For those who work in, or have aspirations of one day working in the world of finance, chances are you're familiar with the Chartered Financial Analyst (CFA) designation. The CFA designation, as it is known, has become arguably the most recognizable and sought after professional designation in the industry. With topics of study ranging from professional conduct standards, quantitative measures, financial reporting and portfolio management to name a few, receiving a CFA designation is a long and challenging endeavor. Becoming a charter holder brings with it a level of achievement and hopefully opens doors in one's profession that may not have been there prior.
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That being said, the CFA charter is truly an all-encompassing designation that focuses more on portfolio management at its highest level. However, for individuals looking to achieve a more expert-level grasp on the area of alternative investments, the Chartered Alternative Investment Analyst designation (CAIA) should be considered, either as a stand-alone designation or to augment one's CFA charter. (For more information, see A Look At CFA Job Opportunities.)
The CAIA designation focuses on the alternative investment asset class(es), which includes private equity, hedge funds, commodities and real estate, among others. Alternative assets can be considered investments and asset classes that do not fall under the general umbrella of equity or fixed income. Investment and interest in such alternative assets continues to grow in the financial community, and individuals with advanced expertise in the area are in ever-increasing demand. Here, we will introduce you to the CAIA program and subjects related to obtaining the CAIA designation. (For related reading, see The Alphabet Soup Of Financial Certifications.)
The CAIA Association was founded in 2002 by the Alternative Investment Management Association and the Center for International Securities and Derivatives Markets, and offered the first CAIA exam in February 2003. The CAIA designation is awarded by the CAIA Association to those who completed the CAIA program's stated requirements. In order to obtain the designation, candidates must: hold a U.S. Bachelor's degree (or equivalent); successfully pass both the Level I & II exams; have more than one year of qualifying work experience (or four years of professional experience); maintain annual membership dues and abide by the membership agreement.
The program itself is based upon self-directed learning, like most professional designations, meaning that it is up to the candidate to decide what and how much to study, based upon the guideline curriculum and required readings given by the CAIA Association. Probably the best way to learn about obtaining the designation itself would be to go through the Level I CAIA exam and the topics covered within it, and touch upon the Level II exam a bit as well.
Both the Level I & II exams are offered twice a year, in March and September, and students have the option of booking their exam within a 10 business day window during the exam periods. The Level I exam consists of 200 multiple choice questions and aims to take candidates' elementary knowledge of the topics of study and build upon what one should have learned during their undergrad. The exam covers seven distinct topics, all of which share a relatively even weighting on the exam:
Professional Standards and Ethics
This section covers much of the same topics that would be covered in the CFA curriculum, such as professionalism, duties to employers and clients, and conflicts of interest. Much like the CFA Institute, the CAIA Association places a serious emphasis on professional standards and ethics, and drills home that obtaining the CAIA designation and membership comes with strong professional and ethical guidelines.
Alpha and Beta Drivers
The second section aims to define alternative assets and their importance to generating alpha and beta in active management. As noted previously, an alternative asset can be best defined as an asset class or investment that would not be considered an equity or fixed income. This section also focuses on measuring the effectiveness of active management, through the use of such measures as the information ratio, the information coefficient and the beta continuum. Other topics would include Capital Asset Pricing Model (CAPM) and benchmark identification. (To learn more, read The Capital Asset Pricing Model.)
The Real Estate section introduces students to the different types of real investments, such as real estate investment trusts (REITs), direct investment in real estate and real estate valuation. Additionally, understanding the role of the National Council of Real Estate Investment Fiduciaries (NCREIF) and its indexes are important aspects to the real estate section.
Hedge Funds cover a wide range of hedge fund related topics and more than likely acts as an introduction to most on the hedge fund industry. Candidates will learn about the different types and styles of funds, how their performance can be measured, fee structures and the inherent risks associated with hedge fund investment. Additionally, studies on well-known hedge fund collapses, such as the falls of Amaranth and Marin Capital, are part of the study. (To read more on hedge fund collapses, see Massive Hedge Fund Failures.)
Commodities and Managed Funds
This aims to familiarize students with the commodities and futures markets, along with the part they play in a diversified portfolio. Commodity and futures related topics such as contango, spot vs. futures prices and trend relations are part of the curriculum here. Understanding the roles of hedgers and speculators in this marketplace is a key topic, as well.
Next, the Private Equity (PE) section gets into topics such as venture capital, leveraged buyouts (LBOs) and mezzanine debt. Additionally, the readings look at trends in the industry and the economics of private equity investments, namely the role of debt.
The final topic covers all things credit, especially Collateralized Debt Obligations (CDOs). In this section, candidates are expected to understand the basis behind CDO valuation and the different underlyings a CDO can be based on, such as distressed debt and arbitrage CDOs. This is typically one of the most difficult sections for students on the exam, so most may need to pay extra attention to this final topic. (For related reading, see Collateralized Debt Obligations: From Boon To Burden.)
The Similarities and Differences
The Level II exam covers much of the same areas of study as Level I, but challenges test-takers to take the knowledge they've gained from Level I to a deeper level of understanding. Additionally, sections found on the second exam not present on the first include Risk Management, Due Diligence and Current Topics. While only consisting of 100 multiple choice questions, the Level II exam also includes three sets of written essay questions, which will challenge a candidate's full understanding of the material. Historical pass rates for the two exams also cement the point that the Level II exam is much more challenging for test-writers, as in recent years roughly 72% of Level I writers received a passing grade, while approximately 70% make the cut for Level II. However, don't let these statistics deter you; if you put in the required time and effort, you will more than likely be rewarded for your hard work.
The Bottom Line
Upon becoming a member of the CAIA, members get to enjoy many benefits associated with the designation. First and foremost, the CAIA designation itself is viewed as the standard for alternative investment professionals and thus CAIA members can be found in positions in many different areas, including hedge funds, PE funds, investment banks and commodity desks. Also, the membership brings with it access to related events and conferences, where members can share ideas with like-minded professionals and build upon their knowledge of alternative investments. Like most highly regarded professional designations, the perks associated with membership (both professional and otherwise) often are a large part of the reward.
This has been just a quick look at the CAIA program and what individuals new to the designation can expect from the program. For more information please visit the CAIA website to get a complete introduction and description of the program and the CAIA Association itself. (To learn about other designations, read A Guide To Financial Designations.)