Preface xiii Acknowledgments xvii About the Authors xix PART 1 Introduction to Alternative Investments CHAPTER 1 What Is an Alternative Investment? 3 1.1 Alternative Investments by Exclusion 3 1.2 Alternative Investments by Inclusion 4 1.3 Structures among Alternative Investments 8 1.4 Investments Are Distinguished by Return Characteristics 12 1.5 Investments Are Distinguished by Methods of Analysis 15 1.6 Investments Are Distinguished by Other Factors 18 1.7 Goals of Alternative Investing 18 1.8 Overview of This Book 20 Review Questions 21 CHAPTER 2 The Environment of Alternative Investments 23 2.1 The Participants 23 2.2 Financial Markets 30 2.3 Regulatory Environment 32 2.4 Liquid Alternative Investments 37 2.5 Taxation 40 Review Questions 43 CHAPTER 3 Quantitative Foundations 45 3.1 Return and Rate Mathematics 45 3.2 Returns Based on Notional Principal 47 3.3 Internal Rate of Return 50 3.4 Problems with Internal Rate of Return 54 3.5 Distribution of Cash Waterfall 60 Review Questions 69 CHAPTER 4 Statistical Foundations 71 4.1 Return Distributions 71 4.2 Moments of the Distribution: Mean, Variance, Skewness, and Kurtosis 74 4.3 Covariance, Correlation, Beta, and Autocorrelation 79 4.4 Interpreting Standard Deviation and Variance 88 4.5 Testing for Normality 95 4.6 Time-Series Return Volatility Models 98 Review Questions 100 CHAPTER 5 Measures of Risk and Performance 101 5.1 Measures of Risk 101 5.2 Estimating Value at Risk (VaR) 105 5.3 Ratio-Based Performance Measures 111 5.4 Risk-Adjusted Return Measures 117 Review Questions 120 CHAPTER 6 Foundations of Financial Economics 121 6.1 Informational Market Efficiency 121 6.2 Single-Factor and Ex Ante Asset Pricing 124 6.3 Multifactor and Empirical Models 129 6.4 Arbitrage-Free Models 135 6.5 The Term Structure of Forward Contracts 142 6.6 Option Exposures 147 6.7 Option Pricing Models 153 6.8 Option Sensitivities 155 Review Questions 157 CHAPTER 7 Benchmarking and Performance Attribution 159 7.1 Benchmarking 159 7.2 Types of Models 162 7.3 Performance Attribution 165 7.4 Distinctions Regarding Alternative Asset Benchmarking 169 Review Questions 172 CHAPTER 8 Alpha, Beta, and Hypothesis Testing 175 8.1 Overview of Beta and Alpha 175 8.2 Ex Ante versus Ex Post Alpha 177 8.3 Inferring Ex Ante Alpha from Ex Post Alpha 180 8.4 Return Attribution, Alpha, and Beta 182 8.5 Ex Ante Alpha Estimation and Return Persistence 185 8.6 Return Drivers 186 8.7 Using Statistical Methods to Locate Alpha 188 8.8 Sampling and Testing Problems 193 8.9 Statistical Issues in Analyzing Alpha and Beta 197 Review Questions 201 CHAPTER 9 Regression, Multivariate, and Nonlinear Methods 203 9.1 Single-Factor Models and Regression 203 9.2 Multifactor Models and Regression 208 9.3 Three Dynamic Risk Exposure Models 210 9.4 Two Approaches to Modeling Changing Correlation 212 9.5 Four Multifactor Approaches to Understanding Hedge Fund Returns 215 9.6 Evidence on Fund Performance Persistence 219 Review Questions 221 PART 2 Real Assets CHAPTER 10 Natural Resources and Land 225 10.1 Natural Resources Other Than Land 225 10.2 Land 230 10.3 Timber and Timberland 236 10.4 Farmland 238 10.5 Valuation and Volatility of Real Assets 242 10.6 Historical Risks and Returns 246 Review Questions 249 CHAPTER 11 Commodity Forward Pricing 251 11.1 Forward Contracts versus Futures Contracts 251 11.2 Rolling Contracts 259 11.3 The Term Structure of Forward Prices on Commodities 260 11.4 Backwardation and Contango 266 11.5 Returns on Forward Contracts 270 Review Questions 275 CHAPTER 12 Commodities: Applications and Evidence 277 12.1 Commodity Investing for Diversification 277 12.2 Commodity Investing for Return Enhancement 280 12.3 Investing in Commodities without Futures 282 12.4 Commodity Exposure through Futures Contracts 287 12.5 Commodity Futures Indices 294 12.6 Commodity Risks and Returns 296 12.7 Historical Risks and Return