Caia designation gaining momentum in hedge fund industry

Back to school

In March this year over 2,000 people filled test centres around the world to take one of two exams required to attain the chartered alternative investment analyst (Caia) designation, the most widely recognised professional certification in the hedge fund industry.

Over 16,000 people have enrolled in the Caia programme since it was introduced in 2003. The successful candidates from the class of March 2011 will join the nearly 5,000 alternative investment professionals in 70 countries who have passed the Level I and II exams, earning them the right to use the Caia designation.

The burgeoning popularity of Caia is one element of the changes currently sweeping the alternative investment industry. The healthy inflows into hedge funds in 2010 reflect the demand among investors for the unique and differentiated source of returns offered by hedge funds. But the financial crisis and the Madoff fraud also highlighted a knowledge gap in the marketplace and fed calls for improved regulatory oversight, operational practices and professional standards in the hedge fund business.

While the hedge fund industry accepted tighter regulation with some reluctance, it has actively embraced the need for professional standards and certifications. The Caia designation is held by senior executives at prominent hedge fund businesses like Highbridge and Paamco and is quickly becoming a stamp of credibility in the industry.

The Caia programme was created in 2002 as a joint venture between the Alternative Investment Management Association (Aima) and the Centre for International Securities and Derivatives Markets (CISDM) at the University of Massachusetts at Amherst, led by Professor Thomas Schneeweis.

“We felt the alternative investment industry needed an independent and internationally recognised qualification. The traditional investment world has the CFA [chartered financial analyst] but at the time there was nothing for people specialising in alternative investments,” says Florence Lombard, the CEO of Caia and former head of Aima.

Schneeweis developed the Caia curriculum with input from industry practitioners and academics. It covers the full range of alternative investments, including hedge funds, private equity, real estate, commodities and managed futures. More recently, the curriculum was expanded to include structured products, credit derivatives and infrastructure funds.

Caia promotes an objective, data-driven approach to analysing alternative investments. “We want people to understand the fundamental risk and return drivers of hedge funds so they can make better use of them in their portfolios,” says Schneeweis.

One of Caia’s aims is to dispel the perception that hedge funds possess some secret sauce which allows them to outperform. Schneeweis argues that while hedge funds offer “alpha and unique return opportunities” a large portion of their returns are “consistent with the underlying markets they trade”.

Level I of the Caia curriculum introduces the major alternative investment strategies and explains their sources of return in terms of alpha and beta drivers. Level II delves deeper into manager selection, performance benchmarking, risk management and asset allocation. Ethics and professional standards are also an important part of the curriculum.

Caia estimates that it typically takes around 400 hours of self-directed study to complete both levels. Candidates must pass the Level I and II exams and have a year’s professional experience before they can use the Caia designation.

People who take the certification typically work at funds of hedge funds (FoHFs), pension funds, banks or advisory companies. “The course is designed for professionals who analyse, monitor or distribute alternative investments,” says Lombard.

Jane Buchan, co-founder and CEO of Paamco, a FoHF with around $10 billion in assets, completed the Caia designation in 2005 and later joined Caia’s board of directors. Buchan, who has been in the hedge fund industry for over 25 years, says the programme “provides a great foundation for people that want to work in the FoHF industry”.

Buchan believes even seasoned industry veterans will benefit from the programme. The curriculum, she says, gave her valuable insights into private equity, real estate and commodities. “While we invest in hedge funds, it is helpful to understand other areas like private equity and oil and gas because how they are doing tends to affect the opportunity set for hedge funds,” says Buchan.

Paamco encourages its investment analysts to obtain the designation and is sponsoring a series of Caia scholarships through the 100 Women in Hedge Funds organisation.

Buchan believes the industry will be stronger if more people take the certification. “We need more people in the industry who understand the fundamentals, can look at objective data and make sound decisions. If market participants are more knowledgeable, it makes the marketplace better,” she says.

The Caia designation is also attracting interest from people involved in hedge fund management, particularly those working at multi-strategy funds where a broad knowledge of alternative investment styles is valuable, as well as risk management and operations staff at hedge funds.

According to Caia’s latest member survey, of those who hold the designation, around 19% are portfolio managers, another 17% work as advisers or consultants and 14% are employed in sales and marketing roles. The certification is also held by analysts, risk managers, fund administrators, lawyers and accountants working in the alternative investment business.

The Caia certification can help open doors for analysts and portfolio managers at hedge funds.

Joe Jacobs decided to pursue a series of professional certifications while he was working in the portfolio analytics group at BlackRock, the world’s largest money manager.

He enrolled in the chartered financial analyst (CFA) programme, long considered a rite of passage for anyone serious about a career in asset management, but soon realised there were a number of other certifications that could help advance his career goals.

“I was interested in hedge funds and private equity. The CFA touched on alternatives but I wanted to go into much greater depth,” says Jacobs.

After passing the CFA Level I exams in 2007, he elected to take the Caia and financial risk manager (FRM) certifications while he completed the CFA.

Jacobs, an MIT graduate, took the Caia exams, the CFA Level II and the FRM certification in 2009 while simultaneously pursuing an MBA at New York University and working at BlackRock. He completed the CFA Level III in 2010.

The hard work paid off. Last year he landed a position as a portfolio analyst at a top hedge fund in New York.

Jacobs says the three certifications complement each other and have helped him in his current role.

The CFA has the broadest scope of the three main programmes, but its focus is fundamental security analysis, while the FRM is best suited for people in risk management or operations roles.

Caia is more specialised. It drills into alternative investment strategies and also covers many of the practical business issues relevant to hedge funds, such as fund structures, performance benchmarking and fee arrangements.

“The Caia curriculum is probably the most relevant to my current role,” says Jacobs. “It gives you a broad understanding of alternative investments so you can have more informed conversations with investors and colleagues in client services or operations.”

But Jacobs says candidates interested in a career in alternative investments will benefit from all three certifications.

“Each programme covers several distinct topics that are inexorably linked,” he says.

In a practical scenario, if a portfolio manager wanted to add multi-currency credit derivative and infrastructure exposure to an active global portfolio, they would need to know what tail risks to consider and how best to hedge them while keeping tracking error at acceptable levels.

“In isolation none of the professional education programmes cover all aspects of this scenario but the collective curriculums of the CFA, FRM and Caia programmes do,” says Jacobs.

Lombard says the Caia designation should be seen as a complement to the CFA and other relevant certifications. “This is a professional qualification for people who want to specialise in the alternative investment sector. It is assumed that candidates are already involved in the asset management sector and they should ideally have the CFA Level 1 before attempting the Caia exam,” she says.

According to Lombard around 30% of Caia charter holders and candidates have either completed the CFA or are in the process of doing so.

“If you want to have a comprehensive understanding of investments, take the CFA and Caia,” Schneeweis advises. “You need a broad set of tools to capture the risk/return trade-off in the marketplace. Alternatives are a big part of that equation.”

Being a Caia member is about more than just passing exams and earning an accreditation. It has become a vibrant community. Charter holders started forming local Caia chapters in 2005 and these now exist in 13 of the world’s major financial centres. Caia chapters organise regular educational seminars and networking events for charter holders in the area and actively promote the designation.

The Caia association is also working hard to raise the profile and visibility of the designation. Central to this initiative is a series of academic partnerships with business schools and universities around the globe. HEC Montreal and the University of Lausanne’s business schools became academic partners in 2010. The Graduate School of Management at Clark University in the US joined the programme in February and the Cass Business School in London will do so later this year.

Schools participating in the programme teach the Caia curriculum to graduate students specialising in business or finance. Caia is also providing a number of scholarships for students and faculty members at these institutions.

Cass already covers the CFA as part of its MSc in investment management. The addition of the Caia curriculum reflects the growing importance of alternatives in the funds sector, says Dr Nicholas Motson, a lecturer in finance at Cass. “Alternatives have become mainstream and we see more interest in this area among our students and candidates. Our job is to equip our students to succeed in the financial sector and the Caia designation helps them do that,” notes Motson.

As the next generation of hedge fund managers embraces the designation, Caia seems poised to play a key role in the industry’s future.