All you ever wanted to know about Hedge Funds

I didn't have the baby this week, so I was able to work on a very difficult session. Alternative investments (AI) deals mostly with real estate and hedge funds and some of the unique aspects of valuing them. There are half a dozen readings and I have finished 5 and a half. The trick is that it is of course the most difficult reading this week. The hedge fund readings are entirely conceptual dealing mostly with their unique risks. However, if I were a betting man I would bet that they will ask about real estate valuation. Anyone who has been paying attention to the news knows that the nation (and globe) is in a recession. The talking heads have blamed the proximate cause to be the subprime mortgages. Relative to the CFA program that means derivatives (SS 16 & 17), fixed income securities (SS 14 & 15), and real estate valuation (this one). I fully expect them to come correct on the exam in some misguided notion that my performance on a multiple choice test in June 2009 could prevent mistakes made in June 2007. However, those 5 session will have at least that many item sets on the exam. That is at least 25% of the test. If I perform well here, it will go a long way toward reaching my goal.

The part of the reading I haven't finished I have purposely put off until Saturday and Sunday. Saturday I want to spend the day on the reading and practice questions. Sunday I'll review the entire session. AI should be an area where I get at least 4 of 6 if I do my job right. This is one of the harder parts of the preparation right now. I'm in the middle of the journey. I have to motivate myself to work hard in February for something that won't pay off until June and frankly I have to do it alone. I don't know any other candidates and because I'm unemployed I can't afford some of the classes offered by the prep companies. My family and friends love me but I can't discuss hedge funds with people who don't know the difference between a debit and a credit. I've been here before and I'll get through it but if you're driving from NY to LA, then Indiana ain't nothing but a place to refill your gas tank.

FSA is AOK

They changed econ around a bit this year. Had I studied with last year's texts I would have been in trouble and not known it. They changed the definition of direct and indirect quotes around. Not a major change, and something that intuitively makes much more sense, and it wasn't a major problem. Overall econ was much as I remember it. It was largely divided into two parts with minor changes. Last year there were only 3 arguments against free trade. This year they used some pretty tortured logic to nullify those arguments. Last year the currency parts were similar but as I mentioned, they changed the definition of direct quotes and the LOS seem to be less about calculate and more about discuss. I feel pretty good about both, but that is the real problem with econ. Currency deals with really small numbers and fractions. The key is knowing with numbers to work with and what to do with them. You must know to use the bid price and divide. No worries however! If you accidentally use the ask price and multiply they will gladly put that (incorrect) answer as one of the options. You will select that option and be none the wiser until you get the results in August that when you thought you got 5 of 6 correct, you got no more than 3 correct. Trust me, I'm talking from experience on this one.

I have the baby this week, and a bit of a family problem so I am choosing a pretty weak study session. Session 5,6, & 7 are financial statement analysis and accounting. I always get above a 70 in this area. Plus they have really watered it down this year. This week's session is session 5. Two readings and one of them is 12 pages. All of FSA is 7 readings for 3 sessions - equal to the number of readings in econ. The readings are longer, but not particularly meaty. Last week was a chicken thigh, this week is a chicken wing. I will be flying to NYC round trip this weekend to bury my grandfather so I should have session 5 done before I leave and use the flights to review quants and econ. If I had actually performed on quants and econ as well as I thought I did, I'd be about halfway done with the level 3 cirriculum today.

On to Econ

First of all, the CFA institute was really on the ball. I ordered the books after business hours on Wednesday. They arrived by 5pm Friday. I don't know where the books were located, but standard delivery from VA to central FL usually takes more than 48 hours. Hell, standard delivery from Atlanta to central FL is 3 days. Anyway, I got the new books which included the new reading for study session 10. SS10 is pretty much an intro to valuation, but the new reading had several new ways to calculate the required return rate (I'll just call it K for this post). For those who aren't into finance I won't go into detail but K is one of the fundamental concepts. Without K most of the level 2 cirriculum wouldn't exist. In fact, K is the foundation of level 1 as well. I now know about a half dozen ways to compute it. ThCFA people tend not to test new readings the first year, but it would be criminally negligent to walk into the exam without being fully prepared for this one. I can say that I am fully prepared on all of SS10 including the new reading. I even did pretty well on the practice questions. That means since it's Monday, it's time for a new study session.

Since I don't have the baby this week, I wanted a session with some meat to it. SS4 (economics) is perfect for me. First, it is the longest. It has over 100 pages of textbook reading (very dry stuff at times). It is divided into 7 readings and with only 6 questions on the exam you know they won't test on even half of the stuff. However you don't know what part they will test so you have to learn everything. Also, the currency exchange that I learn in this session is imperative in other areas. The session is largely in two halves. The first is the ideological and conceptual stuff. This isn't a politcal blog but the people who write the economics texts are obviously McCain supporters. It boils down to gov't regulation is bad and the best countries in the world have the weakest investment laws. If you can't speak the company line it will probably hurt you on the exam. The second half of the session in foreign exchange. That area is trick for me. I understand the concept well, but the calculation can be a bitch. To convert from dollars to whatever you have to know whether to use the bid or ask price and whether to multiply or divide. If you get it wrong no worries! They have the wrong answer you just got as one of the 4 choices. You fill in the oval thinking you got the answer right until you get the results in August showing you got at least 3 of 6 quesitons wrong. Trust me I am talking from experience. I will be spending most of this week on currency exchange and GOP ideology, and if there's time leftover I'll review quants.

Level 2 Candidate

It's official – I am a Level 2 candidate (again). I paid the fee to enroll and received electronic confirmation that I am enrolled for the exam. One of the ethics rules makes it clear that you are not a candidate until you pay the money. You then remain a candidate until the day the results are released. Anyway, I had to register I couldn't wait much longer. I started studying a few weeks ago, but I have hit a wall. There are no easy study session left where they haven't changed the material from last year. Study session 10 (capital markets) looked promising, but they changed one of the readings. Same for statement analysis. I would be more than willing to do a hard study session but I can't, my son won't let me. I lost my job last fall (why I didn't register for the exam months ago). My wife works 13 hours a day on Monday, Wednesday, and Friday. Right now, on alternating weeks my in laws watch my 15 month old son for 8 hours on those days. On those weeks I have plenty of time which allow me to do some real studying. The other weeks, I am stuck with him all day long for 3 days a week. If you have ever babysat a 15 month old you know that you can't take your eyes off of them for 5 minutes. I have to strap him into the stroller to use the restroom. I am literally unable to study before 8pm this week on M, W, and F. That means I am limited to light material. However, there is no more light material that hasn't changed at least a little from last year.


I have finished corporate finance which is study sessions 8 and 9. Those are my favorite areas of learning usually and I don't know why I didn't get above 70 on the last exam. I did tighten up on economic income and profit (not like accounting income and profit). I did very well on the practice questions. This most recent week was quants – study session 3. The first two readings were single and multiple linear regression. I feel confident on those overall. I didn't study as much as I planned and am not as tight as I'd like, but I feel strong about it. The third reading is time series analysis and that could be tough for me if they test it in June (I'm certain they will ask at least 3 questions minimum). The first half on the reading is simple enough, but when they start asking me to test for errors and correct them, my eyes start to glaze over. This chapter more than any other in the level 2 curriculum has all of those weird statistics and symbols. If you remember high school trigonometry with all the weird greek letters, that is the last half of time series analysis. I am going to have to make some time this spring to learn this stuff. For now, I am moving on to study session 10. I should be able to work most of it by the end of the weekend. It will be even easier now that football season is over.