SHOWCASE YOUR KNOWLEDGE

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All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Past performance is not a guarantee of future results. © 2013 CAIA Association, Inc.

PROTECTING YOUR

PORTFOLIO FROM INFLATION KEITH BLACK, PHD, CFA, CAIA

THE CAIA PROGRAM

The Chartered Alternative Investment Analyst (CAIA) curriculum

covers the following topics:

Ethics and professional standards, hedge funds, private

equity, real assets, commodities and structured products

Over 20% of the program material is dedicated to inflation-

sensitive assets

Over 6,700 members worldwide have earned the CAIA

designation

75% of candidates are from the US, UK, Hong Kong,

Switzerland or Singapore

Members are typically employed as

Portfolio managers, consultants, marketers, asset allocators,

analysts, or risk managers

2

Level I

Chapter 8: Land, Infrastructure, and Intangible Real Assets

Chapter 19: Commodities: Applications and Evidence

Level II

Chapter 3: Risk Management for Endowment and Foundation Portfolios

Chapter 24: Role of Commodities in Asset Allocation

Chapter 27: Macroeconomic Determinants of Commodity Futures Returns

CAIA CURRICULUM

3

WHY HEDGE INFLATION?

Most investors think in terms of nominal returns, especially in the

fixed income markets

However, rising inflation makes it more difficult to meet terminal wealth goals in nominal terms

Investors with a greater need for inflation protection will choose

larger allocations to real assets

Endowments and foundations who seek to maintain real spending

while preserving the real value of the endowment

Pensions who offer cost-of-living (COLA) adjustments to their retirees

Corporations or individuals with fixed incomes, but expenses that

grow with inflation

4

INFLATION UNCERTAINTY

With global fiscal and monetary stimulus, the uncertainty of

future inflation is high

While money supply growth is high, significantly higher inflation is unlikely to come until employment and production levels

increase

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0.50

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Dispersion of Forecasted Inflation Change

Philadelphia Federal Reserve, “Standard Deviation of One Year Inflation Forecasts of Professional Forecasters”, 2013

5

HEDGING INFLATION

Housing

32%

Medical

and

Education

14%

Commoditie

s

23%

Other

Goods and

Services

29%

US Consumer Price Index,

January 2014

USCPI, 2014

6

INFLATION BETAS

Where can institutional investors turn to hedge their inflation risk?

Studies have found that a few assets can hedge inflation risk

(positive inflation beta), while the majority of institutional assets

have a risk to rising inflation (negative inflation beta)

Within equities, smaller cap stocks and less capital intensive sectors

have even greater inflation risk

In practice, many institutions build a real assets allocation,

investing 5% to 20% of the portfolio in timberland, farmland, linkers

and commodity futures

Assets with superior inflation protection may have lower risk-

adjusted returns

20 Year US

Treasuries

S&P 500 3 Month

T-bills

10 Year

TIPS

Farmland Commodity

Futures

-3.1 -2.4 0.3 0.8 1.7 6.5

Bernstein Global Wealth Mgmt, “Deflating Inflation: Redefining the Inflation-Resistant Portfolio”, 2010

7

INFLATION-LINKED BONDS

Sovereign debt issues offer a real yield with an inflation-adjusted

principal value

10 year US TIPS offer a real yield of less than 0.5%

Break-even yield implies 2.2% future inflation, down from 2.5% last year

Bernstein estimates an inflation beta of 0.8

Holding non-USD issues can hedge the declining value of the

dollar, but are more sensitive to local country inflation

$2.3 trillion issued worldwide

Approximately 30% in US, 40% in UK and Eurozone

30% in Canada, Australia, Japan, Sweden, Iceland, Emerging Markets

Bernstein Global Wealth Mgmt, “Deflating Inflation: Redefining the Inflation-Resistant Portfolio”, 2010

8

LEVERAGED LOANS

As of August 30, 2013 Sorted by

June Total Return

Jan-13 Total

Return

May-13 Total

Return

June-13

Total Return

Yield-to-

Worst

Modified

Duration

Barclays U.S. TIPS -0.68% -4.36% -3.58% 2.27% 8.0 years

Barclays U.S. Corporate -0.89% -2.34% -2.76% 3.39% 6.8 years

Barclays U.S. Aggregate -0.70% -1.78% -1.55% 2.48% 5.5 years

Barclays U.S. Treasuries -0.81% -1.71% -1.10% 1.36% 5.1 years

S&P/LSTA Leveraged Loan +1.06% +0.19% -0.59% 6.65%* < 90 days

Leveraged loans are floating rate, high yield investments

With low duration, leveraged loans don’t necessarily suffer during rising rates

Shenkman Capital Management Inc., 2013

9

LEVERAGED LOANS PROSPER WHEN RATES RISE

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Dec

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Co

rrel

atio

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Rolling 3-year Correlation to U.S. Treasuries: Jan 1997 - Aug 2013

S&P/LSTA Leveraged Loan

BCAP Aggregate

BCAP U.S. Corporate

BCAP U.S. TIPS

Deleveraging Regime

Pre-Deleveraging Regime

Shenkman Capital Management Inc., 2013

10

COMMODITY FUTURES

Commodity futures returns have attractive correlation

characteristics over long time periods

Diversify across energy, industrial and precious metals, and agricultural products

Bernstein estimates an inflation beta of 6.5

Gorton/Rouwenhorst, “Facts and Fantasies about Commodity Futures”, Financial Analysts Journal, 2006

Commodity

Futures

Correlation

Stocks Bonds Inflation

One Year -0.10 -0.30 0.29

Five Years -0.42 -0.25 0.45

Bernstein Global Wealth Mgmt, “Deflating Inflation: Redefining the Inflation-Resistant Portfolio”, 2010 11

TRENDS IN CORRELATION

Ecowin, Barclays Research, 2013

12

Commodity/equity correlations fall… … as do cross-commodity correlations

EQUITIES

Equities have high long-term returns, but suffer in the short run

from higher interest rates during times of inflation

Firms in the natural resource, energy and real estate sectors have

greater inflation protection than broad equity indices

Energy and metals stocks have an inflation beta of 2, REITs of -2, and

S&P 500 of -2.4

Smaller stocks and less capital intensive stocks get hurt the most

by rising inflation

13

Rising Inflation Leaders to Higher Earnings… … but a Higher Discount Rate Hurts Valuations

Bernstein Global Wealth Mgmt, “Deflating Inflation: Redefining the Inflation-Resistant Portfolio”, 2010

REAL ESTATE AND REITS

Real estate investments are a hybrid between fixed

income and equity securities

Long-term leases are similar to fixed income instruments, as fixed rate leases suffer from higher discount rates

Property equity can act like stocks, rising with long-term

inflation

Short-term effects are negative for both REITs and private

real estate partnerships

14

TIMBERLAND

Like real estate, the land value can be negatively affected by

inflation

Like commodities, timber values are positively affected by inflation

Can be correlated to economic activity, especially housing

starts

Interesting real options characteristics, where waiting to harvest

during times of low prices can lead to another year of biological

growth

Martin, “The Long-Horizon Benefits of Traditional and New Real Assets in the Institutional Portfolio”, Journal of Alternative Investments, 2010

15

FARMLAND

Unlike infrastructure or real estate, the supply of farmland is fixed

or shrinking despite growing demand for food

Returns may be leveraged to growth in population and income in emerging markets

Commodity-based rents benefit from short-term inflation

Bernstein estimates an inflation beta of 1.7

Permanent crops, such as orchards or citrus, have different

characteristics than row crops

Row crops, such as corn or wheat, have annual option to switch

to a more profitable crop

Bernstein Global Wealth Mgmt, “Deflating Inflation: Redefining the Inflation-Resistant Portfolio”, 2010

16

INFRASTRUCTURE AND MLPS

Toll roads, pipelines, ports and utilities can benefit from inflation

when user fees increase at a greater rate than expenses

Infrastructure is a hybrid asset class, having characteristics of fixed

income, real estate and private equity

Many infrastructure assets have low price elasticity of demand,

making the cash flows somewhat recession proof

Some contracts to operate regulated assets include inflation

escalation clauses

Investment opportunities may be large due to growing energy

demand, governmental budget deficits and needs for

infrastructure growth and rehabilitation

17

SUMMARY OF REAL ASSET CHARACTERISTICS

Martin, “The Long-Horizon Benefits of Traditional and New Real Assets in the Institutional Portfolio”, Journal of Alternative Investments, 2010

18

THE CAIA CHARTER The Global Benchmark In Alternative Investment Education

caia.org

THE CAIA CHARTER The Global Benchmark In Alternative Investment Education

March 2015 Exam

GLOBAL PRESENCE

21 March 2015 Exam

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Membership as of May 31 Annually

MEMBERSHIP GROWTH

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MEMBERSHIP PROFILE

23

55%

13%

32% Americas

Asia-Pacific

Europe, Middle-East, Africa

March 2015 Exam

3%

4%

5%

5%

7%

11%

11%

11%

16%

26%

Accounting / Fund Administration

Due Diligence, Compliance, and/or Legal

Asset Allocator

Marketing

Risk Management

Other

Business Development

Consultant

Analyst

Portfolio Management

CAIA Members by Profession

*From January 2014 CAIA Member Survey with 14% of members responding.

Regional Distribution of CAIA Members

LEVEL I CURRICULUM

Professional Standards & Ethics

Introduction to Alternative Investments

Real Assets

Hedge Funds

Commodities

Private Equity

Structured Products

Risk & Portfolio Management

24

CORE CONCEPTS

March 2015 Exam

LEVEL II CURRICULUM

Professional Standards & Ethics

Venture Capital & Private Equity

Hedge Funds & Managed Futures

Real Estate/Real Assets

Commodities

Structured Products

Manager Selection, Due Diligence & Regulation

Research Issues & Current Topics

Risk & Risk Management

Asset Allocation & Portfolio Management

25

ADVANCED CORE CONCEPTS

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15%

5%

10%

5%

5% 10%

5%

5% 5%

10% 15%

10% 5%

10% 15%

Level I Level II

Minimum Weights by Topic per CAIA Exam Level

Introduction to Alternative

Investments

Hedge Funds & Managed

Futures

Standards & Ethics

Hedge Funds

Real Assets

Commodities

Private Equity

Structured Products

Risk Management

EXAMINATION FORMAT

LEVEL I

200 Multiple Choice Questions Section 1 : 100 questions / 120 minutes

Section 2 : 100 questions / 120 minutes

SAMPLE: Consider the case of a non-dividend-paying financial asset where F > Ser(T-t).

How, in this case, can the hedge fund manager earn a profit?

LEVEL II

100 Multiple Choice Questions + 3 Essays Section 1 : 100 questions / 120 minutes

Section 2 : 3 essays / 120 minutes

SAMPLE: Recent studies argue that during tail-risk events, the returns earned by broad

equity indices go to extremes. What are the primary forces driving this process?

27 March 2015 Exam

CANDIDATE SUPPORT/TOOLS

Study guides outlining keywords and learning

objectives

Workbooks with sample exercises

Candidate orientation sessions

Study calculator to plan your course of study

Third Party Preparatory Course and Programs

Level I & Level II sample exams

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FEES

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CURRICULUM COST

The CAIA Curriculum is available for purchase through

Amazon.com and Wiley.com.

Approximate pricing (in USD):

• Level I Textbook US $110 - 200

• Level II Textbook & Readings US $310 - 400 • Standards of Practice Handbook US $30 - 40

March 2015 Exam

(in USD) Level I Level II Membership (annually)

Program Enrollment $400 Full $350

Exam Registration $1250 $1250 Affiliate $175

TOTAL $1650 $1250 Retired $175

Early Registration Discount -$100 -$100

Retake Fee $450 $450

PASS RATES

30 March 2015 Exam

71% 74% 68% 64% 68% 68% 67%

58% 59% 58% 62% 65% 62% 63%

0%

100%

Pass Rates of Candidates Per Exam Cycle

Level I

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CAIA CHARTER

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ACADEMIC PARTNERSHIPS

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Fund Management

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SAMPLE OF CAIA MEMBER EMPLOYERS

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• HSBC

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• Blackrock • Goldman Sachs • J.P. Morgan

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• FCA UK • CIMA Cayman

• APG

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CAIA IS “PREFERRED”

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Sample job postings from the CAIA Job Board.

Top companies seek to hire CAIA Charter holders.

Risk Management - Associate

Industry certifications, such as a CFA, CAIA, or FRM, are a plus.

International Relationship Manager

CFA, CAIA or working toward preferred.

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CAREER VALUE OF THE CAIA CHARTER

36

10%

11%

15%

15%

43%

66%

0% 100%

Increased Compensation

New Business

New Position/Promotion

Additional Responsibilities

Expanded Professional

Networks

Increased Credibility

CAIA Members Report Positive Career Outcomes

After Earning the CAIA Charter

*From October 2013 CAIA Member Survey. Numbers represent approximately 14% of members.

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Self Evaluation Tool Ongoing education

MEMBER BENEFITS

37

Regular educational and networking events

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CAIA.org Knowledge Center

MARCH 2015 EXAM NOTABLE DATES

Registration

• Early: October 1- November 12, 2014

• Regular: November 13, 2014 – February 4, 2015

Level I Exam

• March 9 - 20, 2015

Level II Exam

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38 March 2015 Exam

AMERICAS

Millissa Allen, CAIA Amherst Director of Business Development direct: +1 413 549 3324 mallen@caia.org

EUROPE, MIDDLE-EAST, AFRICA

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