ALTERNATIVE INVESTMENTS AND RISK MANAGEMENT
Course code
GRAE023
Study program
MSc in Financial Economics
Course title
Alternative investments and risk management
Type of course
Compulsory
Level of course
Department in charge
Advanced
Graduate school
Year of study
1nd
Semester
2nd
Number of credits
6 ECTS; 36 hours of class work, 124 hours of
self-study, 2 hours of consultations (distant or
direct form)
Lecturer
Contact information
Michel Verlaine, Ph.D.
verlaine@capm-consulting.com
Course prerequisites
Asset Pricing. Econometrics, Mathematical
Finance.
Aims of the course
This course is structured around three sub-parts. The first part focuses on Portfolio theories and
investor behaviour with a critical view on standard portfolio theory. The second part focuses on
different types of investment structures and regulatory issues. Finally, the third part focuses on
specific Risk Management for funds. A more detailed presentation of the sub-parts is provided
below.
The first sub-part starts with the modelling of investor preferences and with an overview of the
standard portfolio theory. We then move on with more advanced behavioural theories of investor
behaviour and an overview of behavioural finance theory. We then discuss how these theories are
used to develop a behavioural approach to portfolio theory and style analysis. Factor models are
presented and rationalized. Afterwards, tactical and strategic asset allocation and behavioural
portfolio theory are presented. Finally, risk adjusted performance measures as well as benchmarks
are discussed.
Investment funds are specific vehicles known as pass-through structures and basically outsource all
their services to fund accountants, transfer agents, asset managers, investment advisors and auditors.
Partly, this is due to specific regulations that aim to protect investors. We will present the regulatory
framework at the root of the Mutual Fund and Hedge Fund distinction. We discuss specific
techniques and compensation rules used by the alternative investment managers such as Hedge
Fund and Private Equity managers. We then analyse the business models of service providers and
how they might impact operational risks. We end with a presentation of Due Diligence approaches
Typically, asset managers have to be controlled and this is done through risk limits and risk
measures. We will thus discuss the different risk measures such as VaR, Expected Shortfall.
Estimation and evaluation methodologies of the latter are arguably the most important topic and we
will analyse the existing methodologies such as Historical, Parametric, Non-parametric and Monte-
1
Carlo simulations. Finally, we will analyse how the setting of risk limits impacts the behaviour of
asset managers and might lead the letter to increase tail risk.
Learning outcomes
On completion of this course successful students should be aware of:
Course learning outcomes (CLO)
CLO1. The limits of standard portfolio theory
and recent developments of behavioral models
CLO2.
Challenges
facing
the
Asset
Management industry.
CLO3. Alternative Investment strategies
CLO4. Risk Management implementations and
specific risks involved with alternative
investments
CLO5. The different Investment structures and
service providers
CLO 6. Regulatory issues behind Fund
strategies, Specific compensation rules
Study methods
Lectures, seminars,
self study
Lectures, seminars,
self study
Lectures, seminars,
self study
Lectures, seminars,
self study
Assessment methods
Take home exam, data
analysis report, final exam
Take home exam, data
analysis report, final exam
Take home exam, data
analysis report, final exam
Take home exam, data
analysis report, final exam
Lectures, seminars, Take home exam, data
self study
analysis report, final exam
Lectures, seminars, Take home exam, data
self study
analysis report, final exam
Course Content
Session
1
Topic
Modelling Uncertainty and Preferences
Portfolio Theory
Reading
Ch. 1+ 2 Lecture
Notes MV (Part I)
2
Asset Allocation Puzzle
Asset Pricing
Ch. 3 + 4 Lecture
notes MV (Part I)
3
Alternative Theories of Behavior under
Uncertainty
Behavioral Portfolio Theory
Risk Adjusted Performance mesures
More advanced performance measurement
Chap. 5+6+7 Lecture
notes MV (Part I)
5
Delegated Portfolio Management
Architecture of the Fund Industry
6
Alternative Investment Funds :
Operational, organizational and performance
issues
Chap I, 2 and 3
Lecture notes MV
(Part IV)
Chap 4 Lecture notes
MV (Part IV)
7
Credit Risk Modelling and Structured Finance
8
Risk Management and Measurement
Extreme Value Theory
4
9
An Integrated Risk Management process for
Funds
Chap. 8+9 Lecture
notes MV (Part I)
Chap 1, 3, 4, 5
Lecture notes MV Part
III
Book : Quantitative
Risk Management
Lecture notes MV Part
III
2
Final Exam.
Reading list:
1. Michel Verlaine, Lecture Notes “Asset Management: Risks and Products”
2. A W. LO “Hedge Funds: An Analytic Perspective”
3. McNeil, Frey and Embrechts “Quantitative Risk Management”
Other papers will be mentioned in class.
Teaching methods:
The course will involve lectures over relevant material.
Assessment methods:
Students will be evaluated on the basis of homework assignments and their performance in final
exam.
TASK TYPE
Take-home document in groups of two
Final exam
Total
FINAL GRADE, %
40%
60%
100%
ASSIGNMENT (40%):
The Take-home document should be done in groups of two and consists of a kind of short
research on the topic of Asset Management and the Fund Industry. Topics will be suggested in
class.
FINAL EXAM (60%):
The final exam will test the understanding of the techniques presented throughout the course and
the ability to apply them. The test is open book.
Role of the subject in reaching learning outcomes of Financial Economics programme
Special learning outcomes
S1. Demonstrate knowledge and understanding of contemporary theories, their
criticism and applications in the research field of financial economics; apply the
modern theory of finance and economics in practice;
S2. Integrate theoretical knowledge of financial economics to develop, apply and
implement original research ideas in the fields of financial management,
investment management, financial risk management and financial engineering
S3. Analyse and critically evaluate the behaviour of national and international
financial markets and institutions, investment environment of the company,
financial engineering tools, the impact of fiscal and monetary policy to formation
and management of organizations’ financial flows;
S4. Analyse and assess both micro- and macroeconomic environment of private
and public organizations in financial-decision making;
S5. Evaluate, choose, and systemically apply advanced mathematical statistics
methods and advanced econometric models and techniques in solving complex
problems of corporate finance, the management of financial markets and financial
CLO1, CLO2
CLO1, CLO2
CLO5, CLO6
CLO3, CLO4
CLO1, CLO4
3
economics;
S6. Express independent opinion, formulate judgments and knowledge-based CLO1-CLO6
conclusions on relevant issues in financial economics, including international
professional and academic literature
S7. Conceptualize, research and write a state of the art review of a chosen area CLO1, CLO2
of financial economics and analyze empirical data on the phenomenon under
investigation; be able to evaluate the appropriateness of the use of social science
research methods, both qualitative and quantitative, including a number of
different econometric tools, in a particular context.
General learning outcomes
G1. To apply modern information technologies in the data gathering, analysis and
communication.
G2. To apply a systematic, critical-analytical and constructive thinking in problem
identification and solving.
G3. Have abilities to communicate in English the knowledge to specialist and
non-specialist audiences clearly and unambiguously.
G3. Develop a range of personal skills including argumentation, evaluation,
problem identification and solving, interactive and group skills, self-appraisal,
cross-cultural teamwork.
G4. To prepare research papers in English according to proper language, writing
style and general bibliographic citation requirements.
G5. To develop independent learning skills necessary to continue studies on a
higher level.
CLO4, CLO5
CLO3 – CLO6
CLO5, CLO6
CLO1, CLO2
CLO1 – CLO6
4