CAIA Program Benefits: Why Take The CAIA Exams?

A quant trader friend of mine at a hedge fund dubbed Hedge Funds: Quantitative Insights by L’Habitant -once a major book in the CAIA program– as “Hedge Funds 101”. This is true of the CAIA program as a whole. The book itself is a good introduction to how the industry works, and how investors evaluate hedge funds.

The rest of the CAIA program expands on these basics. If you are looking at various certification programs, the CAIA program is particularly useful if you are interested in being a better alternative investment professional, or just becoming one for that matter.  Last March, I decided to look into the CAIA certification program, as a small challenge to keep myself sharp.

The exam itself covers alternative investments.  A large chunk of the CAIA curriculum includes quantitative analysis and hedge fund-specific material.  The CAIA exam’s focus on how hedge funds’ clients see them attracted me to the program.  I expected the CAIA would help me understand my clients better, because I will understand their reporting needs in greater depth.  While I do already have a degree in finance, I expected the CAIA would give me much more depth in hedge-fund specific finance.

What do hedge funds think of the CAIA?

I think the material is probably most useful to people working for or with hedge fund investors. These would include Fund of Hedge Funds, Family Office funds, endowments or anyone else actively investing in hedge funds. The material is rather qualitative, so it’s basically a really good way to get your head around how hedge funds are different from other investments types. There are some quirks, both from an asset class point of view, and how to diversify portfolios containing alternative asset classes.

On the hedge fund side, the material would be most useful for the people actively engaged with investors: Investor Relations and/or Operations. This knowledge would be pretty valuable when raising capital, as you get to understand the typical portfolio-level tradeoffs your clients have, so it’s probably easier to craft a persuasive argument. Later on, when dealing with reporting and relationship management, this background could also be useful.

Is the CAIA useful?

For investors in hedge funds and hedge fund ops people, definitely. Really useful-like preparing small note cards for giving a best man’s speech.

From a quantitative risk management point of view? Probably not, as the exam’s not particularly quantitative. It certainly makes you aware of liquidity risks, though, through some of the case studies and other material. This is probably the most important risk facing hedge funds.

Trading? Even less so. Most of the trading-related material is at the level of being able to understand terminology traders would use. There are probably better certifications and books to read first, if you want to be a better trader. That said, getting the certification can’t hurt your results, and it will make you more aware of the institutional context, which can be useful.

Is the CAIA hard?

Well, it’s not conceptually hard, just time consuming. There is a lot to read and memorize. There are some formulas and quantitative questions. As long as you:

  1. put in 200 hours to master the material at each level (I should know, because I didn’t once and it wasn’t pleasant)
  2. you know beforehand how to add, subtract, multiple and divide, and what a square root is
  3. you’re willing to learn how to use either one of the funny financial calculators

you’ll be ok. Not to mention, I’ve heard it’s easier than the CFA.

Expected personal benefits of the CAIA program

Here are the reasons why I originally decided to take the Level I exam, in anticipation of getting the CAIA certification:

1. Learning is the key to moving forward career-wise.  Any permanent change in my life will require that I change myself first.  The classic example: lottery winners who lose all of their winnings within a short period of time, because they don’t know how to handle their newfound wealth.  Just as they didn’t expand their ability to handle the extra cash, I want to expand my abilities in order to permanently move forward. As a result, I need in the skills imparted in the CAIA exam to ground my knowledge.

2. Keeping the skills fresh is crucial.  What’s the point of getting a great degree in finance, and then not using it for a long time?  As most of my time at work is spent on the IT side, I wanted to have a good refresher of financial concepts.  The CAIA program provides a comprehensive framework for alternative investments, so it was much more than just a refresher.  It builds on all of my previous knowledge and expanded it.

3. Education is a great way to respond to a recession, such as the one caused by the credit crunch.  On one hand, you get a better understanding of what’s going on around you.  On the other hand, you are more employable in a difficult job market with a relevant certification, like the CAIA.  When the economy does pick back up, everyone with relevant certifications will be immediately considered a subject matter expert.  I remember how the job market looked when the economy was overheating. Every recruiter and their grandmother were willing to hire. The primary requirement was knowing how to google hedge funds. I’m certain that people who were CAIA certified had an additional negotiating edge.  You can think of getting any certification in market timing terms.  It’s best to get certified before you really need it, while the qualification’s value will be greatest financially during boom times.

4. While my primary interest lies in hedge funds, and the CAIA program exposes me to a number of industries. Private equity, venture capital, real estate, and commodities are also covered.  Arguably commodities are closely related to hedge funds anyway.  Quantitative methods in the CAIA program are also strongly applied in the context of hedge funds.  This variety is intellectually challenging and useful, as it helps think of hedge funds as one of a number of alternative investments.  Hedge funds indirectly compete for capital with all of these other alternative instruments, as a result of legal frameworks and industry standards, differentiating them out from mainstream investments.  If an institutional investor can invest in one of them, he can invest in any of them.  As a result you will be looking at all of them, to seek out the best possible investment given his goals.

5. Given that the hedge fund industry requires keeping up in a number of areas of knowledge, such as finance, IT, mathematics, in addition to all the usual business skills, recent certifications’ content are usually seen as signals of interest in the industry.  As I have a strong finance and IT background, but mostly work in IT, the CAIA certification will help me move back towards a greater business focus.  In general, certifications help to change job roles.

6. In theory, the more you know, the more you earn. While in my case my employer is funding my participation in the CAIA program, and as a result will probably be unwilling to give me a raise upon completion, my indirect value on the job market will rise.  Should I ever wants me to change jobs once I do have the certification, I can expect to earn that extra bit more. Unlike the CFA, I don’t recall ever seeing any hard numbers on this particular topic yet, with respect to the CAIA program.

7.  I like how the CAIA program has been standardized enough, that the CAIA association can estimate the total number of hours (150,200) that it will take to prepare successfully for each level of the exam.  It don’t think the material is conceptually difficult.  It just requires a sufficient amount of time to master their required knowledge.  This makes it easier to schedule, and to carry out.

8.  Especially since I am quite comfortable where I am, in the CAIA program helps me grow, by challenging myself. I expect the main benefit of the CAIA program will be certain critical thinking skills, the greater precision in how I approach problems, and how I solve them.  Much of the material refers to things I’ve seen before, but now my knowledge will be systematic, giving me a better sense of relative importance of each bit of information.

Ok Luke, What’s The Bottom Line? Is It Worth Doing the CAIA?

It costs a lot of money if you are paying out of pocket, but if you are serious about hedge funds, learning the material in this exam will help you understand the most important part of this industry: their clients’ perspective.

My company has generously been sponsoring my examination process, so I’m sure that helped me decide to get going. If that wasn’t the case, I’m not sure I would go ahead with it. I guess everyone needs to evaluate the cost-benefit ratio for themselves. Although the cost is admittedly high, it depends on exactly what your current or expected role in the industry is.

Then again, as Derek Bok a former president of Harvard University said, “If you think education is expensive, try ignorance.”

Oh, and if you’re into hedge funds and automated trading, you can  follow this blog by entering your email above.

5 Responses to “CAIA Program Benefits: Why Take The CAIA Exams?”
  1. Florida CPA says:

    Hi there great website! Does running a blog such as this take a massive amount work?

    I have absolutely no understanding of computer
    programming but I was hoping to start my own blog in the near future.
    Anyways, if you have any ideas or techniques for new blog owners please share.
    I know this is off subject nevertheless I simply needed to ask.

  2. marcos says:

    “There are probably better certifications and books to read first, if you want to be a better trader ” Which certifications? thx

    • It depends on the type of trading you want to do, e.g. CFA for anything with a fundamental slant like long/short. For anything quantitative, then just having a really strong Math background, like a PhD, will do it. Ultimately when you’re trading, you’re looking for an edge, competing with everyone else who is trying to use the same strategy. If you think about it that way, it will be easier for you to figure out what to learn. The traders who are best in their niche tend to have greater depth of knowledge, usually thanks to analysis or backtesting, than anyone else. That’s why they are the best. These certifications, CAIA included, are a good first step and a supplement if you are serious about trading as a career.

    • Joshua says:

      Chartered Market Technician (CMT) for trading.

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