Activity 1 -

You are approached by a large pension fund with assets of $60bn who currently have a very traditional (though global) asset allocation, which is 60% equities and 40% fixed income. They employ a mix of active and passive investments using the MSCI World Equity and Citigroup World Government Bond indices as their benchmark. Their long run mean return has been 6.75% per annum with 8.0% annualised volatility and a maximum drawdown of 30% which occurred between October 2007 and February 2009.

The pension fund is considering adding alternatives to their portfolio and ask you to give a presentation to the trustees who are a mixture of investment experts and members of the fund with a less technical background.

Using what you have learned during this course, prepare a PowerPoint presentation with a maximum of 20 slides outlining what you think that pension fund should do, highlighting both the opportunities and the risks.

As you are going to be graded on the contents of the slide deck and will not have the opportunity to make the presentation yourself you can add commentary in the 'notes' section under each slide if you think it is necessary to clarify points made on the slides. Use the spreadsheet return data for assignment, which contains the return data for all of the asset classes we have covered to save you having to gather any data.

Activity 2 -

One of the features that distinguishes alternative investments from traditional investments is the compensation structure. While traditional investment vehicles generally only charge a management fee, it is common for alternative investments such as hedge funds, private equity and venture capital to also charge an incentive fee.

a. Describe the mechanics of incentive fees and the explain the rationale for this alternative compensation structure.

b. How do incentive fees influence the behaviour of the manager and do they lead to any agency issues?

c. If the answer above is 'yes' then how can these agency issues be resolved

Activity 3 -

Traditional mean/variance measures such as the Sharpe ratio show that for the period 1994-2016 the risk adjusted performance of most alternative investments is superior to traditional investments.

However, it can be argued that this approach seriously understates the risk of alternative investments, why is this the case?

Attachment:- Assignment Files.rar