Research Proposal - Final Draft - Applicability of Traditional Risk Measures for Assessing the Inherent Risks of Alternative Investment Portfolios - An Analytical Framework - 11/15/2018

Introduction Presenter: Florian Martin Böhlandt (ref. 14959747) Course: MBA-Fulltime 2006 Timeframe for Research Report: January 2006 – May 2006 11/15/2018

Definition of Research Problem Question 1: Do risk measures derived from Sharpe‘s Capital Asset Pricing Model and Modern Portfolio Theory adequately display the risks of Alternative Investments? Question 2: What risk measures more accurately reflect the inherent risks of Alternative Investment Portfolios? 11/15/2018

Statistical Analysis Naught Hypothesis: There is not sufficient statistical evidence that traditional risk measures derived from Sharpe’s CAPM and mean-variance analysis adequately reflect shortfall and default risks of non-traditional investments Alternative Hypothesis: There is sufficient statistical evidence that Sharpe’s CAPM and mean-variance analysis adequately explains the inherent risks of non-traditional investments It is the aim of the research study to show that H0 is indeed true. 11/15/2018

Statistical Analysis To evaluate the two hypotheses, the following characteristics of Hedge and Private Equity Funds will be studied in detail: Skewness of probability distributions and the likeliness of extreme results (default risks) survivorship bias and the exclusion of sunk funds in existing surveys managerial bias and the impact of fund manager skills on the risk dimensions shifts in market correlations due to unforeseen events short performance history and statistical inference from limited sample sizes 11/15/2018

Distribution of Returns Use of Derivatives and Hedging Instruments Lower degree of overall variation in performance history Alternative Investment Funds return distributions display excess kurtosis and are negatively skewed Higher risk of returns to fall significantly below the expected mean (‘Fat Tails‘) Unbalanced Allocation of funds between Equity and Bond markets Financial Leverage to enhance performance from Arbitrage Trades 11/15/2018

Effects of Autocorrelation Effects of Managerial Bias and Performance Smoothing Distribution of funds returns appear smoother than they actually are Performance of Alternative Investment Funds (entire industry) appears better than they actually are  Industry Indices Survivorship Bias and the exclusion of sunk funds Other effects of Autocorrelation 11/15/2018

Changing Market Correlation Disruptive market events can significantly change the interrelation between market and single investment/Portfolio Beta may be an inappropriate measure of risk in the event of changing market correlations Adapted Beta measures may improve the assumptions derived from the CAPM Alternative investment funds tend to be more susceptible to disruptive market events Beta fails to reflect risks of investments over the long-term 11/15/2018

Statistical Inference Short Performance History of Alternative Investment Funds Limited degree of usability of time series analysis Accuracy of simulated time series Analysis of Fund of Funds or Style Indices leads to biased results Inappropriate Levels of Confidence in Statistical Inference Limited availability of data on Hedge/Private Equity Funds performance 11/15/2018

Proposed Analysis Framework In order to provide Analysts and prospective investors with a holistic risk analysis framework the study will…: Try to evaluate how existing risk measures can be adapted Provide analysts and investors with innovative measures to assess risks Estimate in what domain and under what circumstances those risk measures hold true Evaluate what risk measures should be assigned to what alternative investment strategies Assign weightings to risk measures according to their relevance Adapted risk measures will be subject to the same statistical analysis as traditional risk measures 11/15/2018

Data Treatment Weigthing Category I: First hand data from fund managers and HSH-Nordbank Not available Weigthing Category II: Data from Perfomance Reports, Online Databases and News Providers Single Fund Data Fund of Funds Data Not available Category III: Simulated time series (from various data sources) 11/15/2018

Tools and Programs Available Support Resources Industry Contacts 11/15/2018

Framework of Report Title page: “Applicability of traditional risk measures for assessing the inherent risks of alternative investment portfolios – an analytical framework” Table of Contents Chapter One: “Measuring the Risks of Alternative Investments – An Introduction” Chapter Two: “Data Mining and analysis tools” Chapter Three: “Why do traditional risk measures inadequately reflect the risks of private equity and hedge funds?” Chapter Four: “Statistical significance of utilizing traditional risk measures” Chapter Five: “Adapting risk measures to improve the dependability of statistical data – a framework” Chapter Six: “Analyzing the benefits of the proposed framework” Chapter Seven: “Closing Remarks” List of Sources Table of Contents - Annex Annex: Tables and graphical depictions 11/15/2018

Time Table IV. Quarter 2007 I. Quarter 2008 II. Quarter 2008 III. Quarter 2008 I. + II.Quarter 2009 IV. Quarter 2008 Literature Review/Interviews Data Collection and Evaluation Data Treatment and Calcualtion Full Proposal Ph.D.Thesis Correspondance with Financial Institution Preparatory Work Writing of Research Report No activities in subsection Hand-in of First Draft 11/15/2018

Thank You for Your Attention! Questions? Thank You for Your Attention! 11/15/2018