B1_1

Financial Investment Services and Capital Markets Act (FSCMA), Financial Services Commission (FSC), Financial Supervisory Service (FSS)

Financial Instruments and Exchange Act (FIEA), Act on Investment Trust and Investment Corporation (ITIC).

The Kanto Local Finance Bureau of Ministry of Finance Japan (KLFB) is the regulating authority to enforce the disclosure requirements under FIEA

Registration is generaly required

A. The CCO has the following key duties:

Establish the tone from the top, in terms of the firms commitment to compliance from senior management down to the employees

Compliancetesting (e.g., testing effectiveness of policies and procedures)

Report to senior management

Review documents that provide investment information to investors to ensure nothing is false or misleading

Ensure all supervisors know their responsibilities for maintaining books and records and testing such policies and procedures at least annually

B. According to the Advisers Act, a code of ethicsis required by all registrants. Access persons would include the firms directors, officers, partners, andother persons who would be privy to material nonpublic information on securities

C. The code of ethics would make it mandatory for access persons to

report personal securities transactions and holdings at fixed intervals, and receive approval from the firm prior to investing in reportable securities such as IPOs

A: i) primarily directors who are independent of the hedge fund ii) sufficient qualified directors iii) a group of directors who cover a wide range of investors iv) independent directors who could be used to speak for investors whenever a conflict between management and investors arises

B: Could compromise independence and cofidentiality as well as impair the ability to act in the best interest of the investors e.g. due to the lack of time

A: Delivering water to buildings as wel as the processing of wastewater are engergyintensive activities

B: i) Water taps/faucetes should be low flow ii) Monitor water use with controls in place to suggest leaks iii) Consider reusing water or using other water sources such as rainwater iv) Landscaping designs should minimize water usage v) Building users hsould be presented with tips on how to conserve water.

1. Whether ESG investing is profitable or not is  acomplex question and is dependent on context and circumstances

2. Sin stocks tend to outperform

3. In some years there is statistically significant evidence to suggest firms with high ESG have higher returns, but in other years no such evidence exists

4. Some studies have shown the market does not care about ESG factors

5. Evidence sxists that activist ESG investors do add value for all stakeholders

Greenwashing describes the situation where potential investors are deliberately mislead about the positive social impact of an investment

1. Audit marketing materials to check for greenwashing

2. Develop ESG policies and processes

3. Put controls in place that ensure compliance with ESG requirements stated in client agreements and fund offerings

4. For private fund management firms consider the level of congruence with the ESG philosophy of the fund adviser

5. Formulate mitigation strategies for ESG investment risks

6. Conduct time series audits of investment descisions to determine congruence with the firms ESG policies and strategies

The Coase Theorem states that in normal markets government intervention regarding property rights has no impact on efficient production and distribution. In applying the concept to the ESG work the creators of negative externalities and the sufferers of negative externalities do not require the application of the law to eome up with the best solution to a dispute.

For: i) Accounting for all relevant adjustments - single factor mode - the past returns of firms that embrace ESG issues are either equal to or slightly better ii) Managers hae a moral obligation to shield their investors from harm caused by ESG risks iii) Managers who actively integrate ESG into investment decisions create intangible benefits to investors and the general population

Against: i) After accounting for all relevant adjustments - multifactor model - the past returns or firms that embrace ESG issues are equal to those that do not ii) Managers generally have a fiduciary duty to maximiye risk adjusted returns iii) Managers who actively integrate EST into investment decisions are taking into consideration their own personal beliefs which should be irrelevant when investing money for others

Exogenous = comes from source outside the model

Endogenous = comes from within the model (dependent variable)

Normative model = explain how people / aset prices SHOULD behave (fundamental analysis)

Positive model = explain how people are ACTUALLY behaving (technical analysis)

Theoretical models = similar to normative (fundamental analysis) draw conclusions about behavior from existing observations of underlying behavior

Empirical model = similar to positive (technical analysis) makes predictions using relationship between variables and the change over time - better choice for complex securities and overlapping layers of optionality. Often better choice for alternative investors

Applied model = designed to solve actual real world challenges in the present day e.g. Markowitz

Abstract model (aka basic model) = is structured to solve hypothetical resl world challenges set in the future. (Not widely used by alternative managers)

Cross sectional = analyze relationships at a specific point in time

Time series = studies behavior over a period

Panel data = combines study of multiple variables with observation over a period

Single facor model that assumes constant volatility and mean reversion

\(r_{t+1} = r_t + k(\mu - r_t) +\sigma * \epsilon_{t+1}\)

Next short term rate is the current short term rate plus two adjustment factors. Mu is the long term average of the short term rate. k is the speed of the mean reversion high k means faster movement towards mean. Sigma is the volatility of change in interest rate that is further adjusted for noise Epsilon which is standard normal distributed

E(r(t+1)) = 0.0375 +0.65*(0.0425-0.0375)+0.01*0 = 0.04075

Attention the expected value of the noise - which is multiplied with the volatility - is zero!

Model can produce yield curve that is downwards sloping, upwards sloping or humped.

Upward (downward) sloping reflects an upward *downward) movement toward the mean. A humped line shows risk aversion

Equilibrium (fixed income) model

Vasicek allows negative interest rates CIR does not allow negative interest rates

\(r_{t+1} = r_t + k(\mu - r_t) + \sqrt{r_t} * \sigma * \epsilon_{t+1}\)

Same as Vasicek but the last component is adjusted by another factor of the sqare root of the current rate

CIR Model can also produce yield curves with different shapes

Arbitrage free models of the term structure (second generation models) use parameters based on the current yield curve. Support the risk neutral ide that arbitrage opportunities should not exist.

--> Theoretical output of the model is consistent with current observations. This means that a fixed income derivative priced in this way will be consistent with the current yield curve structure and no arbitrage opportunities should be present