Center for International Securities and Derivatives Markets (CISDM):
A World Class Financial Research Center at the Isenberg School

In its recent evolution as a world-class leader in education and research, the Isenberg School's Center for International Securities and Derivatives Markets (CISDM) has shown impeccable timing. Now in its seventh year, the center has grown hand in glove with its academic focus-alternative investments, including hedge funds, futures, swaps, and options. That is breakneck growth indeed: Since 1990, the use of derivatives has mushroomed geometrically. According to the Economist, $128 trillion of over-the-counter derivatives were outstanding in June of 2002, a 28% increase over the previous June. "You can attribute the rise of those vehicles to several factors, but the bottom line is that they offer practitioners unrivaled flexibility and precision in managing investment risk," observes CISDM director Thomas Schneeweis, who is Michael and Cheryl Philipp Professor of Finance at the Isenberg School.

Five years ago, the center, which employs thirteen Isenberg School students as research assistants and generates some two dozen research papers and reports each year, created the Journal of Alternative Investments. Distributed internationally by Institutional Investor, the refereed publication has rapidly become the premier journal in its field and second in circulation among Institutional Investor's prestigious family of twelve journals. The publication's latest issue reflects the richness of the center's interests and the alternative investments field. The lead article, by Schneeweis (the journal's editor), Hossein Kazemi (one of CISDM's two associate directors and an Isenberg School professor), and George Martin (the center's research director), is an analytical round-up of the market factors that drive various hedge fund strategies and the performance of leading strategies themselves. Other articles, by non-CISDM researchers on three continents, examine asymmetric returns of long/short hedge fund managers who specialize in one sector only, return/risk benefits of adding managed futures to investment portfolios, and performance effects of private equity on a portfolio weighted primarily in listed equities.

"CISDM's own research is generic and publicly available to all. It's not targeted toward any given firm's specific products," emphasizes Kazemi. "We might evaluate, for example, characteristics-like survivor bias, age, and size-that contribute to the performance of hedge funds in general, but we would never custom-analyze a firm's specific financial products. We receive considerable financial support from major investment houses, but it's never on a quid pro quo basis. That would jeopardize our research credibility. Our real value is inseparable from our independence and integrity."

Industry ties, in fact, are crucial to the center. CISDM's forty-person advisory board roster reads like a Who's Who of the alternative investments industry. And more than 30 individuals and firms financially sponsor CISDM's generic research. Sponsorship encompasses, among other things, stipends for students, including a Ph.D. student fellowship from Michael '82 MBA and Cheryll Philipp, endowers of Schneeweis' own faculty chair. CISDM's board members and sponsors stay in the loop of the center's activities through its newsletter, research reports, and annual conferences in Amherst, Manhattan, London, and other financial centers.

In September 2002, the center-formerly a congested warren of drab offices and workspaces in the old Isenberg School building-moved into spacious, new facilities in the School's 47,000 sq. ft. state-of-the-art Harold Alfond Management Center. For the first time, CISDM has a modern office suite, meeting facilities, and the Dodge CISDM Computer Lab, which offers the center's graduate-student researchers six work stations and the building's fastest computers, linked to the center's extensive financial databases. The lab is the gift of SOM alumnus William Dodge '76 '80 MBA, who is President of Delaware Investments in Philadelphia. In the lab and elsewhere, CISDM researchers employ a wealth of databases, including Hedge Fund Research, Altvest, Datastream, and most importantly, the CISDM Data Base. (The center's latest acquisition is $27,000 in donated financial software from the FinancialCad Corporation in British Columbia.)

Last August, the alternative investments services firm Zurich Capital Markets gave CISDM the biggest gift in its history-full ownership of an influential set of alternative investment data bases, valued at millions of dollars. Previously known as the Zurich Capital Markets Database, the renamed CISDM Database tracks the performance of hedge funds, commodity trading advisors, and managed futures funds. Listed monthly in MarHedge, a publication of Metal Bulletin LLC, the database tracks current performance of almost 2500 entities, as well as historical performance dating to the early 1970s. It also holds records of several thousand other alternative investment vehicles that have either gone out of business or that no longer publicly report their performance. Schneeweis notes that the database has the potential to double its subscription base, which is currently at 20+ subscribers in industry and academia. "This gift represents a tremendous opportunity for the center and the University of Massachusetts," he emphasizes. "It's a perfect complement to our work here, because it builds seamlessly on our research and on our educational relationship with the industry."

So does the center's cosponsorship (with the Internationally based Alternative Investment Management Program) of the CAIASM (Chartered Alternative Investment AnalystSM ) program, the first global accrediting initiative for alternative investment professionals. To obtain CAIASM certification, candidates must pass two levels of CAIASM exams and meet other professional criteria. "One criterion is that you must be an alternative investment professional to take the exam," observes Isenberg School finance and operations management department chair Nelson Lacey. In January, eighty candidates sat for the first round of Level I accreditation exams, administered around the world by Prometrics testing service. The next set of exams, in July, will offer both Level I and Level II testing. "The market for alternative investment accreditation is extremely promising; for now, the CAIASM program is the only player on the scene," notes Lacey.

At the Isenberg School, the center's influence colors all levels of student education in finance. "Alternative investments is one of our department's strengths, so it shouldn't surprise you to see them discussed in the classroom-even in introductory corporate finance," Lacey continues. Lacey speaks from personal experience. In his own introductory course for undergraduates, derivatives play an integral role. "Many corporate finance textbooks and courses at other universities introduce derivatives almost as an afterthought; they're something you try to cover if you've completed the course's main material. I introduce options right in the middle of my course. They're a great lead-in, I've found, to the course's next topics-capital structure and bankruptcy. Owning equity in a firm, after all, is like having an option on it, especially if it dissolves."

In upper level undergraduate courses, students gain further exposure to alternative investments in Ben Branch's investment course. They also learn about exchange rate derivatives in Nikunj Kapadia's international finance course, and about various types of market hedges in Charles Bagley's course in financial engineering. Isenberg School MBA students receive analogous close encounters with options and futures. There's a strong section on derivatives in the School's core MBA finance course and still more in Professor Branch's investments seminar. During their second year, MBA students can take a seminar with Schneeweis himself, which covers state-of-the-art topics in alternative investments. "Tom and the center, of course, are magnets for Ph.D. students who want to study alternative investments," continues Lacey. "Tom has been attracting outstanding Ph.D. students for two decades. I just got off the phone with a Romanian woman who called me from New York. She knew about Tom's work back in Romania and wants to enroll in the Ph.D program here because of him and the center.

"The center's resources and industry connections make a great number of research streams available to Ph.D. students," remarks Janie Bouges, a CISDM researcher and Isenberg School Ph.D. candidate whose dissertation is examining the influence of taxes on investor choice of mutual fund and hedge fund investments. "After graduation, a Ph.D. degree in the alternative investments field opens lots of doors in both academia and industry." "I can't imagine learning more marketable skills from an industry internship than I've acquired right here as a research assistant with the center," insists graduating MBA student Alper Daglioglu. "It's not only the skills that you learn; you get a really comprehensive inside-view of an entire industry.

"Working for two years as a research assistant and taking classes with Tom in the 1980s gave me an ideal substrate for my subsequent work experience," Deutsche Bank's head of global markets, Anshu Jain '85 MBA, told The CommonWealth several years ago. "I gained a strong introduction to risk management and a polished, well-rounded resume. Tom's network on Wall Street also led to my first three job offers. In truth Tom Schneeweis was my placement office." In an earlier issue of the magazine, another former Schneeweis student, Robert Mayerson '82 MBA, recalls putting some of his Isenberg School education to work at his former employer, Staples. As the company's treasurer and vice president, he persuaded its CFO in 1994 to implement the first hedge on interest rates in Staples' history. "It was uncharted territory for Staples; a year earlier, its exposure was insufficient to justify a hedge," he told The CommonWealth.

"Tom has been on the cutting edge of derivatives and risk management research for well over two decades," notes Kazemi. "He's written seminal papers, but no less remarkable, he's been a tireless networker, regularly presenting papers at conferences and seminars around the globe. At the same time, he spends hours on the phone enthusiastically discussing issues and events with academics and investment professionals. He might not want to admit it, but he's become a notable personality in the international alternative investments field."

It's a field, Schneeweis insists, that brings unprecedented leverage and adaptability to the management of financial risk. That includes, he observes, the virtues of hedge funds, which-depending on the risk and return characteristics of both the hedge fund and the portfolio at hand-can play unique, vital roles as risk reducers, diversifiers, or return enhancers. "An important lesson from our research is that hedge fund returns rely on a combination of trader/manager skill and market factors like volatility and changes in credit spreads," notes Schneeweis. "There are many aspects of financial markets that we can't control, that perhaps we don't want to control. Trader/manager skill sets and education are another matter. Among other things, CISDM is dedicated to educating investment professionals and the public about alternative investments and helping the industry hold professionals to higher standards through CAIASM accreditation. We're trying to take unnecessary risk out of the system. One thing's for sure: alternative investments are indispensable and growing on the investment landscape. At CISDM, we've been fortunate to see our own roles in education and research grow alongside those exciting markets."

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This article appeared in the Summer 2003 edition of Isenberg's alumni magazine, The Commonwealth.

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