The CAIA exam focuses on alternative investments and if you are new to the industry or to the subject, you might come across quite a lot of new terms. I have compiled a list of some terms that you might find useful in your studies.

2/20 (two and twenty): this refers to the fee structure that is charged by hedge funds. The 2 refers to the recurring 2% management fixed fee that is charged as a % of assets held. The 20 instead refers to the 20% fee that is charged on any investment returns.

Accredited Investor: accredited investors are individuals who are allowed to invest in sophisticated investments such as hedge funds, VCs, private placements, etc. In order to be classed as such, accredited investors need to meet a number of criteria such as having a net worth of $1,000,000 or having an income of at least $200,000 (these criteria might vary based on the country).

High-Watermark: this is the highest fund value reached by a fund. High-Watermarks are very important when we are talking about performance returns that are paid out to hedge fund managers. Let’s look at the below example:

Assuming a fund’s NAV (Net Asset Value) at inception in 2014 is 100 we can see that in 2015 it had a return of 20% and the NAV grew to 120. The fund will take 20% of the 20 that it made in profit (Year 2 NAV – Year 1 NAV which is equal to 120 – 100 = 20 from the table above). Therefore 120 is the High-Watermark at this stage.

Similarly, in the following year it rose again by 20 and now the returns are calculated in terms of any gains made above the High-Watermark of 120 so (140-120)*20%, the new High-Watermark now becomes 140.

In the following year we can see that the fund didn’t have such a great year and it’s NAV fell to 120. No performance fees will be paid as the NAV value was below the High-Watermark. If we look at the next year we can see that the fund posted some gains from 120 to 130 but still this is below the 140 High-Watermark so no performance fees arise.

CTA: stands for commodity trading advisor. This is a term used to define a hedge fund that aims to generate returns via futures, options and forex trading.

Vintage: vintage refers to the year when the VC fund was set up. When you are comparing returns of VC funds, it’s very important to compare two funds that have the same vintage. Fund performance will be hugely affected by the prevailing economic conditions from when the fund was set; comparing two funds with the same vintage allows us to make a fair comparison.

General Partners vs. Limited Partners: you will come across these terms when looking at private equity. The general partner will be involved in the day to day running of the VC firm where he or she will manage the projects and decide which projects to invest in. Limited partners on the other hand are not involved in running the VC firm but instead they provide the funds that the General Partners put to use to increase the value of the firm.

Cap Rate (Capitalization Rate): you will come across this term in real estate and you can interpret it as the yield that your property is offering. The Cap Rate is obtained by Net Operating Income (NOI)/Property Value.

REIT: stands for Real Estate Investment Trust. A REIT is a company that owns and operates a real estate portfolio. Real estate could range from warehouses, hospitals, commercial properties, residential properties and more. REITs are listed on exchanges and investors can buy REITs just like ordinary common stocks. REITs tend to have inflows of cash flows in terms of rent paid by tenants and this allows for such returns to be paid out to investors in the form of hefty dividends which could range from 2-6%. They could be a good for income generation and moderate inflation protection. REITs are sensitive to economic conditions and fluctuations in the property market.

So, you are interested in alternative investments and you are seriously considering taking the CAIA exam?  I passed the level 1 and level 2 exams a few years ago and I would like to provide you with some genuine pieces of advice that I hope you will find useful.

For those who have not come across this qualification, CAIA stands for Chartered Alternative Investment Analyst and the whole exam goes into a lot of depth in testing candidates about alternative investments. If you are interested in learning about common hedge fund strategies, going deeper into commodities and real assets, I think you will enjoy studying for the exam. I certainly did.

What is tested and how are topics weighted?

CAIA Level 1 Topics	Exam weight
Professional Standards and Ethics	15% – 20%
Introduction to Alternative Investments	20% – 25%
Real Assets (Including Commodities)	10% – 20%
Hedge Funds	10% – 20%
Private Equity	5% – 10%
Structured Products	10% – 15%
Risk Management and Portfolio Management	5% – 10%

Exam Format

If you want to become a CAIA Charterholder you will have to complete two exams in addition to meeting other requirements, such as four years of work experience or a bachelor’s degree with one year of work experience. For level 1 you will have 4 hours to complete 200 multiple choice questions (you can choose to take a 30 minute break which I strongly recommend you do). You will also have a total of 4 hours for level 2, however this time in addition to 100 multiple choice questions you will have a section on constructed responses. A plus if you have already completed the CFA exam is that the ethics portion tests you on the CFA Standards of Conduct, so for this section you have killed two birds with one stone.

Unlike the CFA exam, the CAIA exam is computer based; so if you are like me and you enjoy marking answer sheets with your HP pencil you will be disappointed. You will be spending hours staring in front of a computer screen so if you decide to take the exam make sure to take online mock exams so you get used to starting at a screen for a long period of time.

Exam Windows

An advantage of the exam being computer based is that there is some flexibility with regards to the dates on which you can sit the test. The exam windows for 2019 are:

• Level 1: September 2 – 13
• Level 2: September 16-27

How to prepare for the exam?

The CAIA institute provides core textbooks for each level (materials can be found here). The Chapter Head for CAIA is Keith Black and his research is very well respected in the field.

It goes without saying that there are a few training providers out there who sell their study notes. I have had a look at the Schweser ones and similarly to the CFA study notes they are well written and the information is summarised well. However, in my case, going through the curriculum and doing a few mocks was more than enough.

Overall I’d say that if you have some foundations in finance, 100 – 200 hours for level 1 and 200 to 250 hours for level 2, this should allow you to pass the exam. Don’t be fooled by the pass rates, it’s definitely not an exam that you want to underestimate, especially level 2.

How to tackle item sets in level 2

If you have been used to answering multiple choice questions, the idea of typing your responses for item set questions might be intimidating. From my experience the markers will mainly focus on content and you shouldn’t get marked down for your style although clear and well structured responses will be appreciated. My advice is to provide short clear and concise bullet point answers.

General thoughts regarding the exam

Ok, if you have read this far you might be asking yourself if overall the exam is worth taking. The short answer in my opinion is “Yes” but again this will depend on your situation and your career goals. If you think this qualification will help you get hired straight away in a VC fund then you will need to reassess your expectations. The alternative investments industry is extremely competitive and you will need more than a qualification to differentiate yourself from the competition. I think the exam has the following two benefits:

• The curriculum is very well structured and provides a good overview of alternative investments. Upon completing it I felt like I knew a bit of everything regarding alternative investments; as a professional working in the financial sector it definitely helps having awareness of a wide range of asset classes.
• The network. I attended several events and I have had the pleasure of meeting William (Bill) J. Kelly, CEO of the CAIA Association. I had a very positive experience talking to him and I could feel his drive and passion in expanding this association globally. The events that I attended were in Tokyo and although the society is still relatively small compared to other capital cities, I am confident that it will keep growing in popularity. A lot of the charterholders here in Japan are quite senior people who have pursued the exam with the sole purpose of expanding their knowledge, so if learning is a key priority in life you will meet a lot of like minded people.

In future posts I intend to cover some topics that I especially enjoyed studying when prepping for the exams, so hopefully you will be able to use the content for your preparation. Thanks for reading and good luck with your studies.