jan, Zaghum Umar, Mateusz Mikutowski
In Inflation Hedging in the Long Run: Perspectives from Seven Centuries of Commodity Prices, published in the Summer 2021 issue of The Journal of Alternative Investments, Adam Zaremba of Montpellier Business School, Jan J. Szczygielski of Kozminski University, Zaghum Umar of Zayed University and Mateusz Mikutowski of Pozna´n University of Economics and Business investigate the efficacy of using commodities to hedge inflation risk. They analyze the relationship between inflation and various commodity price indexes across varying lengths of time and regions. The evaluation includes rolling correlations to see if relationships change over time. Results illustrate that commodities can be very effective hedging tools. However, some commodities do a better job than others. The optimal choice depends on what regions’ or countries’ inflation risk one seeks to mitigate, and the optimal choice can change as conditions change in the future. For example, in many countries, agricultural commodities used to be among the best hedging instruments but have since been displaced by energy commodities.
在《另类投资杂志》2021年夏季刊上发表的《长期通胀对冲:从商品价格的七个世纪看》一篇文章中，蒙彼利埃商学院的Adam Zaremba、科兹明斯基大学的Jan J. Szczygielski、扎耶德大学的Zaghum Umar和波兹纳恩经济与商业大学的Mateusz Mikutowski研究了利用商品对冲通胀风险的有效性。他们分析了不同时间和地区的通货膨胀和各种商品价格指数之间的关系。评估包括滚动相关性，以查看关系是否随时间变化。结果表明，商品可以是非常有效的对冲工具。然而，一些商品比其他商品表现得更好。最优选择取决于人们寻求减轻哪些地区或国家的通胀风险，而最优选择可能随着未来条件的变化而变化。例如，在许多国家，农产品曾经是最好的对冲工具之一，但后来被能源商品所取代。
{"title":"Practical Applications of Inflation Hedging in the Long Run: Perspectives from Seven Centuries of Commodity Prices","authors":"Adam Zaremba, J. Jan, Zaghum Umar, Mateusz Mikutowski","doi":"10.3905/jai.24.s1.048","DOIUrl":"https://doi.org/10.3905/jai.24.s1.048","url":null,"abstract":"In Inflation Hedging in the Long Run: Perspectives from Seven Centuries of Commodity Prices, published in the Summer 2021 issue of The Journal of Alternative Investments, Adam Zaremba of Montpellier Business School, Jan J. Szczygielski of Kozminski University, Zaghum Umar of Zayed University and Mateusz Mikutowski of Pozna´n University of Economics and Business investigate the efficacy of using commodities to hedge inflation risk. They analyze the relationship between inflation and various commodity price indexes across varying lengths of time and regions. The evaluation includes rolling correlations to see if relationships change over time. Results illustrate that commodities can be very effective hedging tools. However, some commodities do a better job than others. The optimal choice depends on what regions’ or countries’ inflation risk one seeks to mitigate, and the optimal choice can change as conditions change in the future. For example, in many countries, agricultural commodities used to be among the best hedging instruments but have since been displaced by energy commodities.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46408881","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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