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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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Introduction
Presenter:
Florian Martin Böhlandt (ref. 14959747)
Course:
MBA-Fulltime 2006
Timeframe for Research Report:
January 2006 – May 2006
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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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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 nontraditional 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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Statistical Analysis
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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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Distribution of Returns
Use of Derivatives and Hedging
Instruments
Unbalanced Allocation of funds
between Equity and Bond
markets
Financial Leverage to enhance
performance from Arbitrage
Trades
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
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‘)
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Effects of Autocorrelation
Effects of Managerial Bias and
Performance Smoothing
Survivorship Bias and the
exclusion of sunk funds

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
Other effects of Autocorrelation
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Changing Market Correlation
Disruptive market events can
significantly change the
interrelation between market
and single investment/Portfolio
Alternative investment funds
tend to be more susceptible to
disruptive market events

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
Beta fails to reflect risks of
investments over the long-term
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Statistical Inference
Short Performance History of
Alternative Investment Funds
Inappropriate Levels of
Confidence in Statistical
Inference

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
Limited availability of data on
Hedge/Private Equity Funds
performance
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Proposed Analysis Framework
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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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Data Treatment
Category II:
Data from Perfomance Reports,
Online Databases and News
Providers
Single Fund Data
Fund of Funds Data
Category III:
Simulated time series (from
various data sources)
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Not
available
Weigthing
Category I:
First hand data from fund
managers and HSH-Nordbank
Not
available
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Available
Resources
Support
Tools and Programs
Industry
Contacts
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Framework of Report
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
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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Time Table
IV. Quarter
2007
I. Quarter
2008
III. Quarter
2008
IV. Quarter I. + II.Quarter
2008
2009
Hand-in of First Draft
Literature
Review/Interviews
II. Quarter
2008
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
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Questions?
Thank You for Your Attention!
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