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Individual assignment
SMM730 Alternative Investments (October 2022)
Activity 1
You are approached by a large pension fund with assets of $50bn 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 FTSE World Govt
Bond indices as their benchmark. Their long run mean return has been
7.1% per annum with 8.8% annualised volatility and a maximum
drawdown of 32% 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
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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.xls (on the Moodle page), which contains the return data for all
of the asset classes we have covered to save you having to gather any data.
(50 marks)
Activity 2 (maximum 1,000 words)
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
(25 marks)
Activity 3 (maximum 1,000 words)
Traditional mean/variance measures such as the Sharpe ratio show that for
the period 1994-2020 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?
(25 marks)