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Mastering Illiquidity: Risk management for portfolios of limited partnership funds

Book Description

Arms investors with powerful new tools for measuring and managing the risks associated with the various illiquid asset classes

With risk-free interest rates and risk premiums at record lows, many investors are turning to illiquid assets, such as real estate, private equity, infrastructure and timber, in search of superior returns and greater portfolio diversity. But as many analysts, investors and wealth managers are discovering, such investments bring with them a unique set of risks that cannot be measured by standard asset allocation models. Written by a dream team of globally renowned experts in the field, this book provides a clear, accessible overview of illiquid fund investments, focusing on what the main risks of these asset classes are and how to measure those risks in today's regulatory environment.

  • Provides solutions for institutional investors in need of guidance in today's regulatory environment

  • Offers detailed descriptions of risk measurement in illiquid asset classes, illustrated with real life case studies

  • Helps you to develop reliable risk management tools while complying with the regulations designed to contain the individual and systemic risks arising from illiquid investments

  • Features real-life case studies that capture an array of risk management scenarios you are likely to encounter

Table of Contents

  1. Cover
  2. Title Page
  3. Copyright
  4. Dedication
  5. Foreword
  6. Acknowledgements
  7. Chapter 1: Introduction
    1. 1.1 Alternative investing and the need to upgrade risk management systems
    2. 1.2 Scope of the book
    3. 1.3 Organization of the book
  8. Part I: Illiquid Investments as an Asset Class
    1. Chapter 2: Illiquid Assets, Market Size and the Investor Base
      1. 2.1 Defining illiquid assets
      2. 2.2 Market size
      3. 2.3 The investor base
      4. 2.4 Conclusions
    2. Chapter 3: Prudent Investing and Alternative Assets
      1. 3.1 Historical background
      2. 3.2 Prudent investor rule
      3. 3.3 The OECD guidelines on pension fund asset management
      4. 3.4 Prudence and uncertainty
      5. 3.5 Conclusion
    3. Chapter 4: Investing in Illiquid Assets through Limited Partnership Funds
      1. 4.1 Limited partnership funds
      2. 4.2 Limited partnerships as structures to address uncertainty and ensure control
      3. 4.3 The limited partnership fund's illiquidity
      4. 4.4 Criticisms of the limited partnership structure
      5. 4.5 Competing approaches to investing in private equity and real assets
      6. 4.6 A time-proven structure
      7. 4.7 Conclusion
    4. Chapter 5: Returns, Risk Premiums and Risk Factor Allocation
      1. 5.1 Returns and risk in private equity
      2. 5.2 Conclusions
    5. Chapter 6: The Secondary Market
      1. 6.1 The structure of the secondary market
      2. 6.2 Market size
      3. 6.3 Price formation and returns
      4. 6.4 Conclusions
  9. Part II: Risk Measurement and Modelling
    1. Chapter 7: Illiquid Assets and Risk
      1. 7.1 Risk, uncertainty and their relationship with returns
      2. 7.2 Risk management, due diligence and monitoring
      3. 7.3 Conclusions
    2. Chapter 8: Limited Partnership Fund Exposure to Financial Risks
      1. 8.1 Exposure and risk components
      2. 8.2 Funding test
      3. 8.3 Cross-border transactions and foreign exchange risk
      4. 8.4 Conclusions
    3. Chapter 9: Value-at-Risk
      1. 9.1 Definition
      2. 9.2 Value-at-risk based on NAV time series
      3. 9.3 Cash flow volatility-based value-at-risk
      4. 9.4 Diversification
      5. 9.5 Factoring in opportunity costs
      6. 9.6 Cash-flow-at-risk
      7. 9.7 Conclusions
    4. Chapter 10: The Impact of Undrawn Commitments
      1. 10.1 Do overcommitments represent leverage?
      2. 10.2 How should undrawn commitments be valued?
      3. 10.3 A possible way forward
      4. 10.4 Conclusions
    5. Chapter 11: Cash Flow Modelling
      1. 11.1 Projections and forecasts
      2. 11.2 What is a model?
      3. 11.3 Non-probabilistic models
      4. 11.4 Probabilistic models
      5. 11.5 Scenarios
      6. 11.6 Blending of projections generated by various models
      7. 11.7 Stress testing
      8. 11.8 Back-testing
      9. 11.9 Conclusions
    6. Chapter 12: Distribution Waterfall
      1. 12.1 Importance as incentive
      2. 12.2 Fund hurdles
      3. 12.3 Basic waterfall structure
      4. 12.4 Examples for carried interest calculation
      5. 12.5 Conclusions
    7. Chapter 13: Modelling Qualitative Data
      1. 13.1 Quantitative vs. qualitative approaches
      2. 13.2 Fund rating/grading
      3. 13.3 Approaches to fund ratings
      4. 13.4 Use of rating/grading as input for models
      5. 13.5 Assessing the degree of similarity with comparable funds
      6. 13.6 Conclusions
    8. Chapter 14: Translating Fund Grades into Quantification
      1. 14.1 Expected performance grades
      2. 14.2 Linking grades with quantifications
      3. 14.3 Operational status grades
      4. 14.4 Conclusions
  10. Part III: Risk Management and Its Governance
    1. Chapter 15: Securitization
      1. 15.1 Definition of securitization
      2. 15.2 Financial structure
      3. 15.3 Risk modelling and rating of senior notes
      4. 15.4 Transformation of non-tradable risk factors into tradable financial securities
      5. 15.5 Conclusions
    2. Chapter 16: Role of the Risk Manager
      1. 16.1 Setting the risk management agenda
      2. 16.2 Risk management as part of a firm's corporate governance
      3. 16.3 Built-in tensions
      4. 16.4 Conclusions
    3. Chapter 17: Risk Management Policy
      1. 17.1 Rules or principles?
      2. 17.2 Risk management policy context
      3. 17.3 Developing a risk management policy
      4. 17.4 Conclusions
  11. References
  12. Abbreviations
  13. Index