Encyclopedia of alternative investments

Encyclopedia of Alternative Investments CRC_C6488_Fm.indd i 7/17/2008 1:07:12 PM CRC_C6488_Fm.indd ii 7/17/2008 1:07:14 PM Encyclopedia of Alternative Investments Edited by Greg N Gregoriou CRC_C6488_Fm.indd iii 7/17/2008 1:07:14 PM Chapman & Hall/CRC Taylor & Francis Group 6000 Broken Sound Parkway NW, Suite 300 Boca Raton, FL 33487-2742 © 2009 by Taylor & Francis Group, LLC Chapman & Hall/CRC is an imprint of Taylor & Francis Group, an Informa business No claim to original U.S Government works Printed in the United States of America on acid-free paper 10 International Standard Book Number-13: 978-1-4200-6488-9 (Hardcover) This book contains information obtained from authentic and highly regarded sources Reasonable efforts have been made to publish reliable data and information, but the author and publisher cannot assume responsibility for the validity of all materials or the consequences of their use The authors and publishers have attempted to trace the copyright holders of all material reproduced in this publication and apologize to copyright holders if permission to publish in this form has not been obtained If any copyright material has not been acknowledged please write and let us know so we may rectify in any future reprint Except as permitted under U.S Copyright Law, no part of this book may be reprinted, reproduced, transmitted, or utilized in any form by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying, microfilming, and recording, or in any information storage or retrieval system, without written permission from the publishers For permission to photocopy or use material electronically from this work, please access www.copyright.com (http:// www.copyright.com/) or contact the Copyright Clearance Center, Inc (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400 CCC is a not-for-profit organization that provides licenses and registration for a variety of users For organizations that have been granted a photocopy license by the CCC, a separate system of payment has been arranged Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe Library of Congress Cataloging-in-Publication Data Encyclopedia of alternative investments / editor, Greg N Gregoriou p cm Includes bibliographical references and index ISBN 978-1-4200-6488-9 (hardback : alk paper) Investments Encyclopedias Asset allocation Encyclopedias Portfolio management Encyclopedias Investment analysis Encyclopedias I Gregoriou, Greg N., 1956- II Title: Alternative investments HG4513.E53 2008 332.603 dc22 2008015276 Visit the Taylor & Francis Web site at http://www.taylorandfrancis.com and the CRC Press Web site at http://www.crcpress.com CRC_C6488_Fm.indd iv 7/17/2008 1:07:14 PM Editorial Board Carole Alexander University of Reading Reading, England, UK Dieter G Kaiser Feri Institutional Advisors GmbH Bad Homburg, Germany Keith Black Ennis Knupp and Associates Chicago, Illinois, USA Steve Kaplan University of Chicago Chicago, Illinois, USA B Wade Brorsen Oklahoma State Stillwater, Oklahoma, USA Josh Lerner Harvard University Cambridge, Massachusetts, USA Douglas Cumming York University Toronto, Ontario, Canada FranÇois-Serge Lhabitant University of Lausanne Lausanne, Switzerland and EDHEC, Nice, France William Fung London Business School London, England, UK Colin Read State University of New York (Plattsburgh) Plattsburgh, New York, USA Michael Gorham Illinois Institute of Technology Chicago, Illinois, USA Antoinette Schoar Massachusetts Institute of Technology Cambridge, Massachusetts, USA Campbell Harvey Duke University Durham, North Carolina, USA Denis Schweizer European Business School (EBS) Oestrich-Winkel, Germany Scott H Irwin University of Illinois at UrbanaChampaign Urbana, Illinois, USA Hilary F Till Premia Capital Mgmt and EDHEC-Risk (Nice) Chicago, Illinois, USA CRC_C6488_Fm.indd v 7/17/2008 1:07:15 PM CRC_C6488_Fm.indd vi 7/17/2008 1:07:15 PM Contents Acknowledgments xxvii Introduction xxix Editor xxxi Contributors xxxiii List of Contributor Entries xxxix A Absolute Return Agricultural Trade Option Merchant 12 Franziska Feilke Sean Richardson Allowances 13 Absolute Return Index Elisabeth Stocker Acceleration Douglas Cumming Accredited Investor Sean Richardson Active Premium Carlos López Gutiérrez Activists Dieter G Kaiser Aftermarket Colin Read Aftermarket Orders .7 Colin Read Aftermarket Performance .7 Steven D Dolvin Agency Problem Oana Secrieru Aggregation 11 François-Éric Racicot Abdulkadir Civan Alpha 13 Markus Leippold Alternative Asset 14 Begoña Torre Olmo Alternative Asset Class 16 Marno Verbeek Alternative Alpha 17 Georges Hübner Alternative Betas 17 Georges Hübner Alternative Investment Strategies 18 Zsolt Berenyi Angel Financing 20 Oana Secrieru Angel Groups 20 Stephan Bucher Angel Investor .21 Winston T H Koh vii CRC_C6488_Fm.indd vii 7/17/2008 1:07:15 PM viii • Contents Annualized Compound Return 21 Mohamed Djerdjouri B Backfilling Bias 37 Robert Pietsch Annualized Standard Deviation 22 Mohamed Djerdjouri Approved Delivery Facility 23 Ingo G Bordon Arbitrage 24 Andreza Barbosa Arbitration 25 Keith H Black Archangel .26 Martin Hibbeln Artificial Price 26 Bill N Ding Asset Allocation 27 Giampaolo Gabbi Asset-Based Style Factors 29 Roberto Savona Asset-Weighted Index 30 Timothy W Dempsey e Assignment 31 Raymond Théoret Associated Person .32 Julia Stolpe At-the-Money Option 32 Back Pricing 38 Bill N Ding Backwardation 38 Hilary F Till Basis .39 Hilary F Till Basis Grade 40 Sergio Sanfilippo Azofra Basis Swap 41 Francesco Menoncin Beauty Contest 41 Claudia Kreuz Benchmark 42 Wolfgang Breuer Beta 42 Raymond Théoret Bid-Ask Spread 44 François-Éric Racicot Block Trade 44 Paolo M Panteghini Bonds (Overview of Types) 45 Karyn Neuhauser Raymond Théoret Attrition Rates 33 Robert Pietsch Average Gain (Gain Mean) 34 Galina Kalcheva Average Return .35 Mohamed Djerdjouri CRC_C6488_Fm.indd viii Bookbuilding 47 Edward J Lusk Booking the Basis 49 Ansgar Belke Bottom-Up Investing 49 Hayette Gatfaoui 7/17/2008 1:07:15 PM Contents • ix Bridge Financing 50 Jens Burchardt Carve-Out 66 Stefano Gatti Bridge Loan 52 Christian Hoppe Cash Commodity 67 Keith H Black BTOP 50 Index 53 Jodie Gunzberg r Cash Market 68 Keith H Black Bucketing .54 Carlos López Gutiérrez Buyer’s Market 55 Begoña Torre Olmo C Calendar Report 57 Bill N Ding Call Option 58 M Banu Durukan Calmar Ratio 61 Mehmet Orhan Cancellation 62 Keith H Black Capital Call 62 Philipp Krohmer Cash Settlement 69 Dengli Wang Cash Settlement (An Example) 69 Walter Orth CDO 70 François-Éric Racicot Certification 71 Douglas Cumming Chinese Wall 71 Denis Schweizer CISDM Indexes .72 Laurent Favre Clawback 73 Denis Schweizer Clearing Members 74 Abdulkadir Civan Capital Commitment 63 Markus Ampenberger Capital Distribution 63 John F Freihammer Capital Structure Arbitrage 64 Georges Hübner Carried Interest 65 Markus Ampenberger Carrying Charge 66 Oliver A Schwindler CRC_C6488_Fm.indd ix Clearing Organization .76 Keith H Black Clearing Price .76 Robert Christopherson Closing 77 Stuart A McCrary r Coefficient of Determination .78 Fabrice Douglas Rouah Coffee Market .79 Zeno Adams 7/17/2008 1:07:15 PM Indexx • 531 Investment style analysis, 456–457 asset-based style factors, 400, 458 bottom-up investing, 49–50 contrarian, 167, 476 drift, 458–460 impact of, 358 momentum, 476 opportunism, 334–335 peer group based style factors, 354–356, 458 return-based style factors, 399–400, 458–459 top-down, 481 Investors, types of accredited, 3–4, 375, 394 active, angel, 21, 26, 418, 420, 507 endowment, GARP (Growth at a Reasonable Price), 177 institutional, 147, 170, 197, 213, 245, 370, 394, 404, 443 lead, 262–263, 465–466 passive, 14 qualified, 383 retail, 245 rise-averse, 149, 415 risk-taking, 34 venture capitalists, see Venture capitalists vulture, 145 IPO Financial Network Corporation (IPOfn), 249, 412–413 IPOX® (Initial Public Offering Index), 251–253 J Jensen’s alpha, 42–43, 168, 255, 281, 329, 432 Jones, Alfred Winslow, 224, 495 Jones, Dean, 449 Jones Model characteristics, 256–257 Modified, 257, 302 Junk bonds, 47 See also Fallen angels Jurisdiction See Offshore jurisdiction K Kalman fi lter techniques, 221 Kansas City Board of Trade, 140 Karlweis, Georges Coulon, 197 Kerb trading See Curb trading Keynes, John Maynard, 39 Keynesian economics, 224 Kurtosis, 111–112, 230, 259, 301, 304, 343, 435, 482 CRC_C6488_Index.indd 531 L Lagrangian function, 482 Laspeyres formula, 209 Last notice day, 261–262 Last trading day, 262 Late stage financing, 181 Law of one price, 24 Lead manager, 263 Leasing, venture, 511–512 Legislation Commodity Credit Corporation Charter Act, 81 Commodity Exchange Act (CEA), 82, 85–86, 89, 100, 102, 108, 128, 131, 138–139, 164–165, 170, 286, 330 Commodity Futures Modernization Act (CFMA) of 2000, 82, 85, 108, 170, 418 Federal Agricultural Improvement and Reform (FAIR) Act, 81–82 Food for Peace Act, 81 Grain Futures Act of 1922, 213 Investment Company Act of 1940, 234 Sarbanes Oxley Act, 207, 252, 423 Securities Exchange Act of 1933, 323, 375, 391, 394 Securities Exchange Act of 1934, 373, 384, 394, 440, 464 United States Grain Standards Act, 409 Lehman Aggregate Bond Index, 299 Leverage asset allocation, 158 commodity market, 93 implications of, 1–2, 17, 118, 264–265, 495–496 transaction merchant, 31 Leveraged buyouts (LBOs), 53, 96, 239, 265–267, 282–283, 380 LIBOR, 41, 45, 69, 242, 321 Likelihood ratio, 9–10 Limit move, 269, 297 overview of, 269–270 orders, 62, 270 Limited liability company (LLC), 208, 270–271 Limited partners (LPs), 65, 73, 80–81, 95, 119, 183, 270–271, 376, 474, 507 See also Partnerships Linear regression, 13–14, 285 See also Regression analysis Liquidation, 146–147, 270, 272 Liquidity, implications of, 4, 45, 50, 54, 64, 74, 103, 148, 151, 220, 226, 271 Livestock feed ratio, 178–179 live hogs market, 272–273 7/10/2008 12:16:04 PM 532 • Index Loans bridge, 50–52 closing, 77–78 covenants, 120–121 see also Financing Lock limit, 270 Lock-up characteristics of, 273, 319 period, 4–5, 161, 198, 274, 356 Log-log regression model, 44 London International Financial Futures Exchange (LIFFE), 106 London International Financial Futures and Options Exchange (LIFFE), 79, 200 Long call, 337 Long position, 18, 107, 137, 163, 189–190, 202, 224, 241, 274–275, 297, 301, 318–319, 331, 379, 403, 429, 433, 471 Long put, 337, 381 Long/short equity hedge strategies, 167–168, 185, 211, 275 Long Term Capital Management (LTCM), 398 Lookback option, 28 Losing streak, 277–278 M Macroeconomics, 17, 19, 281, 417, 481 Maintenance margin, 12, 76, 288, 293 minimum, 287 Managed account characteristics of, 289–290 platforms, 290–292 Managed funds, 281 Managed Funds Association (MFA), 282 Managed futures characteristics of, 18 factor models, 175 fund, 33, 143 notes, 161 Management buy-in, 282–283 Management buyouts (MBOs), 96, 265–266, 283, 380, 507 Manager agent problems, book-running, 465–466 lead, 263 skill, 284–286 syndicate, 263, 465–466 Many-to-many platform, 286 Margin account, 202, 287 CRC_C6488_Index.indd 532 call, 272, 288, 292–293 characteristics of, 11, 286–287 defined, 428 gross processing (GPM), 401 initial, 32, 287–288 maintenance, 12, 76, 288, 293 open trade equity, 332–333 requirements, 241, 293, 453 variation, 288 Mark-to-market, 76, 88, 117, 202, 287, 293, 332, 428, 447 Market breadth, 44 bubbles, 431–432 capitalization, 44, 483 cycles, 50 efficiency, 24 open order, 334 order, 294 participant (MP), 128 price, 49 Market-based asset classes, 27 Market makers, 38, 44, 263, 330, 348, 352 Market neutral strategies, 43, 184–185, 275, 294, 319 Market timers, 277, 295 Market-timing strategy, 285, 294–295, 357, 447 Market value CDO, 70 implications of, 5, 11, 474 Markowitz, Harry, 28, 300, 335–336, 426 Maturity date, 120 Maximum drawdown (Max.DD), 61 Mean average gain (gain mean), 34 characteristics of, 448 reversion, 44, 122 Mean-variance portfolio theory, 221, 335 Mechanical system traders, 144 Mediation, 26 See also Arbitration Mentors See Archangel; Venture capital Merger arbitrage, 19, 30 characteristics of, 169, 211, 297–298, 403, 477 Merger and acquisition (M&A) transactions, 50, 53, 113, 244 Merton option-pricing model, 192 See also BlackScholes-Merton option pricing model Mezzanine financing, 181, 299, 411 Minimum acceptable return (MAR), 152, 299, 303, 426–427, 441 Minimum variance hedge ratio (MVHR), 223 Minneapolis Grain Exchange, 140 Mispricing, 64, 212 Modern portfolio theory (MPT), 27, 300–301 Modified internal rate of return (MIRR), 246 7/10/2008 12:16:04 PM Indexx • 533 Moment higher, 229–230 lower partial (LPM), 427 Momentum trading strategies, 485 Money left on the table See Overpricing Money market account, 285 Montreal Stock Exchange, aggregation rule, 11 Moody’s, 47, 70 Moral hazard, 9–10, 411 Moratorium, 125 Mortgage arbitrage, 185 Mortgage-backed securities (MBS), 46, 305–307 Mortgage-backed security arbitrage, 185 Mount Lucas Management Index (MLM Index™ x ), 307–308 MSCI database, 355, 421 Emerging Markets Index, 176 Multinationals, tax issues See Offshore tax haven Multiple regression, 14 Multiplier effect, 453 Multi-strategy fund, 309–310 Mutual funds characteristics of, 142, 159 closed-end, 318 real estate, 318 traditional, N Naked options, 59 NASDAQ 100, 192 Nash Equilibrium, 423 National Association of Securities Dealers (NASD), 25, 422 National Business Incubation Association (NBIA), 235 National Futures Association (NFA) functions of, 25, 32, 140, 201, 236, 248, 314–315 Rules, 406–407 National Introducing Brokers Association (NIBA), 315–316 Natural gas, 316 National Stock and Commodity Exchanges, 422 National Venture Capital Association (NVCA), 497 NCDEX Commodity Index, 90 Near arbitrage, 25 Near-the-money options, 515 Net asset value (NAV), 5, 38, 245, 318, 379, 447 Net gains, 63 Net hedging, 105 Net long, 318 Net market position, 168 CRC_C6488_Index.indd 533 Net present value (NPV), 492 Net worth, New York Board of Trade, 440 New York Cotton Exchange (NYBOT), 116, 135 New York Mercantile Exchange (NYMEX), 129, 135, 140, 241, 316, 326, 369 New York Stock Exchange (NYSE) characteristics of, 25, 131, 478 Euronext Liffe, 116, 341–342, 445 Eurex, 106, 200, 342 Newton-Raphson option pricing method, 232 Niche strategies, 199 Normal distribution, 97, 110–111, 259, 304 Notice period, 392 Notification factoring, 511 Notional principal, 320–321, 462 O Obligation acceleration, 125 default, 125 Offering circular, 393 date, 323 direct public (DPO), 141 initial public, see Initial public offerings (IPOs) memorandum, 324 price, 324–325, 473 public, 379, 425 range, 325–326 seasoned equity (SEO), 238, 410–411 secondary, 187, 416 unseasoned equity, 494 withdrawn, 519 Offset, 327 Offshore investments funds, 327 jurisdiction, 328 tax haven, 328–329 Omega, 329 Omnibus account, 330 One Chicago, 140 One-to-many platform, 330–331 Opaque funds, 483 Open bridges, 53 Open interest, 331–332 Open outcry markets, 177, 332, 446 Opening premium, 333 range, 333–334 Opportunistic behavior, 334–335 Opportunistic global hedge funds, 211 7/10/2008 12:16:04 PM 534 • Index Opportunity cost, 105 Optimization, 9, 335–336 Option based portfolio insurance (OBPI), 158–159 Option pricing models, 231–232, 259, 329 See also Black-Scholes-Merton option pricing model; Black-Scholes option pricing model; NewtonRaphson option pricing model Option pricing theory, 285 Options characteristics of, 1, 341–342 commodity, 88 contract, 11, 337–338 covered, 122, 489 exercise, 171 expiration date, 173 intrinsic value, 247 naked, 313 OTC, 342 premium, 29, 337–339, 365 pricing, 24 settlement price, 428 uncovered, 489 valuation, 342 writer, 58, 88 see also At-the-money options; Call options; Deep-in-the-money options; In-the-money options; Put options; Out-of-the-money options Options Clearing Corporation, 327, 427 Options Clearing House, 327 Order book, 342–343, 424 Order management system, 62 Order placement aftermarket, component of, 25 large order execution procedures, 261 market order, 294 open outcry system, 332, 446 order book, 342–343, 424 Ordinary least squares (OLS), 176, 219, 223 Organization for Economic Cooperation and Development (OECD), 90, 328 Organization of Petroleum Exporting Countries (OPEC), 129, 231 Ornstein-Uhlenbeck process, 44 Out-of-the-money options, 11, 32–33, 59, 233, 337–338, 343, 453, 503, 515–516 Over-the-counter (OTC) market, 12, 30, 38, 85, 170, 188, 191–192, 244, 291, 337–338, 341–342, 347–349, 413–414, 461–462, 501 Out trade, 344 Overallotment option, 239, 344–345 Overbought market, 64, 345 Overcollateralization, 307 Overpricing, 345–346 CRC_C6488_Index.indd 534 Oversold market, 64, 346–347 Oversubscription, 347 Overvalued stock, 195, 351, 433 Ownership, seasoned equity offering (SEO), 410–411 See also Investor, lead; Shareholder Ownership buyouts (OBOs), 349, 390 P Pairs trading, 351, 449 Par, 351 Par value, 46 Pareto-optimal, 156 Parity, 128, 231, 443, 471 Park ratio, 358 Parmalat, 328 Participation constraint, Partnerships agreement, 64–65, 119, 207–208, 473–474 aggregation, 11 characteristics of, 240 companion fund, 95–96 general-limited, 207–208 limited, 4, 63, 208, 220, 270–271, 308, 412, 507 venture capitalists, 509–510 Passive investment strategy, 42, 114 Passive management, 28 Pass-through entities, 185 Patents, 240 Payoff commodity-linked bonds, 86–87 implications of, 303 options, 31, 59, 88 variance swaps, 501–502 Payout ratio, 196 Pearson correlation coefficient, 114–115, 353–354 Peer funds, Peer group, 354–356 Penalty bid, 356 Performance aftermarket, 7–8 analysis, see Valuation persistence, 357–358 Philadelphia Board of Trade, 140 Philadelphia Stock Exchange, 341 Physical market, 444 See also Spot market Piggyback registration, 358–359 PIPE investments, 394, 396 Pipeline, 359–360 Pit, 332, 360–361 Plain vanilla securities options, 31–32, 470, 490 swaps, 461 7/10/2008 12:16:04 PM Indexx • 535 Pooled fund, 361 Portable alpha, 14 Portfolio diversification, 1, 34, 435, 467 insurance, 455 management, 27–29, 284–286, 329, 335–336, 447 optimization, 112, 447 theories, 27, 176, 224, 300–301 Position limit, 361–362 reportable, 397–398 risk-neutral, 469 traders, 362, 442 see also Long position; Short position Postponement, 363 Prearranged trading, 364 Preferred stock, 20, 181, 298 Premiums, types of, 4, 29, 44, 104, 150, 333, 337–339, 365, 518 Present value, 158 Price basing, 366–367 clearing, 76–77 discovery, 367–368 elasticity, 43, 427 fluctuation, see Price fluctuations limit, 368–369 meetings, 464 range, 369–370 revision, 370 see also Pricing Price/earnings ratio (PER), 49, 195, 370 Price fluctuations maximum, 297 minimum, 300 Price-to-book value ratio, 49 Price-to-sales ratio, 49 Pricing back, 38 stale, 447 tree model, 338 Prime rate, 41, 66 Primitive trading strategies (PTS), 277 Principal, 372–373 Principal-agent relationship, 372 See also Agency problem Principal-owner problem, 9–10 Principal protected notes (PPNs), 159, 455 Private equity (PE) certification from, 71 characteristics of, 133, 373–374 covenants, 118–119 financing, 151 firms, evergreen fund, 169–170 CRC_C6488_Index.indd 535 investments, 5–6, 17 management, 95 syndication deals, 467 see also Private equity funds Private equity funds characteristics of, 62–63, 65, 77 takedown, 473 Private Equity Industry Guidelines Group (PEIGG), 398, 497 Private placement, 324, 374–375, 454 Privately held, 375–376 Probability density function, 9, 259 Productivities, agency problem, 10 Projection, 376 Proprietary trading characteristics of, 484 one-to-many platform, 330–331 Prospectus components of, 323, 325, 376–377, 384, 426 final, 180 IPOs, 179 pathfinder, 391 preliminary, 364–365 ranking, 387–388 Prototypes, 189, 419 Proxy fights, Public commodity funds, 377–378 Public equivalent market (PEM), 378–379 Public market equivalent (PME), 246 Public offering characteristics of, 379 selling concessions, 425 see also Initial public offerings (IPOs) Public to private (P2P) transactions, 380 Pure arbitrage, 25 Put-call parity, 471 Put options characteristics of, 88, 122, 171–172, 174, 246, 275, 336, 338–339, 381, 432–433, 453, 471, 478–479, 489, 503 516 protective, 381 writing, 340 PutWrite Index, 340 Put writer, 31 Pyramiding, 382, 465 Q Quantitative analysis, 295 Quanto options, 106 Quasi entity, 299 Quiet fi ling, 383–384 Quiet period, 384, 393 7/10/2008 12:16:04 PM 536 • Index R R 2, 78, 285, 400, 457, 459 Ranking, 387–388 Ratchets, 388–389 Rate of return, 195–196 Ratio, types of appraisal, 358 Calmar, 61 down capture, 151 exchange, 298 feed, 178–179 gain-to-loss, 205–206 generalized Treynor, 208–209 hedge, 219, 222–223 information, 209, 237–238 modified Sharpe, 303–304, 358 Park, 358 payout, 196 price/earnings, 195, 370 Sharpe, 61, 65, 198, 281, 303, 329, 340, 441 Sortino, 303, 441, 449 Sterling, 449–450 Treynor, 281, 486 up-capture, 494–495 Real estate investments, 18 Realized volatility, 516 Real option approach, 389–390 Recap buyout, 390 Recapitalization, 53, 390–391 Recession, 427 Recovery rate, 146–147 Red herring, 384, 391–393 Redemption applications, 4, 38 early, 161 period, 392 Registration requirements, 140 statement, 326, 393 see also Demand Rights; Securities and Exchange Commission (SEC), registration with Regression analysis, 13–14, 126, 357, 456–457 Regulation D fund, 393–394 offering, 394–396 rules, 3–4, 375, 394–395 Reinsurance, 31 Relative returns, Relative Strength Index (RSI), 345 Relative value, 19, 211, 294, 319 Reporting guidelines, 398 Repudiation, 125 Reserve funds, 307 Reserves, CRC_C6488_Index.indd 536 Residual returns, 14 Restrictive covenants, 119 Restructuring, 53, 125, 211 Return analysis absolute, 152 traditional, 152 Return momentum strategies, 485 Return on equity (ROE), 49 Reuters CRB Index (CCI), 91, 123–124 Reuters/Jefferies CRB Index, 90–92 Reverse convertible note, 456 Reverse leveraged buyout (RLBO), 402 Right of first refusal, 402–403 Rising markets, Risk absolute, aversion, 9–10, 185 basis, 490 counterparty, 117 credit, 17, 74, 107, 202, 220, 398 default, 75, 118, 202, 287 gamma, 107 idiosyncratic, 264, 298 interest rate, 107, 176, 220, 243 management, see Risk management market, 43, 294, 301, 398 measure, 336 pipeline, 360 premium, 104, 150, 518 profi le, 2, 151, 450 systemic, 2, 42–43, 237, 285, 454–455, 486, 518 tail, 340 volatility, 107, 220 Risk-adjusted returns, 358 Risk-free rate, 1, 14, 43, 84, 86, 134, 205, 225, 278, 303, 317, 338–339, 443, 490 Risk management hedging, 223–224 strategies, 421, 483 stressed markets, 452 Risk-neutral strategies, 329 Risk-return profi le, 34 Roadshow, 48, 375, 404 Rogers, Jim, 404–405 Rogers International Commodities Index (RICI), 90, 404–405 Rolling window analysis, 99, 458, 460 Roll-up, 405–406 Round turn, 406 Royalties, 240 Rule 144, 319 Russell 3000 Index, 176 7/10/2008 12:16:05 PM Indexx • 537 S Sale-leasebacks, 121 Sample grade, 409 Sarbanes Oxley (SOX) Act, 207, 252, 423 Scalpers, 410, 442 Scalping, 188 Scenario analysis, 514 Seasonality, 362 Seasoned equity offering (SEO), 238, 410–411 Secondaries, 412 Secondary action track, 412–413 Secondary buyout, 413 Secondary market, 412–415, 494 Secondary offering, 187, 416 Second-order conditions, agency problem, 10 Second-stage funding, 411 Sector-based investments, 19 Sector breakdown, 416–417 Sector strategy, 417–418 Secured debt, 46 Securities and Exchange Commission (SEC) functions of, 3, 5, 7, 85, 180, 447, 465 pipeline, 360 prospectus, fi ling with, 377, 384, 426, 464 qualified investor defined, 383 quiet fi ling, 383–384 registration with, 140, 361, 373, 375, 379, 391, 428–429 registration statement, 393 Regulation D, 3–4, 375, 393–394 regulations, 323, 327, 330 Rule 10b5–1, 364 Rule 415, 393, 429 Rules 144/144(k) and 701, 319 Schedule 13D/13G, 373 Section 12 registration, 362 shelf registration, 428–429 uptick rule, 418, 431 Securities Exchange Act of 1933 provisions of, 323, 375, 384, 391, 394 Regulation D, see Regulation D Securities Exchange Act of 1934 components of, 373, 394, 440 Regulation M, 464 Securities issues, covenants, 120–121 Security future, 418 Seed capital, 418–419 financing, 180–183 money, 419 see also Early stage finance; Seed stage financing Seed stage financing, 20, 419–420 Segregated account, 420–421 CRC_C6488_Index.indd 537 Selection bias, 33, 421–422 Self-financing, 482 Self-regulatory organization (SRO), 140, 373, 422–423 Self-reporting bias, 33 Self-selection bias, 198, 423–424 Sellers, option, 339–341 Seller’s market, 424 Selling concession, 425 group, 424–425, 473 pressure, 263 Sell orders, 38 Sell signals, correlation and dispersion trade, 505 Semideviation, 426–427 Semiparametrics, 100 Senior debt, 47, 146, 387 Sensitivity analysis, 194, 514 Separate account, 420 Serial correlation, 44 Settlement cash, 69, 272 date, 427–428 deferred, 215 defined, 77 futures contracts, 331 price, 428 Share buybacks, 169, 173, 431 See also Tender offers Share repurchase, 6, 120–121, 157 Shareholder activists, see Activists conflicts, see Agency problem majority, 153, 173 minority, 66, 153, 173 principal, 373 selling, 426 Sharpe, William F., 4, 28, 456 Sharpe ratio applications of, 4, 61, 65, 198, 281, 329, 340, 441 modified, 303–304, 358 Shelf fi ling, 428–429 Shipping certificates, 136 Short call options, 122, 340 Short exposure, 429–430 Short position, 136–137, 163, 168, 189–190, 202, 215, 224, 297, 301, 319, 379, 429–431, 471 Short put options, 340, 381 Short sales See Short selling strategy Short sellers, 275 Short selling strategy 1–2, 14, 17, 27, 215, 223, 298, 429, 431–432, 457 Short squeeze, 432–433 Short stock, 12 Short the basis, 433–434 7/10/2008 12:16:05 PM 538 • Index Simulation conditional value-at-risk (CVaR), 98 Monte Carlo, 500–501 venture valuation, 514 Single-strategy fund, 434 Single strategy fund of funds, 434–435 Skewness, 111–112, 158, 229, 233, 301, 303–304, 343, 435, 482, 503 Skill-based asset classes, 27 Sliding fee scale, 436 Smile, 232–233, 259 Soft dollars, 440 Sortino, Frank, 441 Sortino ratio, 303, 441, 449 SPAN (Standard Portfolio Analysis of Risk), CME, 288 Spearman correlation, 354 Specialists, sector, 416–417 Specialization See Commodity trading advisors (CTAs), discretionary Special purpose vehicles (SPVs), 70, 74 Speculation, 11, 40, 137, 190, 192, 442 Speculative arbitrage, 25 Spin-offs, 162, 169, 211, 252–253, 443 Spot indices, 91, 443–444 market, 67–68, 442 month, 444–445 overview, 443–444 price, 24, 39, 49, 69, 90, 101, 104–105, 171, 183, 200, 317, 336–339, 367, 443–444 rate, 134, 352, 443 return index, 83 Spreads applications, 24, 445–446 bear, 60, 241, 445 bid/ask, 331 bid-offer, 452, 503–504 bull, 60, 241, 445 butterfly, 60–61 calendar, 241 crack, 122, 240, 446 credit, 176, 396, 417 crush, 240, 446 default, 176 excess, 307 five against note (FAN), 184 gross, 216, 493–494 horizontal, 241 intercommodity, 240–241, 445–446 interdelivery, 241 interexchange, 240 intermarket, 445 intracommodity, 241 intramarket, 241 CRC_C6488_Index.indd 538 municipals over bonds (MOB spread), 310–311 reverse crush, 400–402 time, 241 underwriting, 493–494 Staging, 446–447 Stand-alone deals, 467 Standard and Poor’s Commodity Index (SPCI™), 90 Credit Pro database, 146 500 Index, 47, 102, 132, 167, 192, 265, 295–296, 299, 340–341, 432, 458–459, 495, 515 Standard deviation, 22–23, 27, 43, 205, 303, 448 Start-up companies angel financing, 20 angel investor, 21, 26 archangel, 26 failure rate of, 21 post-money valuation, 363 public venture capital, 380–381 seed money, 419 venture capital method, 506–507, 509 venture leasing, 511–512 State-owned companies, 375 Statistical analysis, 518 Statistical arbitrage, 19, 25 Sterling ratio, 449–450 Stochastics, 149 Stock market crash of 1929, 384 of 1987, 455 Stock options See Options Stock selection, 351 Stop-loss orders, 433 Straddles, lookback, 276–277 Stress testing, 287, 450 Stressed markets, 450–452 Strike price, 32, 100, 174, 365, 453, 479 See also Exercise price Strong hands, 453 Structured products access provision, 454 algorithmic trade rule products, 454 examples of, 455–456 leverage, 454 loss limitations, 454 principal protection, 454 systemic risks, 454–455 Stub trading, 396 Style analysis, 456–458 Style drift, 458–460 See also Managed account Stylized scenarios, 450 Subordinated debt, 47 Subordination, 307 Subscription period, 38 Sub-prime leasing, 511–512 7/10/2008 12:16:05 PM Indexx • 539 Subsidiaries, 66–67, 443 Supervisory board, 66 Supply, economically deliverable, 163 Supply and demand, 26–27, 39, 66, 129, 474 Support and resistance, 475 Survivorship bias, 33, 198, 225–227, 248, 460 Sutter Hill Ventures, 170 Swaps amortizing, 244 applications, 24 basis, 41, 244 commodity, 94 credit default, see Credit default swap (CDS) delayed start, 244 floating, 94, 242–243 forward-forward, 244 interest rate (IRS), 242–244 overview of, 460–463 plain vanilla, 461 settlement date, 428 spread arbitrage, 185 variance, 501–505 volatility, 192, 502 Sweat equity, 463–464 Syndicate, 464–466 See also Syndication Syndicated sale, 466–467 Syndication, 467 Synthetic securities, 70, 226, 469–471 Systematic trading, 212, 469 T Tail distribution, 501 See also Fat tail Takedown, 63, 473–474 TASS database, 33–34, 37, 355 Taxation offshore jurisdiction, see Offshore tax haven types of, 309–310 Tax-exempt debt, 46 Taylor-series expansion, 111 Technical analysis applications, 144, 249, 362, 496 charts, 476 contrarian strategy, 476 Dow Theory, 475 momentum strategy, 476 overview of, 474–475 support and resistance, 475 Tender offers, 476–477 Term sheet, 476–477 Terrorist attack (9/11/01), economic impact of, 451 Three-factor model, 400, 432 Tick, 478 CRC_C6488_Index.indd 539 Ticker reports, 32 Time horizon, 299 Time value (TV), 478–479 To-arrive contract, 479–480 Tombstone, 480 Total return asset contracts (TRAKRS), 405 index, 84–85 Tracking error, 4, 459–460, 481–482 Trademarks, 240 Trading errors See Managed account Trading hours, 32 Trading pit See Pit Trading range, 333 Trading volume, significance of, 331 Tranche CMO, 306 commodity-linked bonds, 87 principal-only, 306 types of, 482 Transparency, 131, 142, 155, 220, 273, 289–290, 308–309, 330, 348, 421, 483–484, 497, 502 Treasury inflation-protected securities (TIPS), 46 Trend following, 484–485 Treynor, Jack, 486 Treynor ratio, 42, 281, 486 Trigger events, 73 Triple-witching days, 173, 262 Trust, unit investment (UIT), 318 Turnaround, 486–487 U UBS Bloomberg Constant Maturity and Commodity Index (CMCI™), 90 Ultrahigh net worth individuals (UHNWIs), 228 Uncovered calls, 59 Underpricing, 8, 325–326, 491–492 Undervalued stock, 195 Underwriter functions of, 8, 492–493 initial public offering (IPO), 42, 238–239, 324–325 in selling group, 424–425 lead, 263–264 participating, 353 seasoned equity offering (SEO), 411 syndicated sale, 466–467 Underwriting group, 424–425, 473 Underwriting process, 359–360 U.S Department of Agriculture (USDA), 81 U.S equity hedge, 495–496 U.S Futures Exchange, 140 7/10/2008 12:16:05 PM 540 • Index U.S Private Equity Valuation Guidelines, 497 U.S Treasuries bills (T-bills), 41, 46, 340, 357, 405 bonds (T-bonds), 46, 106, 184, 300, 310 notes (T-notes), 46, 102, 184 Unseasoned equity offering, 494 Unsecured debt, 46 Unsystematic returns, 14 Up capture ratio, 494–495 Uptick rule, 418, 431 Utility function, 9, 149, 426 V Valuation applications, 50, 333 guidelines, 497–498 options, 338, 342, 389–390 post-money, 362–363, 477 pre-money, 365–366, 477 venture, 514–515 Value-Added Monthly Index (VAMI), 295, 499 Value-at-risk (VaR) characteristics of, 223, 287, 304, 450, 499–501 conditional (CVaR), 96–100 Cornish-Fisher, 110–112, 304–305 modified, 304–305 Value creation, 437 Value investing, Variance, 28, 43 Variance-covariance matrix, 482 Variance swaps characteristics of, 501–502 pricing, 502–503 typical trade applications, 504–505 variants, 505 VDAX, 192–193 Vega, 502 Vega, Joseph de la, 342 Venture capital, see Venture capital (VC) factoring, 511 philanthropy, 437–438, 512–513 valuation, 514–515 Venture capital (VC) alternative investments, 18 angel financing, 20, 508 angel groups, 20–21, 26 angel investor, 21 bridge financing and, 50–51 certification from, 71 characteristics of, 96 community development, see Community development venture capital CRC_C6488_Index.indd 540 corporate, 113–114 covenants, 118–119 down round, 151 financing, phases of, 180–181 funding from, 507 government programs, 381 method, 509 overview, 506–507 public, 380–381 secondaries, 412 second-stage funding, 411 seed capital distinguished from, 419 social, 437–438 syndicate bids, 464 syndicated deals, 467 syndication of, 465–466 takedown, 473 term sheet, 477 types of investments, 114 see also Venture capital firms; Venture capitalists Venture capital firms evergreen fund, 169–170 first time funds, 183 follow-on funding, 189 Venture capitalists characteristics of, 509–510 control rights, 508 disinvesting, 172 early stage financing, 162 grandstanding, 214 lead investor, 262–263 majority shareholding, 153 piggyback registration, 358–359 post-money valuation, 363 pre-money valuation, 366 ratchet clauses, 388 right of first refusal, 403 Vickrey, William, 156 VIX (CBOE Volatility Index), 192–193, 234, 515–516 Volatile investments, 23 Volatile stocks, 50 Volatility arbitrage, 25, 185 asset allocation and, 28, 158 historical, 232 impact of, 516 indices, 504 interest rate, 417 intraday, 451 options and, 339–340, 343, 435 pumping, 449 stochastic, 192 VOLAX volatility, 192–193 Voting rights, 387 7/10/2008 12:16:05 PM Indexx • 541 W Wallace, Henry A., 177 War, economic impact of, 451 Warehouse licensed, 268 receipts, 136, 517 see also Approved delivery facility Watermark, high, 227–228, 235, 357 Weather premium, 518 WeB-Genes, 346, 491–492 Weighted average cost of capital (WACC), 509 West Texas Intermediate (WTI), 129 Wheat futures, 490 White label, 518–519 Winner’s curse, 347 Withdrawn offering, 519 Write-down, 497 CRC_C6488_Index.indd 541 Write-off, 173 Writing options, 340 Y Yield curve arbitrage, 185 implications of, 457 par, 352 Yunus, Mohammad, 436 Z Zero-coupon bonds (ZCBs), 45, 158–159, 455 Zero-investment strategy, Zurich Capital Markets indices, 355 7/10/2008 12:16:05 PM CRC_C6488_Index.indd 542 7/10/2008 12:16:05 PM .. .Encyclopedia of Alternative Investments CRC_C6488_Fm.indd i 7/17/2008 1:07:12 PM CRC_C6488_Fm.indd ii 7/17/2008 1:07:14 PM Encyclopedia of Alternative Investments Edited by... paper) Investments Encyclopedias Asset allocation Encyclopedias Portfolio management Encyclopedias Investment analysis Encyclopedias I Gregoriou, Greg N., 1956- II Title: Alternative investments. .. main objective of this encyclopedia is to be the most authoritative source on alternative investments for academics, students, professionals, and practitioners The entries of the encyclopedia focus