Alternative Investments

An Allocator's Approach

Donald R. Chambers, Hossein B. Kazemi, Keith H. Black

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119651703
• Edition: 4
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Whether you are a seasoned professional looking to explore new areas within the alternative investment arena or a new industry participant seeking to establish a solid understanding of alternative investments, Alternative Investments: An Allocator's Approach, Fourth Edition (CAIA Level II curriculum official text) is the best way to achieve these goals.

In recent years, capital formation has shifted dramatically away from public markets as issuers pursue better financial and value alignment with ownership, less onerous and expensive regulatory requirements, market and information dislocation, and liberation from the short-term challenges that undergird the public capital markets. The careful and informed use of alternative investments in a diversified portfolio can reduce risk, lower volatility, and improve returns over the long-term, enhancing investors' ability to meet their investment outcomes. Alternative Investments: An Allocator's Approach (CAIA Level II curriculum official text) is a key resource that can be used to improve the sophistication of asset owners and those who work with them.

This text comprises the curriculum, when combined with supplemental materials available at caia.org, for the CAIA Level II exam.

"Over the course of my long career one tenet has held true, 'Continuing Education'. Since CalSTRS is a teachers' pension plan, it is no surprise that continuing education is a core attribute of our Investment Office culture. Overseeing one of the largest institutional pools of capital in the world requires a cohesive knowledge and understanding of both public and private market investments and strategies. We must understand how these opportunities might contribute to delivering on investment outcomes for our beneficiaries. Alternative Investments: An Allocator's Approach is the definitive core instruction manual for an institutional investor, and it puts you in the captain's chair of the asset owner."
— Christopher J. Ailman, Chief Investment Officer, California State Teachers' Retirement System

"Given their diversified cash flow streams and returns, private markets continue to be a growing fixture of patient, long-term portfolios. As such, the need to have proficiency across these sophisticated strategies, asset classes, and instruments is critical for today's capital allocator. As a proud CAIA charterholder, I have seen the practical benefits in building a strong private markets foundation, allowing me to better assist my clients."
— Jayne Bok, CAIA, CFA, Head of Investments, Asia, Willis Tower Watson

PART 1
Ethics Regulations and ESG

Investors in both traditional and alternative investments need to consider ethics, regulations, as well as environmental, social, and governance (ESG) issues when allocating assets. Part 1 begins with two chapters (Chapters 1 and 2) that lists the standards of the Asset Manager Code from the CFA Institute as well as recommendations and guidance. Chapter 3 details the global regulatory landscape, detailing regulations in the US, Europe, and in Asia. Chapters 4 and 5 detail ESG considerations, both generally and in the context of specific applications to alternative investments.

CHAPTER 1
Asset Manager Code

The CFA Institute Asset Manager Code outlines the ethical and professional responsibilities of firms (“Managers”) that manage assets on behalf of clients.¹ By adopting and enforcing a code of conduct for their organizations, Managers demonstrate their commitment to ethical behavior and the protection of investors' interests.

1.1 GENERAL PRINCIPLES OF CONDUCT

Managers have the following responsibilities to their clients.

Managers must:

1. Act in a professional and ethical manner at all times.
2. Act for the benefit of clients.
3. Act with independence and objectivity.
4. Act with skill, competence, and diligence.
5. Communicate with clients in a timely and accurate manner.
6. Uphold the applicable rules governing capital markets.

1.2 ASSET MANAGER CODE

1. Loyalty to Clients
   Managers must:
   1. Place client interests before their own.
   2. Preserve the confidentiality of information communicated by clients within the scope of the Manager–client relationship.
   3. Refuse to participate in any business relationship or accept any gift that could reasonably be expected to affect their independence, objectivity, or loyalty to clients.
2. Investment Process and Actions
   Managers must:
   1. Use reasonable care and prudent judgment when managing client assets.
   2. Not engage in practices designed to distort prices or artificially inflate trading volume with the intent to mislead market participants.
   3. Deal fairly and objectively with all clients when providing investment information, making investment recommendations, or taking investment action.
   4. Have a reasonable and adequate basis for investment decisions.
   5. When managing a portfolio or pooled fund according to a specific mandate, strategy, or style:
      1. Take only investment actions that are consistent with the stated objectives and constraints of that portfolio or fund.
      2. Provide adequate disclosures and information so investors can consider whether any proposed changes in the investment style or strategy meet their investment needs.
   6. When managing separate accounts and before providing investment advice or taking investment action on behalf of the client:
      1. Evaluate and understand the client's investment objectives, tolerance for risk, time horizon, liquidity needs, financial constraints, any unique circumstances (including tax considerations, legal or regulatory constraints, etc.), and any other relevant information that would affect investment policy.
      2. Determine that an investment is suitable to a client's financial situation.
3. Trading
   Managers must:
   1. Not act or cause others to act on material nonpublic information that could affect the value of a publicly traded investment.
   2. Give priority to investments made on behalf of the client over those that benefit the Managers' own interests.
   3. Use commissions generated from client trades to pay for only investment-related products or services that directly assist the Manager in its investment decision-making process, and not in the management of the firm.
   4. Maximize client portfolio value by seeking best execution for all client transactions.
   5. Establish policies to ensure fair and equitable trade allocation among client accounts.
4. Risk Management, Compliance, and Support
   Managers must:
   1. Develop and maintain policies and procedures to ensure that their activities comply with the provisions of this Code and all applicable legal and regulatory requirements.
   2. Appoint a compliance officer responsible for administering the policies and procedures and for investigating complaints regarding the conduct of the Manager or its personnel.
   3. Ensure that portfolio information provided to clients by the Manager is accurate and complete and arrange for independent third-party confirmation or review of such information.
   4. Maintain records for an appropriate period of time in an easily accessible format.
   5. Employ qualified staff and sufficient human and technological resources to thoroughly investigate, analyze, implement, and monitor investment decisions and actions.
   6. Establish a business-continuity plan to address disaster recovery or periodic disruptions of the financial markets.
   7. Establish a firmwide risk management process that identifies, measures, and manages the risk position of the Manager and its investments, including the sources, nature, and degree of risk exposure.
5. Performance and Valuation
   Managers must:
   1. Present performance information that is fair, accurate, relevant, timely, and complete. Managers must not misrepresent the performance of individual portfolios or of their firm.
   2. Use fair-market prices to value client holdings and apply, in good faith, methods to determine the fair value of any securities for which no independent, third-party market quotation is readily available.
6. Disclosures
   Managers must:
   1. Communicate with clients on an ongoing and timely basis.
   2. Ensure that disclosures are truthful, accurate, complete, and understandable and are presented in a format that communicates the information effectively.
   3. Include any material facts when making disclosures or providing information to clients regarding themselves, their personnel, investments, or the investment process.
   4. Disclose the following:
      1. Conflicts of interests generated by any relationships with brokers or other entities, other client accounts, fee structures, or other matters.
      2. Regulatory or disciplinary action taken against the Manager or its personnel related to professional conduct.
      3. The investment process, including information regarding lock-up periods, strategies, risk factors, and use of derivatives and leverage.
      4. Management fees and other investment costs charged to investors, including what costs are included in the fees and the methodologies for determining fees and costs.
      5. The amount of any soft or bundled commissions, the goods and/or services received in return, and how those goods and/or services benefit the client.
      6. The performance of clients' investments on a regular and timely basis.
      7. Valuation methods used to make investment decisions and value client holdings.
      8. Shareholder voting policies.
      9. Trade allocation policies.
      10. Results of the review or audit of the fund or account.
      11. Significant personnel or organizational changes that have occurred at the Manager.
      12. Risk management processes.

1.3 NOTIFICATION OF COMPLIANCE

Managers must notify the CFA Institute of their claim of compliance through the Asset Manager Code claim of compliance form at www.cfainstitute.org/assetcode. This form is for communication and information-gathering purposes only and does not represent that CFA Institute engages in enforcement or quality control of an organization's claim of compliance. CFA Institute does not verify either the Manager's claim of compliance or actual compliance with the Code.

For additional information on complying, please visit www.cfainstitute.org/assetcode.

1.4 ADDITIONAL GUIDANCE FOR THE ASSET MANAGER CODE

The following interpretations of the Asset Manager Code are responses to inquiries received from firms seeking to comply with the Code. These interpretations serve as additional guidance to the Asset Manager Code from CFA Institute and should be considered official and authoritative explanations of the requirements of the relevant Code provisions.

1.4.1 Defining a Firm

How does the Asset Manager Code apply to large investment advisers that are the parent of a group of smaller managers? Does compliance by the parent company signify that all of the related firms are in compliance? Can the smaller firms claim compliance separately?

In the case of a common parent of several individual asset managers, each individual manager may claim compliance or the parent firm may claim co...