CFA/VBAConference on Alternatives Sep 2019

Alternatives: the new normal?1

RISK MANAGEMENT LESSONS 18

Lessons from the frontlines

EXAMPLES OF ALTERNATIVE INVESTMENTS 23

Devil is in the details

.

WRAP UP 25

APPENDIX 29

One spade deeper

Content

2

INTRODUCTION 3

My Alternative background.

WHY ALTERNATIVES? 4

Strategic considerations.

WHICH ALTERNATIVES? 5

Different shades of grey.

HOW: CASE STUDY DUTCH INSURER 6

Towards An Alternatives Framework

Three main conclusions

DISCLAIMER

Pebbls in in the process of raising capital and applying for the

necessary asset management licenses which implies that Pebbls

does not offer any asset management product or service to any

client. All views expressed in this presentation should be seen as

personal views rather than opinions of any company.

.

VISION

Pebbls’ goal is to improve the financial future of any employee

by reinventing asset management for the pension industry..

MISSION

To create the first client centred fully digitalized asset platform

(PaaS) that enables employees to build up their pensions at

lower cost and with higher expected returns.

Introduction:

ALTERNATIVE RESUMEMichel Klaster is since May 2018 CEO of Pebbls, a

startup company that believes in bringing the value of

Alternative Investments to the masses. Before that he

was six years Head of the General Account for Aegon

Asset Management in the Netherlands. He played a

crucial role in setting up the largest Alternative

Investment platform for a Dutch insurance company.

Before that he held positions at Fortis, Blue Sky Group

and Paerel and started investing in Alternatives in

2005.

Michel studied Econometrics, Monetary Economics and

MBA and lectures Alternative Investments at the Free

University of Amsterdam (CFA).

Statement 1

Which Alternatives Statement do you most agree with?

A

B

C Without sufficient skills and knowledge and without a clear (risk) framework Alternatives

exposure need to be set at a minimum

The expected return and diversification of most institutional portfolios is far below par which

calls for Alternatives.

Alternatives are not an answer to the search for diversification since in most cases Alternatives

have a high exposure to traditional credit and equity risks and are wrapped in liquidity risk

Alternatives within the Legal Environment

Article 143Pw Beheerste bedrijfsvoering

A controlled and .. Specifically for determining and implementing the investment policy, the fund establishes a clear

organizational structure in which (1) risk management is adequately and independently designed and (2) a careful and

transparent decision-making process is guaranteed. In addition, there must be a balance between the nature and complexity

of the investment portfolio on the one hand and the available knowledge and experience, and risk management on the other.

->This part is essential when considering Alternatives since without adequate Risk Management there is no license to play

Article 13a Prudent Person Priciple

Investments traded on non regulated markets need not to exceed a prudent level.

-> What exactly is considered prudent is unclear but between 0% and 20%-25% appear prudent, depending on

specific circumstances like the duration of the liabilities levels and the risk tolerance of the participants.

Investments need to be diversified such that an overdependence on certain assets is prevented

-> If anything this justifies Alternatives since typical pension portfolios have an overreliance on equities

What is the problem: Traditionals lack return

Return expectations traditional investments moderate at best

With global bond yields below 1% in most Western countries and PE ratios above 25 return above 3% are

hard to achieve.

Global bond yields falling US PE ratios again in dangerous territory

Source: ECB, Bundesbank, Bank of England, Federal Reserve

Problem : Pension funds suffer from suboptimal

allocation

Bla

Bla

Expected return very low

Return estimates pension funds per 2019Q2

OPF (%) BPF(%) Assumption OPF (%) BPF(%) Assumption OPF (%) BPF(%)

59% 43% 0.10% 26% 14% 1.0% 19% 11%

4% 4% 0.30% 5% 4% 3.9% 5% 4%

7% 13% 0.50% 16% 21% 5.4% 13% 18%

26% 33% 0.18% 21% 19% 6.0% 52% 52%

1% 2% 1.80% 4% 9% 4.1% 1% 2%

2% 1% 1.00% 8% 4% 4.9% 3% 2%

2% 4% 2.00% 20% 29% 9.8% 8% 11%

100.0% 100.0% 0.22% 0.31% 2.96% 3.80%

36% 52% 61% 78% 73% 84%

12% 20% 48% 63% 24% 33%

0.31% 0.55%

0.09% 0.24%

2.65% 3.25%

0.29% 0.36%

2.94% 3.61%

Reported Costs Asset Management

Of which Equity

Cost estimates

Of which Alternatives

Real estate (liquid)

Allocation Net Return

FI (matching IG)

FI (HY/EMD)

Equities

Hedge funds

Private Debt

Private Equity

TOTAL

Delta cost (other asset management cost)

Net Return after reported costs

Assumed optimistic alpha based on Z-score

Optimistic net returnThe asset a l location weeights are based on DNB data (2019Q2 Quarterly Figures). Since mortgages are in terms of ri sk and return more a matching than a return

component 2/3 of the mortgages are a l located to FI matching. Both the cost and return assumptions are based on severa l sources including quotes or return

estimates of top-10 global asset managers . The Z-score assumption is the upper estimate of the average Z-scores in the last two decades .

Opportunity: The underuse of Diversification

Risk budgetting

Purely from a risk perspective it is optimal to spread out risk as much as possible over categories especially when

these categories are uncorrelated. Pension funds in NL (Both OPF and especially BPF) are geared to equity risk

Diversification in terms of allocation below par Diversification in terms of risk even worse

0%

10%

20%

30%

40%

50%

60%

70%

FI (matchingIG)

FI(HY/EMD)

Real estate(liquid)

Equities Hedgefunds

Private Debt PrivateEquity

Pension fund € allocations

OPF BPF

0%

10%

20%

30%

40%

50%

60%

FI (matchingIG)

FI(HY/EMD)

Real estate(liquid)

Equities Hedgefunds

Private Debt PrivateEquity

Pension fund RISK allocations

OPF BPF

Statement 2

Which Statement do you most agree with when it comes to

identifying Alternatives ?

Everything that is not plain Equity or Investment Grade Fixed Income can be considered

AlternativeA

B

C

Alternatives is a diluted and overused term. For example Real Estate, High Yield, ABS and

Mortgages are so widely used that they cannot be considered Alternatives anymore

All nonlisted assets should be considered as Alternatives

Framework to define Alternatives

Explainably

Statistics sometimes lie. Therefore next to measurably distinct characteristics we also check

whether the underlying assets are different. To assess this we look at the following criteria:

i) liquidity, ii) degree of regulation, iii) underlying assets and key risk drivers

Measurably

We consider an asset class measurably alternative if either i) the correlation is less than

0.75 or ii) the return difference is more than 25% or iii) the return characteristics are

highly nonnormal (in terms of kurtosis and/or skewness)

Definition

We define Alternatives as all asset classes which are not measurably and explainably

different from the two traditional asset classes Global Equities and Global Investment

Grade Bonds

Applying framework Fixed Income?

Applying the framework

We have used both the

quantitative as well as the

qualitative criteria to assess which

Fixed Income Investments would

qualify.

If we use 3 out of 6 as a minimum

threshold of the 20 fixed income

assets we consider 12 as

distinctively Alternative.

Next to Private Loans these

include Convertibles, Infra,

Receivables, CAT Bonds and FI

hedgefunds

Regulation Liquidity Underlying Returns DiversificationNonnormal Alt-Test

Governments

Government Bonds

Local Governemnt Bonds

Inflation Linked Bonds

Supranational Bonds

Emerging Markets Debt √ √

Government related private loans √ √ √ √

Corporates

Credits

High Yield √ √

Private Placements √ √ √ √ √

Mezzanine √ √ √ √ √

Distressed Debt √ √ √ √ √ √

Covered Bonds √ √ √ √ √

Convertible Bonds √ √ √ √

Infra Debt √ √ √ √ √ √

Receivables √ √ √ √ √ √ √

Consumers

Direct Mortgage Loans √ √ √ √

Consumer loans √ √ √ √ √

Securitised

ABS √ √

CAT Bonds √ √ √ √ √ √ √

Fixed Income hedge funds √ √ √ √ √ √

Source: Aegon Asset Management, Pebbls

Whether regulations, liquidity and underlying (structure) are significantly different are qualitative assesments by the author. For returns (more than 25% delta),

diversification (correlation below .75) and Nonnormality (Shapiro-Wilk test@95%) we use quantitative thresholds.

Alternative Fixed Income within Portfolios

Asset Allocation

We have collected estimates for

both the market size as well as the

average allocation of the specific

assets in Dutch pension fund

portfolios (both Big 5 as well as

Rest of Market)

Looking at the positive deltas the

most ‘overowned’ assets appear

to be Government bonds and

Credits (notably RoM).

Looking at the negative deltas the

most ‘underowned’ asset appear

to be Mortgages, Consumer Loans

and Local Government Bonds

Size Size as % P.fund G5 P.fund RoM Delta G5 Delta RoM

Governments in $ tln As % of TOTAL APG, PfzW,… Rest of Market %-point %-point

Government Bonds 35 23.4% 25.3% 31.0% 1.8% 7.6%

Local Governemnt Bonds 10 6.7% 0.0% 0.0% -6.7% -6.7%

Inflation Linked Bonds 1 0.7% 2.5% 0.0% 1.9% -0.7%

Supranational Bonds 5 2.2% 0.0% 0.0% -2.2% -2.2%

Emerging Markets Debt 15 6.7% 5.7% 3.0% -1.0% -3.7%

Government related private loans 2 0.9% 0.0% 0.0% -0.9% -0.9%

Corporates

Credits 20 8.9% 10.6% 17.0% 1.7% 8.1%

High Yield 2 0.9% 3.3% 3.0% 2.4% 2.1%

Direct Lending 1.2 0.5% 0.0% 0.0% -0.5% -0.5%

Mezzanine 0.2 0.1% 0.0% 0.0% -0.1% -0.1%

Distressed Debt 4 1.8% 0.0% 0.0% -1.8% -1.8%

Covered Bonds 1 0.4% 0.0% 0.0% -0.4% -0.4%

Convertible Bonds 0.1 0.0% 0.0% 0.0% 0.0% 0.0%

Infra Debt 10 4.5% 0.0% 0.0% -4.5% -4.5%

Receivables 3 1.3% 0.0% 0.0% -1.3% -1.3%

Consumers

Direct Mortgage Loans 23 10.2% 0.0% 0.0% -10.2% -10.2%

Consumer loans 13 5.8% 0.0% 0.0% -5.8% -5.8%

Securitised

ABS 3 1.3% 0.0% 0.0% -1.3% -1.3%

CAT Bonds 0.1 0.0% 0.4% 0.0% 0.4% 0.0%

Fixed Income hedge funds 0.8 0.4% 0.9% 0.5% 0.6% 0.1%

Source: Pebbls

The market s izes are estimated based on 2018 data. The % are derived from the total market s izes for borth equity markets and

fixed income markets . These weights can be seen as the true CAPM weights s ince the market portfol io was a lways ment to be the

total (investable) market. The Dutch a l locations are shown as wel l as the deltas in %-ppoint as wel l as %.

Applying Framework In Equity markets

Applying the framework

We have used both the

quantitative as well as the

qualitative criteria to assess which

Fixed Income Investments would

qualify.

If we use 3 out of 6 as a minimum

threshold of the 14 Equity related

assets we consider 10 as

distinctively Alternative.

Next to Private Equity and Hedge

Funds these include Infra Equity,

Direct Real Estate and

Commodities

Regulation Liquidity Underlying Returns DiversificationNonnormal Alt-Test

Public

Equities largecap

Equities smallcap √

Equities smart beta

REITS √ √

Commodities √ √ √ √ √

Private

Private Equity (LBO) √ √ √ √ √

Private Equity (VC) √ √ √ √ √ √ √

Private Equity (Other) √ √ √ √ √ √ √

Infra equity √ √ √ √ √ √

Direct Real estate √ √ √ √ √ √

Direct Commodities √ √ √ √ √ √ √

Securitised

Hedge funds Equity related √ √ √ √

Hedge funds Managed Futures/CTAs √ √ √ √ √ √

Hedge funds Other √ √ √ √ √ √ √

Source: Aegon Asset Management, Pebbls

Whether regulations , l iquidi ty and underlying (s tructure) are s igni ficantly di fferent are qual i tative assesments by the author. For returns (more than

25% delta), divers i fication (correlation below .75) and Nonnormal i ty (Shapiro-Wi lk test@95%) we use quanti tative thresholds .

Alternative Equity within Portfolios

Asset Allocation

We have collected estimates for

both the market size as well as the

average allocation of the specific

assets in Dutch pension fund

portfolios (both Big 5 as well as

Rest of Market)

Looking at the positive deltas the

most ‘overowned’ assets appear

to be Equities and Direct Real

Estate (notably Big 5).

Looking at the negative deltas the

most ‘underowned’ asset appear

to be Infra Equity (notably Rest of

Market)

Size Size as % P.fund G5 P.fund RoM Delta G5 Delta RoM

Public in $ tln As % of TOTAL APG, PfzW,… Rest of Market %-point %-point

Equities largecap 39 17% 21.4% 16.9% 4.1% -0.5%

Equities emerging markets 5 2.2% 6.5% 4.2% 4.3% 2.0%

Equities smallcap 5 2.2% 3.0% 2.2% 0.8% 0.0%

Equities smart beta 1 0.4% 0.1% 0.2% -0.3% -0.2%

REITS 2 0.9% 0.9% 2.1% 0.0% 1.2%

Commodities 2.3 1.0% 1.8% 0.0% 0.8% -1.0%

Private

Private Equity (LBO) 5 2.2% 3.2% 2.3% 1.0% 0.1%

Private Equity (VC) 1.2 0.5% 0.2% 0.0% -0.4% -0.5%

Private Equity (Other) 0.2 0.1% 0.0% 0.0% -0.1% -0.1%

Infra equity 3 1.3% 1.0% 0.3% -0.3% -1.0%

Direct Real estate 8.5 3.8% 10.4% 4.6% 6.6% 0.8%

Direct Commodities * 0.5 0.2% 0.0% 0.0% -0.2% -0.2%

Securitised

Hedge funds Equity related 0.8 0.4% 0.9% 0.2% 0.6% -0.2%

Hedge funds Managed Futures/CTAs 0.3 0.1% 0.3% 0.1% 0.2% -0.1%

Hedge funds Other 1.4 0.6% 1.6% 0.3% 1.0% -0.3%

Source: Pebbls

The market s izes are estimated based on 2018 data. The % are derived from the total market s izes for borth equity markets and fixed

income markets . These weights can be seen as the true CAPM weights s ince the market portfol io was a lways ment to be the total

(investable) market. The Dutch a l locations are shown as wel l as the deltas in %-ppoint as wel l as %. Data avai lable from MSCI,

Infradeals , . The s tar denoted categories are estimated by the author.

Statement 3

Which Alternatives Statement do you most agree with?

Alternatives are so complex that only investors with large balance sheets (EUR20bln+) can

sensibly invest and be in control of its Alternative risksA

B

C

Thanks to the rise of ETFs Alternatives are interesting for all investors irrespective of size and

maturity of the investment organization

Being in control of an Alternatives portfolio comes with serious costs in terms of time and

money which need to be accepted before entering into this category

Case study Alternatives Program

step by step approach

Step 3: Selection and Monitoring

Per (sub) asset class find first quartile managers, perform DD, analyse and select and

set up the infrastructure to properly monitor the managers

Step 2: From shortlist to selected list

Based on the most penalizing restrictions narrow down the shortlist to a workable set

Step 1: From longlist to short list

The set of restrictions of an institutional investor are diverse and often in contradiction

which requires an optimization process that is iterative such that it supports learning

Step 1: from longlist to shortlist

Determining the cut-off

Further analysis is done for a subset of the assets. The cut-off needs to be around twice

the amount of alternative asset classes that is envisioned. For the context of this

presentation we assume up to 6 new asset classes (cut-off is 12)

Collecting and ranking the data

For each (sub) asset class and each of the criteria we collected the data and ranked it

in order to be able to make the data comparable. For the weighting we use:

30/25/20/15/10

Setting criteria to do the first assesment

For an insurance company in search of yield and diversification the most obvious candidates

were in our view: 1) Return on (solvency) capital , 2) excess net return, 3) marginal risk ,4)

Liquidity. Moreover we added Complexity (5) to also budget the scarce resources

The shortlist

Top-12 Alternatives ranking on five criteria among 34 (sub) assets

# Rank ROC Return Marg. Risk Liquidity Complexity TOTAL Alt-testRank ROC Return Marg. Risk Liquidity Complexity TOTAL

1 Direct Real estate 4 8 10 24 10 9.8 √

2 Receivables 1 18 15 12 28 12.4 √

3 Private Equity (Uncorrelated) 6 1 11 34 32 12.6 √

4 Government related private loans 5 31 2 12 15 13.0 √

Equities smart beta 19 11 19 1 10 13.4

5 Infra equity 10 7 13 27 21 13.5 √

Equities smallcap 16 8 25 12 6 14.2

6 Direct Mortgage Loans 8 28 6 22 6 14.5 √

7 Mezzanine 2 4 31 31 21 14.6 √

Equities largecap 20 12 27 1 3 14.9

8 Consumer loans 3 21 20 22 15 15.0 √

9 Direct Lending 7 16 18 27 15 15.3 √

10 Hedge funds Managed Futures/CTAs 27 14 1 5 28 15.4 √

11 CAT Bonds 12 18 5 24 32 15.9 √

12 REITS 22 14 26 5 6 16.7 √Ranking is based on the weighted average of the ranking on four di fferent key decis ion cri teria (Return on (solvency) Capita l , Excess net

return, Marginal Contribution to Risk and Liquidi ty. Moreover we added Complexi ty in order to a lso take the human resource restrictions

into account. The weightings used are 30/25/20/15 and 10% respectively.

Step 2a : identifying the high ROC assets

Phase 1: One size fits all

High capital requirement1 Low capital requirement

Low net

return

High net

return

Mortgage

Direct Lending

Mezz

Infra Equity

PE(unc)

Cons.L

CAT

Bonds

Direct RE

CTAs

S/

turquose

L/darkblue

M/blue

Small pebble:<$1tn

Turquose: return per

risk above average

Medium pebble:$1-10tn

Blue: return per risk

around average

Large pebble:>$10tn

Darkblue: return per

risk below average

Step 2a: Identify the below/around/above return on capital assets to create 4D graphs (3rd D is size)

Receivables

1 Capital requirement based on solvency 2 (standard model)

Gov loans

REITS

Step 2b: Selecting based on Return/Marg Risk

Phase 1: One size fits all

High marginal risk1 Low marginal risk

Low net

return

High net

return

Mortgage

Direct Lending

MezzInfra Equity

PE(unc)

Cons.LCAT

Bonds

Direct RECTAs

S/

turquose

L/darkblue

M/blue

Small pebble:<$1tn

Turquose: return per

risk above average

Medium pebble:$1-10tn

Blue: return per risk

around average

Large pebble:>$10tn

Darkblue: return per

risk below average

Step 2b: Deselect the three assets that perform worst in Return/Marg.risk space starting with below average ROC

assets (if in doubt deselect smallest)

Receivables

1 Marginal risk defined as risk increase when 1%-p is added

Gov loans

REITs

Selected Batch Nr.1

Step 2c: Selecting based on Liquidity/Complexity

Phase 1: One size fits all

Low liquidity1 High liquidity

High

complexity

Low

Complexity

Mortgage

Direct LendingPE(unc)

Cons.LCAT

Direct RE

CTAs

S/

turquose

L/darkblue

M/blue

Small pebble:<$1tn

Turquose: return per

risk above average

Medium pebble:$1-10tn

Blue: return per risk

around average

Large pebble:>$10tn

Darkblue: return per

risk below average

Step 2b: Deselect the first three assets that perform worst in Complexity/Liquidity space starting with below

average ROC assets (if in doubt deselect smallest)

Receivables

1 Marginal risk defined as risk increase when 1%-p is added

Gov loans

Deselected Batch nr.2

Mezz

REITs

Infra Equity

Step 2d Assess selection

Phase 1: One size fits all

Low Risk High Risk

Low return

High return

Step 2d: Assess whether the selection is well distributed over the return and risk axis

TraditionalMortgage

PE(unc)

Direct RE

CTAs

Receivables

Gov loans

S/

turquose

L/darkblue

M/blue

Small pebble:<$1tn

Turquose: return per

risk above average

Medium pebble:$1-10tn

Blue: return per risk

around average

Large pebble:>$10tn

Darkblue: return per

risk below average

Step 2e Selecting the weights

Phase 1: One size fits all

Low Risk High Risk

Low return

High returnPortfolio incl. alternatives

optimized on return given Risk

of Traditonal portfolio

Portfolio incl. alternatives

optimized on Risk given

Return of Traditonal portfolio

Portfolio incl. alternatives with

same liquidity optimized on

return per unit of risk

Step 2e: Choose which filter (Risk, Return, Liquidity) deserves highest weight 1

1 The weights for the filters typically depend on fund specific

restrictions and preferences

Return

Liquidity

Risk Traditional

Step 3: Selection and Monitoring

Monitoring

Assess before selecting which reports and datafields are required and ensure the

manager can comply since negotiating after settlement is difficult…

Selection

Be aware of the fact that selecting the exact right manager in Alternatives is less important

than selecting the asset class but NOT selecting the bad manager is the most important of

all, which justifies to weigh prudence (Risk Management) highest in this phase.

Due dilligence

Based on the 6P’s (Philosophy, People, Process, Performance, Price and Prudence) select

the best managers per category and choose the one that passes the risk DD

Case study: setting up Alternatives Program

Program performs well

Despite typical J-curve return developments the program could already harvest an

outperformance in the first full year of its existence and now generates returns above

its initial expectations

Program is well diversified

In total 20+ strategies were selected over 15+ different managers over 10+ different

(sub)asset classes

Program was large

The total Program was more than EUR10bln of which EUR5bln was designated for

external managers and EUR5bln in house managed mandates

Case Study:

Example (Illiquid) Alternative that did make it

Reasons NOT to invest

• The strategy involves oil and Gas which may undermine

efforts to be a leader in ESG

• The (performance fee) costs were high

Reasons to invest

• The strategy was perfectly congruent with the investment

beliefs (illiquidity premium, barbell)

• Manager was part of the Insurance Group which implied that

a relentless focus on risk management was already in place

-0,50

-0,30

-0,10

0,10

0,30

0,50

1 2 3 4 5

Correlation AURA with GSCI, S&P500 and US HY MA 1-5Q

GSCI(En) SP500 US HY (B)

Impact Correlatie op

Diversificatie Vola Div.

1,00 4,36% 0%

0,50 4,17% 52%

0,25 4,08% 78%

0,10 4,02% 95%

0,00 3,98% 106%

-0,10 3,94% 117%

-0,25 3,88% 134%In this analysis we assume a base portfolio with a vol of 4% and an

alternative investment proposal with a correlation between -0,25 and 1,00

Case study:

Example (Liquid) Alternative that did not make it

Reasons to invest

• CTAs have a negative correlation with both equities and

credits making it the ultimate risk mitigator

• The RPM strategy focuses on the sweet spot in the

market being the small and medium sized managers

Reasons NOT to invest

• The strategy did not resonate with any of the investment

beliefs (illiquidity premium, barbell)

• Double cost structure and not solvency friendly (ROC lower

than other options)

Statement 4

Which Alternatives Statement do you most agree with?

The bottleneck for setting up an Alternatives platform is Risk Management, which implies that

before setting it up most time and effort should be spent there.A

B

C

The bottleneck for setting up an Alternatives platform is finding the right assets and sourcing the

right deals, which implies that before setting it up the right Front office staff need to be selected

The bottleneck for setting up any investment platform which includes Alternatives is Data.

Therefore the COO department deserves a leading role from the start

Alternatives Program

Lessons learned

If you can’t beat them join them

Cooperation with a larger peer or a specialized firm pays off. It reduces stress on

resources and can drastically cut fees since size is everything when negotiating fees

down to less alternative levels….

Diversifying Alternatives means spreading thin your scarcest resources

Every Alternative asset class has its own peculiarities which makes it almost impossible

to understand the details if you introduce more than two new alternatives per year

Start with the obvious

If internal teams are available Private Placement may be considered both at the Credit

desk as well as the Rates desk (WSW, Munies, ECA)

Alternatives Program

Lesson learned (Financial Risks)

Lie, damned lies and statistics

How useful are volatility and correlation arguments when comparing liquid and by

nature less liquid alternatives?

Return illusions

IRR is the most used performance measure for private equity but does it pass the CFA

Institute Standards of Practice test?

Look beyond the surface

Alternatives may turn out to be Marks&Spencer suits for Savile Row prices

Alternatives Program

Lessons Learned (Nonfinancial)

One-man-shows do not work with alternatives

The alternative space is so complex that a brilliant fund manager is not enough to earn

a ticket to play. Also risk management (both first and second line) and operations need

to master their duties

It’s all about the data

Some alternatives make use of the size premium (aggregating higher yielding small

tickets to institutional sizes) but to manage those risks require you to evolve into a data

manager

Most Premiums are no free lunch

Liquidity premiums cost liquidity, alternative premiums (investing outside the mainstream

markets) cost resources to identify, monitor and control the risks

Summary

THE GOOD THE BAD

In the current low yield environment

Alternatives is more a question of

how than whether

Michel.klaster@pebbls.eu www.pebbls.eu+31 6 22 58 02 53

“Nothing [...] will ever be attempted, if all possible objections must be first overcome.” Samuel Johnson (1759), The History of Rasselas, Prince of Abissinia

THE UGLY

Most alternatives suffer from

illiquidity which introduces tail risks

in times of liquidity stress

Alternatives are almost without

exception more complex than its

traditional counterparts

Bringing the risk management of

alternatives at par with

traditional assets requires a lot

of skill and effort

We developed a Framework to

identify, select and allocate

Alternatives in Institutional Portfolios

Within alternatives a lot is not

what it seems

32

33

Appendix

Appendix 1: Main deviation asset class level

Aggregated results more pronounced

On asset class level the under exposure in Alternatives becomes more apparent.

Notably Fixed Income Alternatives have a long way to go. The most overowned asset is,

not surprisingly given the regulatory discount rate regime, bonds

Size Size as % P.fund G5 P.fund RoM Delta G5 Delta RoM

Traditional (liquids) 140.0 62% 77.3% 86.9% 14.9% 24.5%

Equities 39.0 17% 25.4% 21.4% 8.1% 4.0%

Fixed Income 35.0 15.6% 21.5% 32.3% 5.9% 16.7%

Equities enhanced 13.0 5.8% 8.3% 6.3% 2.5% 0.5%

Fixed Income enhanced 53.0 23.6% 22.1% 26.9% -1.5% 3.3%

Alternative 82.3 37% 22.8% 13.1% -13.9% -23.5%

Commodities 2.3 1.0% 1.8% 0.0% 0.8% -1.0%

Real Estate 8.5 3.8% 10.4% 4.6% 6.6% 0.8%

Fixed Income Alternatives 61.4 27.4% 5.1% 5.4% -22.2% -21.9%

Equity Alternatives 12.4 5.5% 7.2% 3.1% 1.7% -2.4%

Source: Pebbls

The market s izes are estimated based on 2018 data. The % are derived from the total market s izes for borth equity markets and fixed

income markets . These weights can be seen as the true CAPM weights s ince the market portfol io was a lways ment to be the total

(investable) market. The Dutch a l locations are shown as wel l as the deltas in %-ppoint as wel l as %. Data avai lable from MSCI,

Infradeals , . The s tar denoted categories are estimated by the author.