1. Research Proposal - Final Draft -
Applicability of Traditional Risk Measures for Assessing the Inherent Risks of Alternative Investment Portfolios
- An Analytical Framework -
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2. Introduction Presenter: Florian Martin Böhlandt (ref. 14959747)
Course:
MBA-Fulltime 2006
Timeframe for Research Report:
January 2006 – May 2006
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3. 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?
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4. 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.
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5. 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
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6. 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
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7. 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
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8. 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
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9. 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
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10. 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
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11. 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)
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12. Tools and Programs Available Support Resources Industry Contacts
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13. 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
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14. Time Table IV. Quarter 2007 I. Quarter 2008 II. Quarter 2008
III. Quarter 2008
I. + II.Quarter
IV. Quarter
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
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15. Thank You for Your Attention!
Questions?
Thank You for Your Attention!
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