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Two days ago I sat the CAIA Level 2 exam. Likewise my post on CAIA Level 1 , I cannot give much detail here, but the overall impression is as follows: Significantly harder than Level 1. More calculations, more detail required. There were again some questions I do not recall seeing answers to in Schweser Notes. Essay questions are not very difficult, but require to list up/describe certain processes/reasons for certain events, so memorizing these lists came in very useful (although I am not sure my answers were accurate enough). As such, I am much less confident in the outcome than I was for Level 1. Will be waiting for the results. RELATED POSTS: Preparing for CAIA Level 2 CAIA Level 1 Exam Comparison of financial certifications CFA and CAIA Designations ■

I had an interesting conversation with a hedge fund manager today, during which it became quite clear to me that we may be mere years away from profound economical and political changes in Asia. Japan's Debt It is a well known fact, that Japan has a tremendous amount of outstanding public debt, amounting to around 200% of Japan's GDP. In comparison, Greek public debt stands at an equivalent of about 110% of GDP. The reason this pile of debt doesn't trigger a crisis alike to that of Greece, is that the Japanese government bonds (JGBs) have a very loyal investor base, consisting almost entirely of Japanese domestic investors, most of them institutional. The yield on long term JGBs is extremely low, and recently touched 0.9% before getting back into 1% territory. Why do the investors hold onto anything that is yielding so little? One reason is deflation. As Japanese investors are in JPY, the actual return is yield + rate of deflation. Second, and more important reason, is

Well, this way of looking for new growth is sure to land you in prison. A post on HedgeFundBlogger titled  Hedge Fund Marijuana sent me laughing out loud today. Some quotes: "Tara Bryson and her boyfriend recently received a grant from the state government to set up a goat farm. Instead, the two built a farm to grow marijuana." "Tara Bryson, 36, is the sister of David Bryson, co-founder of Ridgefield, CT-based ew Stream Capital. She heads investor relations for the $1 billion asset-backed lending fund that charges high rates to loan distressed companies money." "Bryson was arrested by the Connecticut State Police in Newtown on July 9th for three felonies: possession of marijuana, cultivation of marijuana, and conspiracy to cultivate marijuana. She plead not guilty, was released on $25,000 bail, and returned to work with investors at New Stream." And I thought this type of reckless hedge fund managers was an endangered species on the brink of ex

I remember I scoffed about CAIA L1 exam. I found it all too easy, and started thinking CAIA should not really stand in one line with CFA. I am starting to change my mind. After some relatively easy sections on Real Estate and Private Equity, here come Hedge Funds and Structured Products, and all of a sudden the exam does not feel so easy any longer. François-Serge Lhabitant, whose book Hedge Funds: Quantitative Insights I had the pleasure (and the pain) reading in the past, really knows what he is writing about... His in-much-detail description of Hedge Fund investment strategies is extremely informative, but memorizing all the formulas involved is no bed of roses. Same goes to the Structured Products. With only a few weeks ahead before the exam, I feel I really need to step on the gas. RELATED POSTS: CAIA Level 2 Exam CAIA Level 1 Exam Comparison of financial certifications CFA and CAIA Designations ■

I highly recommend this article in FT Cautionary tale about exit strategies from 1930s Japan Quote As the policy debate intensifies, investors might spare a thought for Takahashi Korekiyo, Bank of Japan governor from 1911 to 1913. He also served as finance minister and prime minister in the 1920s and 1930s. Outside Japan, few western investors know the name. For while there is discussion about what can be learnt from Japan’s lost decade, little attention has been paid to earlier periods. The experience of 1930s Japan is thought-provoking. Not only does it help explain the decisions that Tokyo leaders took during the lost decade; it offers a cautionary tale about exit strategies. Unqote ■

  Карикатура №: 136 (2654), 26.07.2010 http://www.vedomosti.ru/ ■

Quite predictably, PE industry was not agreeable to the report written by The Centre for the Study of Financial Innovation I mentioned in my post yesterday (see: IRR is not a perfect measure of PE investment returns. So what? ). The article referenced below describes the response by Private Equity Council. Turns out, the report was actually referring to comparing the performance of public and private equity. I have some experience of making similar comparisons, and must admit they are a very tricky business. This is not an apples-to-apples comparison. This is not even apples-to-oranges, it's more like apples-to-apple-jam comparison. Technically, you can run the numbers, and they may or may not be in favor of private equity, but investment in private securities is not only about the level of return. It is also about know-how transfer, liabilities duration match and many other things. Unfortunately, I did not have the chance to read to full report, but my impression is that Mr. Pet

Quote "China Investment Corp, the country’s $300bn sovereign wealth fund, this week announced its latest “worldwide” recruitment drive with 64 positions advertised. [...] The jobs on offer range from secretarial staff and human resources managers – “must be Chinese Communist Party member” – to country analyst in the international co-operation department – “must be good at keeping secrets”." Unquote   Ful article can be found here: Party faithful, your sovereign wealth fund needs you ■

The article titled  IRR as performance measure comes under fire describes a report that criticizes IRR as a measure of private equity returns. This sort of criticism is nothing new. It is true that there is an unrealistic assumption of compound returns underlying the PE IRR calculation, this limitation is widely known by the practitioners. The real question is: so, what are the implications? It is not common to compare PE returns to say publicly traded equity, or bonds using IRR. The metric is more often used to compare performance of one PE fund to another, and as these IRRs are calculated under the same assumptions, the numbers, while not entirely accurate, are comparable. They provide a practicable tool to compare investment returns across the asset class. Another problem, which is not mentioned here, is the risk of having multiple mathematically valid IRRs when making the calculation. This can happen when several cash flows are negative, positive, and then negative again. Th

Mercer put together a great report on Life Settlements, dated April this year, and I had the opportunity to obtain the original report that goes for 90 pages of Power Point slides. Very detailed, to the point and unbiased, it makes an excellent background reading. The report is not publicly available, but an 8 page summary can be found here . Another source of information I have recently acquired is the Life Markets: Trading Mortality and Longevity Risk with Life Settlements and Linked Securities . This is a collection of articles by market practitioners, and therefore has some natural bias in it, but it is well-structured and contains wealth of information. So much to read, so little time... ■

Below is the link to an article on Economist.com, which highlights a possible shift in the way domestic institutional investors treat JGBs. For better and for worse. http://www.economist.com/node/16593589?story_id=16593589&fsrc=rss ■

The article reference below highlights an interesting development. I happen to know that Morgan Stanley Private Equity Asian team is much more nervous about the Volcker rule and does not rule out the possibility of having to become independent. JPMorgan, on the other hand, seems to be on prowl to acquire HF/PE firms. I think there are two points that are worth mentioning in connection with these differences: 1. JPM is much more of a deposit holding bank than MS. As such, it is likely they will be less affected by any looming regulation. 2. Even more importantly IMHO, Brazil is increasingly catching the headlines and claiming the spotlight, in a sense becoming "the next China". And in many respects, for a good reason: it's much less reliant on exports (and when it comes to oil, on imports), the fundamentals look robust, the GDP growth is accelerating and the inflation has been within a reasonable range for years. I have never had the pleasure of talking to a Brazilia