Thursday, 23 February 2017
Last updated 4 hours ago
Jun 20 2012 | 4:45pm ET
A decade ago, when Mark J. P. Anson, then California Public Employees’ Retirement System's chief investment officer, went through the Chartered Alternative Investment program, there was no textbook. So he wrote one.
His original handbook has morphed into CAIA Level I, an 874-page tome now in its third edition from Wiley, but Anson is still the chief writer. FINalternatives Senior Reporter Mary Campbell spoke to Anson—now a managing partner at Menlo Park, Calif.-based Oak Hill Investment Management—about (literally) writing the book on the alternative assets industry.
Can you tell me about your involvement with the CAIA textbook?
This is officially the second edition of the CAIA textbook, but, in fact it’s really now the fourth edition of what goes back to the original Handbook of Alternative Assets.
Ten years ago, when I was the CIO at CalPERS and we were expanding our portfolio into alternatives of all sorts—expanding the private equity portfolio, getting into commodities, really gearing up hedge funds, getting into quantitative strategies— at the same time I was just going through the CAIA program. I was one of the early-adopters. In fact, back then, the CAIA Association program was just a series of papers that you collected and read through to get ready for the exam. And there wasn’t a textbook that pulled the information together. So I sat down and I wrote this textbook called The Handbook of Alternative Assets; it was first published in 2003. And then I updated it three years later, so it was the second edition of that and CAIA began using excerpts from my book. Three years after that, CAIA said, "Well, Mark, why don’t you write a textbook for CAIA."
And that first edition was in 2009?
Yes. And then this edition is 2012, so it’s every three years I’ve been revising and adding and refining my thoughts on alternative assets into a textbook. Not only a textbook but a reference book that any person who’s investing in alternatives could use as just that, a handy reference.
I’m impressed by clarity of writing, given how complicated these topics are.
They are complicated topics, and when I wrote the first edition, way back in 2003, I remembered back to my days as a grad student—I hated picking up a textbook that was all words with very few examples or charts or tables. One of the things I’ve emphasized throughout this book is putting in a lot of examples, a lot of equations with numerical data and a lot of charts and tables and graphs, so that you can pull out from the words concrete examples that can give you a demonstration of how alternative assets work and then you can apply that to your own portfolio.
What are some of differences between the 2009 edition and this edition?
First, there’s a lot more on real assets; in particular, we added a new chapter on land and infrastructure and what we call "intangible" real assets—timber, farmland, intellectual property. That’s all new. We also added a chapter on real estate investment trusts. For things that have changed over time—for instance, hedge funds—one of the things I’ve done is to include new anecdotes about how hedge funds work
We added a whole section on risk management and portfolio management, a whole statistical chapter on regression and multi-variate analysis and how to apply some of these statistical tools that I use throughout the book. We also added a chapter on portfolio optimization and risk parity: What does that mean, "mean-variance portfolio optimization?" What does it mean to actually risk budget and what is risk parity?
The last part of the book is trying to bring back some broader portfolio concept ideas. Alternative investments have become mainstream investments; they’re no longer an oddball thing that only the smartest people and the most esoteric put in a portfolio. They are legitimate portfolio tools, so let’s insure that, at the end of the book, we bring it all back to portfolio management and risk budgeting.
And then, of course, three more years of history gives you much more data, and new ideas to do the analysis with.
What is the writing process like? When it’s time for the next edition, how do you go about deciding what’s to be added or changed?
A lot of these chapters are things that I’ve written about already, so it’s a matter of updating the data. As we were looking at the book this time around, we had the opportunity to look at data coming out of the Great Recession. The 2009 edition came out basically at the bottom of the recession, so we’ve now had a chance to come through that and look back a few years to see how some of these strategies have recovered, not only how did alternative assets perform going all the way through the cycle of the Great Recession but how are they performing going forward. Our big emphasis this time around was focusing on the empirical data and drawing objective conclusions now that we can look back three years and see what the hell happened from this huge financial mess we had back in 2008. So that was very important.
Another example is Chapter 26: Lessons from Hedge Fund Failures. There were a lot of hedge fund failures coming out of the Great Recession, so we put a chapter together and said, "Alright, let’s take a look back and let’s look at some of these hedge funds—well-known hedge funds—that blew up. What happened? How were they impacted by the great recession and to such an extent that they went out of business so quickly and dramatically?" One of the anecdotes in there was on Peloton Partners, which I think in January 2008 was voted Credit Fund Manager of the Year. By March 2008 they were out of business. In a two-month time-span they went from being honored to being out of business—what happened in that timeframe and what can we learn from it?
You mentioned you were an early CAIA adopter. What do you consider the advantages of that designation?
I am both a CFA charter holder and a CAIA charter holder. As I was building out the alternatives program at CalPERS, I needed greater specificity and a more intense training in alternatives than what the CFA program offered at that time. And that’s how I turned to CAIA. Now it was also helpful that I was plugged in already to some of the alternative industry organizations. I was familiar with the Alternative Investment Management Association from over in Europe, and through those connections I was able to get a better sense of what the CAIA program was all about, why it was founded and what it was meant to do. I also recognized at that time that if CalPERS was going to move more heavily into alternatives, you really had to have leadership at CalPERS and that meant getting as professionally trained in alternatives as I possibly could be; CAIA was the program that offered that.
How sophisticated are pension funds as investors today?
They’re much more comfortable investing on their own. There are advantages to investing with funds of funds. The trade-off for a pension fund is, how much have they invested in their own internal investment staff. CalPERS has a very large investment staff and it’s very fortunate in that regard, that it has highly trained, very skilled investment professionals in-house. That allows CalPERS to build its own hedge fund program. Other pension funds may not have the same amount of human capital internally; they may not have a hedge fund expert in-house and so for them, the fund of funds route is a much better way to go. Essentially, they’re outsourcing that hedge fund expertise, and that can be a very efficient way to invest in the hedge fund market place.
But nonetheless, I’d say pension funds have dramatically not only enhanced their understanding of alternatives but have increased their allocation of capital to alternatives and also have tried to recruit in-house those who have expertise in the alternatives sphere. They’re much further along than where they were when I sat down to write the handbook 10 years ago now.
Who is the audience for this book?
Well, we were using it today—we had an issue with regard to measuring the systematic risk with a private equity manager that we intend to allocate capital to, a manager that has a very flexible mandate to go anywhere from growth equity buy-out space to distressed in their fund. So we used some of the analysis in the book to extract out a good estimate of what was the embedded market risk or systematic risk in that portfolio to have a better sense of what was the true alpha of this manager. And literally, we were going through the book today—myself and one of my team members—pulling out some of that data so we could bring it to our next investment committee meeting.
That's a perfect example of how it was used—about two hours ago.