1. Alternative Investments
a new solution for Pension Funds?
Janko Trenkoski, CFA, FRM
CEE Pension Funds Conference & Awards 2016
March 9 2016, Boscolo Prague Hotel, Prague, Czech Republic

2. Outline
Section 1
Alternative investments, growth and positioning
Section 2
Defining alternative investments
Section 3
Pension funds and rationale behind investing in alternatives
Section 4
Alternative investments and CEE
Section 5
Case studies - Asset allocation in developed markets pension funds
Section 6
Factors behind investing in alternative investments in CEE
Section 7
Conclusions
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3. PwC study (1)
“Alternative Asset Management in 2020: Fast Forward to Centre Stage”
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By 2020, it is expected
that global pension
fund assets will have
reached $56.6tn.
– PwC Study

4. PwC study (2)
“Alternative Asset Management in 2020: Fast Forward to Centre Stage”
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By 2020, fundamental
shift towards
alternatives by public
pension funds.
– PwC Study

5. What are the headlines?
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Pension funds are the
largest investors in
alternative assets (33%)
among the top 100
alternative asset managers
– Towers Watson Survey 2015

6. Are alternatives a separate asset class?
“Exposure to alternative asset classes
among the 7 largest pension markets
has grown from 6% in 2000 to 17% in
2010!”
(Source: Fabozzi, Foccardi, Jonas; CFA Publications, 2010)
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7. Outline
Section 1
Alternative investments, growth and positioning
Section 2
Defining alternative investments
Section 3
Pension funds and rationale behind investing in alternatives
Section 4
Alternative investments and CEE
Section 5
Case studies - Asset allocation in developed markets pension funds
Section 6
Factors behind investing in alternative investments in CEE
Section 7
Conclusions
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8. What are alternative investments?
CAIA(Chartered Alternative Investments Analyst Association)1:
1. REAL ASSETS (Natural resources, Commodities,
Real estate, Infrastructure, Intellectual property)
2. HEDGE FUNDS
3. PRIVATE EQUITY
4. STRUCTURED PRODUCTS
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9. Major alternative assets categories 2014 by AuM1
Real
Assets,
30%
Hedge Funds,
38%
Private
Equity,
29%
Structured
Products, 3%
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10. Outline
Section 1
Alternative investments, growth and positioning
Section 2
Defining alternative investments
Section 3
Pension funds and rationale behind investing in alternatives
Section 4
Alternative investments and CEE
Section 5
Case studies - Asset allocation in developed markets pension funds
Section 6
Factors behind investing in alternative investments in CEE
Section 7
Conclusions
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11. Why invest in alternatives?
- To generate improved combination of risk vs. return
1. SUPERIOR RETURNS
• ALTERNATIVE INVESTMENTS ARE RETURN ENHANCER
2. REDUCTION OF RISK
• ALTERNATIVE INVESTMENTS ARE RETURN DIVERSIFIER
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12. Returns of major asset classes (1998-2012)2
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Over the last 15 years, alternative investments
had returns similar or higher than equity.

13. Volatility of major asset classes (1998-2012)2
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Most of them had lower volatility than equity.

14. Some quotes from the Industry
• “Through appropriate diversification, a given level of returns can
be achieved by lower risk-improved efficient frontiers”
• “Portfolio that offers traditional and alternative asset classes may
offer better diversification and opportunity for better return”
• “Alternative asset classes for the most part are not highly
correlated to one another and to traditional assets, increasing
diversification”
• “Many alternative strategies exhibit low volatility, and also act as
diversifiers that lower risk”
• “During financial crisis, an investor with exposure to some
alternatives fared better than the traditional investor”
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15. Outline
Section 1
Alternative investments, growth and positioning
Section 2
Defining alternative investments
Section 3
Pension funds and rationale behind investing in alternatives
Section 4
Alternative investments and CEE
Section 5
Case studies - Asset allocation in developed markets pension funds
Section 6
Factors behind investing in alternative investments in CEE
Section 7
Conclusions
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16. What is considered “alternative” in the
context of the CEE region?
•REAL ESTATE
•PRIVATE EQUITY
•DERIVATIVES???
•No Hedge Funds, No Structured Products,
very little Real Assets
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17. Current situation in CEE –
Affirmative Pension Regulation
Country Real Estate Derivatives Private Equity Infrastructure
Czech Republic YES YES YES NO
Poland NO NO NO NO
Romania NO YES YES* NO
Slovakia YES YES NO NO
Latvia YES YES YES YES
Lithuania NO YES YES YES
Estonia YES YES YES YES
Bulgaria YES YES NO YES
Croatia NO YES YES YES
Slovenia YES YES YES NO
Hungary YES YES YES NO
Macedonia NO NO YES NO
Serbia YES NO NO NO
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Source: OECD & KB First Pension Company-Macedonia

18. Are Derivatives considered Alternative
Investments?
• NO - If used in context of risk hedging or gaining access to
certain risk (e.g. currency, interest rates hedging).
• YES – if used in context of exposure to certain asset
class(e.g. commodities) &/or accompanied with leverage.
Derivative instruments: options, swaps, futures, forwards, etc.
are commonly used in the pension systems of the Baltic
countries, Croatia, Romania, etc.
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19. Examples of Alternative Investments in CEE
• Estonia’s pension funds are investing in commercial real estate, timber and
private equity funds(e.g., Livonia Partners Fund I).
• Latvia’s pension funds have 3% exposure to Other Assets.
• Bulgaria’s pension funds have up to 5% exposure to Real Estate (2,5%
average; Allianz Pension Co.:Black Sea Rama – 12 vacation villas situated at
a seaside golf resort; Varna South Industrial Zone – administrative and
office buildings in the city of Varna; Inter Expo Center – office building in
the City of Sofia)
• One Romanian Pension Fund invested in a Private Equity Fund (e.g.,
Catalyst Romania/Aztec Financial Services).
• Slovenia’s Prva Group-run pension fund has investments in Real Estate.
• Croatia has active regulation governing Infrastructure (financing or
securitization of infrastructure projects in Croatia up to 15% from AUM but
not more than 10% from AUM in one single project).
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20. Outline
Section 1
Alternative investments, growth and positioning
Section 2
Defining alternative investments
Section 3
Pension funds and rationale behind investing in alternatives
Section 4
Alternative investments and CEE
Section 5
Case studies - Asset allocation in developed markets pension funds
Section 6
Factors behind investing in alternative investments in CEE
Section 7
Conclusions
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21. NEST (UK) – Case study
2040 Retirement Fund as of 31.12.20153
Developed Market
Equities, 48%
Emerging Market
Equities, 4%
Real Estate, 21%
Coprorate Bonds,
12%
Government
Bonds, 10%
Money Market
Investments, 5%
Asset Allocation
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22. CALPERS (USA) – Case study
2040 Retirement Fund as of 31.12.20154
Developed Market
Equities, 54%
Emerging Market
Equities, 20%
Real Assets, 9%
Coprorate Bonds,
7%
Government
Bonds, 7%
Money Market
Investments, 3%
Asset Allocation
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23. ABP (Netherlands) – Case study, Q2 2015
Hedge Funds, 6%
Infrastructure, 2%
Real Estate, 10%
Private Equity, 5%
Commodities, 4%
Opportunity Fund,
1%
Equity, 26%Emerging Markets
Equity, 9%
Government
Bonds, 14.00%
Credit, 13%
Inflation-linked
Bonds, 9%
Emerging Markets
Debt, 2%
Asset Allocation
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Source: ABP
28%

24. YALE ENDOWEMENT (USA) – Case study
as of 2014 (1)
• "Endowment Model" of investing.
• 80% of Assets are in Alternative Investments.
• 50% of Assets are illiquid asset classes of private equity, real
estate, and natural resources.
• Broad diversification and an equity orientation, avoiding asset
classes with low expected returns such as fixed income and
commodities.
• Heavy exposure to Private Equity.
• Annual net ten-year investment returns of 11.0% (2004-2014)
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25. YALE ENDOWEMENT (USA) – Case study
as of 2014 (2)
• 1994 Domestic Stocks & Bonds Allocation = 38%
• 2014 Domestic Stocks & Bonds Allocation = 11%
Result: higher expected returns than the 1994
portfolio with only modestly greater volatility!
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26. YALE ENDOWEMENT (USA) – Case study
as of mid 2014 (3)5
Absolute Return,
17%
Domestic Equity,
4%
Fixed Income, 5%
Foreign Equity, 11%
Natural Resources,
8%
Private Equity, 33%
Real Estate, 18%
Cash, 4%
Asset Allocation
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20%

27. Outline
Section 1
Alternative investments, growth and positioning
Section 2
Defining alternative investments
Section 3
Pension funds and rationale behind investing in alternatives
Section 4
Alternative investments and CEE
Section 5
Case studies - Asset allocation in developed markets pension funds
Section 6
Factors behind investing in alternative investments in CEE
Section 7
Conclusions
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28. Some caveats regarding investing in
Alternatives
• Fees (1-2% mgmt. fee & 10-20% profit share)
• Economies of scale (size of pension funds, size of
alternative inves. funds, impact of regulation Dodd-Frank)
• Efficient Market Hypothesis, correlation, returns
• Survivorship Bias
• Use of Leverage
• Regulation (Compliance, Transparency, Liquidity,
Accounting)
• Fraud and Manager Selection
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29. Due diligence is very important for pension
funds investing in Alternative Investments
Increased:
• Fiduciary duties
• Regulation
• Transparency
• Liability
• Oversight
• Accountability
• Requirements
INCREASED COSTS!!!
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30. Outline
Section 1
Alternative investments, growth and positioning
Section 2
Defining alternative investments
Section 3
Pension funds and rationale behind investing in alternatives
Section 4
Alternative investments and CEE
Section 5
Case studies - Asset allocation in developed markets pension funds
Section 6
Factors behind investing in alternative investments in CEE
Section 7
Conclusions
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31. Is the “alternative” becoming the “mainstream”
also in CEE, or is it currently a trend only in other
parts of the world?
NO!
“Alternative” is not the mainstream in
CEE.
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32. Future Prospects for Alternative Investments
in CEE
•Definitively YES!
•Real Estate will rise as a major
alternative asset allocation category.
•Private Equity a distant second.
•Infrastructure - an exotic.
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33. Other Conclusions
• Traditional Investments are alive and kicking, especially if made long-
term, with low costs and no turnover.
• Alternative Investments are here to stay.
• Active management is the key in Alternative Investments. Not all
investors are created equal!
• Real Estate is the natural leader of the pack in CEE.
• Private Equity Funds make a lot of sense if managed the right way.
• Hedge Funds are very distant to CEE due to regulatory and cultural
reasons.
• Infrastructure may be a winner in CEE countries with large pension
AuM.
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34. THANK YOU!
Janko Trenkoski, CFA, FRM
e-mail: janko.trenkoski@gmail.com
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35. References
1. Donald Chambers, Mark Anson, Kieth Black & Hossein Kazemi, Alternative
Investments: CAIA Level I, Nov. 2015.
2. Blackrock, Ten myths surrounding Alternative investments, Nov. 2014.
3.Nest,
https://www.nestpensions.org.uk/schemeweb/NestWeb/includes/public/docs/NES
T-Quarterly-Investment-Report-Oct-Dec_2015,PDF.pdf
4. Calpers, https://calpers.voya.com/static/epweb/pdf/ffs/PR2J452001.PDF
5. Yale Endowement,
http://investments.yale.edu/images/documents/Yale_Endowment_14.pdf
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