1. MARCH 2015 BUILDING A RISK-AWARE BOARD Aristides Protopapadakis, CEO Systemic Solutions

2. Isolated Risk Function -Strategy formed by Investment Committee with limited involvement of the risk function -Board members lack engagement with the risk function Seen as compliance exercise RMP document not corresponding to current risk practice RISK MANAGEMENT PROCESS: FUNDS ARE GETTING IT WRONG!!

3. All Directors assume ultimate responsibility High-level decisions need to simultaneously consider performance and risks. At board level, risk management should NOT form a separate activity “How can I facilitate the board’s engagement in the risk management process taking into account, time constraints & directorship scope” WHOSE LIABILITY?

4. 4 DATA, TOOLS, MECHANISMS A BOARD CAN PUT IN PLACE

5. CSSF licensing requires an approved RMP. However for a new fund (especially alternative) it is difficult to know in advance: What approach, metrics are the most appropriate? Availability of raw information, system capabilities, effort required? Results interpretability & usability? TOOL #1: RMP DOCUMENT

6. 6 RISK MANAGEMENT PROCESS (RMP) Starting or Ending Point? Banks Large Funds System vendors LEARN FROM OTHERS Examples: Risk Approval process Credit risk modeling Stress Testing

7. 7 TOOL #2: PERIODIC RISK REPORT Fully comprehensive by board members Decision making tool, basis for discussions (not merely compliance) Availability of raw information Availability of calculation & monitoring mechanisms Reasonable resources and cost to produce In harmony with prospectus RMP & Risk report in harmony with each other

8. Fund of Hedge Funds L’Habitant’s style VaR approach uses Hedge Fund strategies as Risk Factors. Peer-to-Peer Lending fund Credit Risk modeling borrowed from Banks (Basel III) Real Estate Fund Low-level stress testing at individual lease level AIF RISK REPORT: MODELING EXAMPLES

9. 9 Lack of raw data (strategy-specific indices, default probabilities) Too cumbersome calculations Other risks were far more important (Liquidity, Concentration…) Approaches need to be adapted or abandoned GOOD IDEA, BUT DOES IT WORK?

10. 10 Board discussion Risk Analysis v.1 Risk Analysis v.2 Risk Analysis v.N Initial RMP Reverse Engineered RMP WHERE TO START: CHICKEN VS. EGG PROBLEM

11. Fund of Hedge Funds L’Habitant’s style VaR approach uses Hedge Fund strategies as Risk Factors. This was included in the initial RMP which was approved by CSSF Peer-to-Peer Lending fund Credit Risk modeling borrowed from Banks (Basel III) Real Estate Fund Low-level stress testing at individual lease level INITIAL RMP CASE STUDIES MUST DO FOR DIRECTORS

12. 12 HANDS-ON INVOLVEMENT

13. ENGAGING THE BOARD Assign to one or more directors specific operational areas in risk management to engage on Board members can assume active roles in specific fund initiatives such as the selection of a risk management system choice of methodologies to adopt, meaningful reporting layouts, distribution mechanisms

14. COLLABORATIVE INTRUSIVE vs SUBTLE DIFFERENCES CRITICAL ROLE APPROVAL MANAGEMENT MICRO- MANAGEMENT

15. 15 In-between meetings… IN-BETWEEN MEETINGS… Being able to touch base in between meetings and staying current Such impromptu discussions strengthen a board’s hand on the company’s pulse Keeping board members informed also minimizes the time spent on background that slows up regular board meetings Elevate issues that they’re seeing on the horizon that the board should be thinking about

16. 16 LOW, MEDIUM, HIGH IMPACT BOARDS Low impact boards Quarterly presentation to the Board by the risk function on the evolution of risk during the previous quarter Medium impact boards Active discussion on anticipated risks in the next quarter, to what extent these are justified High impact boards On-going involvement of Directors before any investment/ divestment altering the overall risk profile Frequent risk reporting Less time spent at board meetings

17. 17 ENGAGING WITH STRATEGY AS IT IS FORMING

18. 18 STRATEGY FORMATION Participating early in the formation of strategy and stress-testing it along the way, as opposed to reviewing a strategy that’s been fully thought through by executives Collaborative process => This shifts the board’s attitude from reactive to proactive

19. 19 RISK MANAGEMENT STRATEGY Passive risk management role Investment mgt seeks opportunities & takes investment initiatives Risk mgt observes compliance with limits Collaborative risk management Investment decisions are taken after understanding both sides of the equation, how risks are expected to be covered by returns Collaborative Culture to start at board level!

20. 20 ASK TOUGH QUESTIONS

21. 21 EVERY BOARD MEMBER DOES NOT NECESSARILY NEED TO HAVE INDUSTRY EXPERIENCE. BUT THEY MUST HAVE THE COURAGE IN THE BOARDROOM TO ASK DIFFICULT QUESTIONS. EVERYBODY’S A PEER: BOARDS SHOULD HAVE AT LEAST ONE PERSON WHO HAS THE RESPONSIBILITY TO THINK LIKE AN ACTIVIST INVESTOR. MANY BOARDS ARE CAUGHT UNAWARE BECAUSE NO DIRECTOR IS PLAYING THAT ROLE. DON’T ASSUME THAT WHAT MADE MONEY OVER THE PAST 20 YEARS WILL MAKE MONEY AGAIN.

22. 22 THANK YOU