BLUE PAPER. Liquid Alternatives. What Questions Should Investors Ask? June 2016

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1 BLUE PAPER June 2016 Liquid Alternatives

2 2 AUTHOR Author Paul Mitchell Paul Mitchell is a Senior Product Specialist, focusing on the Alternative Fund of Funds Solutions, at Pioneer Investments. Paul s role involves investor relations and business development, as well as explaining the investment philosophy, process and performance of the Alternative Fund of Funds products, providing updates on overall financial market performances, economic trends and the company s economic outlook.

3 3 INTRODUCTION Concerns over the outlook for returns from equities and bonds, combined with a rise in volatility, have led to a major rethink of portfolio construction. The ability to generate true alpha has increasingly become an important element in the asset allocation process and consequently a much wider focus on diversification is required. Liquid alternative strategies that explore unique, uncorrelated alpha opportunities could provide true diversification from beta-driven sources of return and potentially enhance investors overall asset allocation framework. In this paper, we will Look at the history and evolution of the alternative industry Identify the potential benefits and risks of Liquid Alternatives and the ways in which they can be incorporated into an investor s portfolio 03 Outline what to look for when investing in a liquid alternative, non-traditional mutual fund 04 Assess how alternative mutual funds have performed and look to future performance

4 4 1 Section 1: The History and Evolution of Alternatives WHICH ASSET CLASSES ARE CONSIDERED TO BE ALTERNATIVE? Alternative covers a wide spectrum of investment strategies including private equity, real estate, hedge funds and infrastructure. Many alternative investments are classified as illiquid, in that they trade infrequently or with low volumes. In comparison, traditional investments tend to be frequently traded, with higher volumes and many market participants therefore the returns are based upon liquid prices (as is the case with stocks, bonds and cash). WHAT ARE LIQUID ALTERNATIVES? Liquid Alternatives seek to generate returns, which are less reliant on the direction of bond or equity markets, while aiming to mitigate the downside and supress portfolio volatility. These investment products are viewed as having little or no return correlation with traditional assets and the majority are categorised as absolute return products, since their returns are generally calculated on an absolute basis rather than relative to the returns of traditional investments. Although Liquid Alternatives combine non-traditional strategies into a regulated mutual fund structure, they generally offer daily or weekly liquidity. The growth of Liquid Alternatives can largely be viewed as a reaction to the losses investors endured from non-regulated investments during the Global Financial Crisis. That said, regulated non-traditional UCITS strategies have been steadily growing as investors seek comfort in the fact that these are more tightly regulated vehicles. UCITS regulations have strict guidelines on transparency, liquidity, leverage and risk management. HOW BIG IS THE MARKET? As at the end of February 2016, the Alternative UCITS mutual fund universe is estimated to be $443 billion¹. We feel that this figure significantly undervalues the true size of the universe as this data only captures fund flows and not the multitude of segregated accounts established for large institutional investors. We believe that the trend toward alternative investments will continue to gather pace and that allocations to Liquid Alternatives will continue to grow. A recent PWC report² supports this view, predicting that total alternative assets will grow from $7.9 trillion in 2013 to between $13.6 trillion and $15.3 trillion by Liquid Alternatives Set to Grow 350 AUM Growth (Rebased to 100) Feb 13 Jun 13 Oct 13 Feb 14 Jun 14 Oct 14 Feb 15 Jun 15 Oct 15 Feb 16 Alt Market Neutral Equity Funds Alt Multi-Strategy Funds All Liquid Alts Funds Source: Strategic Insight Simfund GL Database. From 28 February 2013 to 29 February WHO IS INVESTING IN LIQUID ALTERNATIVES? Alternative UCITS mutual funds, has become the fastest growing sector in the European Investment Management Industry. Fund of Funds were first movers in this space, with the subsequent majority of liquid alternative flows coming from discretionary managers or wholesale allocators. The biggest potential allocators to Liquid Alternatives are pension funds, given that a large proportion continue to operate with significant deficits. An allocation to alternative sources of return away from traditional assets offers a diversified approach to addressing the reality of underfunded pension plans. ¹ Source: Morningstar, 29 February 2016 ² Source: PWC Alternative Asset Management 2020, June 2015

5 5 2 Section 2: The Potential Benefits and Risks of Liquid Alternatives and Incorporating Liquid Alternatives into your Portfolio WHY DO I NEED LIQUID ALTERNATIVES IN MY PORTFOLIO? The returns and diversification benefits that were previously provided by bonds are likely to be unsustainable going forward; hence, we have seen an over-reliance on the growth of equities. Including liquid alternative strategies in a portfolio can help investors to manage risk, by capturing some of the market upside potential and limiting the market downside aiming to provide investor protection at crisis points. Non-traditional mutual funds can use approaches and investment techniques that may not be utilised in traditional equity and fixed income investing, potentially leading to asymmetric returns (where the upside potential is greater than the downside risk). Alternative managers are able to adjust market exposure by utilising long and short investments, which can potentially preserve capital and generate returns. WHAT POTENTIAL BENEFITS CAN LIQUID ALTERNATIVES OFFER INVESTORS? Liquid Alternatives offer a unique source of alpha and the potential for more stable and better risk-adjusted returns over time. Allocating a portion of a traditional balanced portfolio s exposure to Liquid Alternatives has the potential to generate uncorrelated returns (independent from prevailing economic conditions). Optimisation of Sharpe Ratio is a key investor concern in this new world of low expected returns. In simple terms, the higher the Sharpe Ratio, the more the investor return per unit of risk undertaken. Investors must harness the most efficient use of risk and seek to improve their portfolio return characteristics. The principal component analysis below uses statistical techniques in trying to identify the main return drivers within the specified markets and indices. While Liquid Alternatives do exhibit some sensitivity to the same factors as other asset classes, it is interesting to note that they offer a truly unique performance-driving factor, which is was not significantly present in any of the traditional indices. This factor can be used to explain at least 30% of the Liquid Alternatives returns over the period, in the analysis below, and is testament to the potential alpha generation capabilities of the strategy. Allocating a portion of a traditional balanced portfolio s exposure to Liquid Alternatives has the potential to generate uncorrelated returns (independent from prevailing economic conditions). Principal Return Drivers Since 1 January 2008 Sovereign Bonds Commodities Global HY Bonds US Treasury 10Y EM Equities Global Equities Liquid Alternatives 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% A truly unique performance-driving factor which is not present in any of the above traditional indices Factor 1 Factor 2 Factor 3 Factor 4 Factor 5 Factor 6 Unique Factor 7 Source: Pioneer Investments, Bloomberg. Data as at 30 September Indices used: Global equities - MSCI World Local Price Index; EM equities - MSCI Emerging Markets Local Price Index; Global HY bonds - ML Global High Yield; Sovereign bonds - Citigroup World Government Bond Index, all maturities($); US Treasury 10y BarCap US Treasury 10y Term Index; Commodities RJ/CRB Commodity Price Index; Liquid Alternatives - HFRU Hedge Fund Composite Index. The above analysis is based on a statistical model that tries to identify the principal return drivers of the historical returns of the used indices. The model identifies similar and/or unique factors but does not name them.

6 6 2 Liquid alternative strategies have the ability to offset investor s beta exposures during periods of declining market returns. This may allow for the drawdowns experienced in both equity and bond markets to be contained. They can exploit opportunities that traditional investment strategies are unable to explore, which could result in the overall market sensitivity of an investor s portfolio being reduced during periods of market stress, potentially mitigating the downside. WHAT SHOULD MY ASSET ALLOCATION LOOK LIKE AND WHAT RETURNS CAN I EXPECT? The days of a traditional 60/40 split between equities and bonds being considered the optimal portfolio could well be behind us. Maintaining this allocation may not produce the steady returns that investors have come to expect. Investors need to look towards differentiated ways of generating returns. Efficiently integrating Liquid Alternatives can allow for enhanced diversification via potential alpha-driven returns and low correlations to the broader markets. When examining a 20-year period, adding a 20% allocation to alternatives within various traditional portfolios would have improved the risk-adjusted returns. Given the lack of extensive history, the chart below is a proxy showing how an allocation to alternatives (in this case hedge funds) would have benefitted a portfolio over a 20-year period. Of course, past performance is no guarantee of future results. Efficiently integrating Liquid Alternatives can allow for enhanced diversification via potential alpha-driven returns and low correlations to the broader markets. ANNUALISED RETURN Adding Alternatives to a Traditional Asset Allocation Mix May Improve Risk-Adjusted Returns Adding 20% Allocation to Alternatives Within Various Traditional Portfolios Over a 20-Year Period 40% Global Equity 60% Global Equity 7.5% 40% Global Bonds 20% Global Bonds 20% Global Equity 20% Alternatives 20% Alternatives 7.0% 60% Global Bonds 20% Alternatives 6.5% 6.0% 5.5% 5.0% 30% Global Equity 70% Global Bonds 50% Global Equity 50% Global Bonds 70% Global Equity 30% Global Bonds 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% STANDARD DEVIATION Source: Pioneer Investments, Bloomberg for the 20-year period ending 30 September Other time periods may produce differing results. Past performance does not guarantee future results. This chart is for illustrative purposes only and is not meant to represent the performance of any particular investment. Indices used: Alternatives HFRI Fund Weighted Composite Index; Global bonds - Barclays Capital Global Aggregate Bond Total Return Index; Global equities - MSCI World Local Price Index. Past performance does not guarantee and is not indicative of future results Traditional approaches to portfolio allocation must be adjusted and Liquid Alternatives should be viewed as a complement to traditional asset allocation, rather than an opportunistic allocation to alternatives. A 20% alternative allocation could be built from existing allocations without altering the proportional balance (e.g. L/S Equity can be allocated from existing Equity exposure and L/S Credit can be allocated from existing Bond). Investors may initially be apprehensive, but embracing this new way of investing alongside their existing allocations may be necessary to achieve their investment objectives.

7 7 2 WHAT ARE THE UNDERLYING INVESTMENTS INVOLVED AND WHAT IS THE BEST WAY TO ACCESS THEM? The underlying strategies that can be used in non-traditional mutual funds often resemble those historically used by hedge funds; however, these sub-strategies represent the liquid portions of each of the relative strategies (such as L/S Equity, Event Driven, Credit and Trading). It is important to remember not all non-traditional mutual funds offer the same solution (as there are many different types of alternative mutual funds and focused strategies available). LONG / SHORT EQUITY EVENT DRIVEN Focus on Equity market by taking long and short positions, the strategy aims to profit from both bullish and bearish market trends. Focus on both Equity and Fixed Income Securities. The strategy aims to profit from extraordinary events, such as M&A, Restructurings and Liquidations. CREDIT MACRO CTA MULTI-STRATEGY Focus on Fixed Income market. The strategy aims to profit from opportunities within the corporate credit space, accessing long and short positions, via fundamental analysis. Focus on Fixed Income and FX markets. The strategy aims to profit from directional and RV opportunities. Focus on a wide range of asset classes (Equity, Fixed Income, Currencies and Commodities). Statistical techniques are used to capture medium-term market trends. Focus on dynamically allocating capital to the best investment opportunities across asset classes. Source: Pioneer Investments. For illustrative purposes only. Subject to an investor s experience in alternatives and their risk/return preferences, these individual strategies can be used individually via single strategies or by combining differing strategies into a cohesive portfolio. Equity market volatility may lead investors to diversify their long-only equity allocation and consider an allocation to Long/Short Equity managers, seeking to take advantage of equity market upswings whilst minimising the downside experienced. Additional diversification can be achieved via Event Driven strategies that seek to take advantage of pricing inefficiencies arising from corporate events, as these returns can be idiosyncratic, therefore displaying a lower correlation to traditional investments. Investors concerned as to how to reduce interest rate risk in long only IG and HY funds may consider allocating to alternative fixed income strategies. Diversifying into alternative fixed income focused strategies such as Long/Short Credit could largely eliminate such risk. Investors looking for a core diversifier and an expansion of the investment mix may allocate to Macro and CTA strategies, by investing across equities, fixed income, currencies and commodities. If investors are unsure about where to allocate, an option may be to allocate to a multi-strategy solution. These funds combine an all encompasing and adaptable vehicle to the investment climate, by seeking out the most compelling investment opportunities across the differing asset classes. Additonally investors may also be able to access these strategies through a multi-manager solution, outsourcing the decision of whom to invest with and how to integrate into existing allocations if short on alternative experience, time and resources.

8 8 3 Section 3: What to Look for when Investing in a Liquid Alternative, Non-traditional Mutual Fund WHAT TO LOOK FOR IN A GOOD LIQUID ALTERNATIVE MANAGER? Simply put, experience is paramount. The optimal approach from Pioneer Investments viewpoint, should be a combination of top-down and bottom-up idea generation. From a top down perspective, the strategic allocation should be influenced by an investor s macroeconomic view, how individual strategies move in and out of focus and the subsequent level of risk investors are looking to take within a portfolio. From a bottomup perspective, investors should aim to explore various investment opportunities globally without setting a target on geographical allocations. Investment ideas should be selected on the basis of many factors including (but not limited to) manager strategy and approach, experience, risk management, operational strength, inter manager correlation and market correlation, return objectives, and subject to understanding operational issues. The cyclicality and structural shifts in strategies and on market expectations i.e., whether heading for a widening spread environment or a tightening in liquidity and the combination of qualitative insight and quantitative tools can allow investors to pursue an aggressive return target. HOW TO PICK THE INTERESTING MANAGERS AND STRATEGIES? The number of investment vehicles continues to grow and is very broad. This universe is a moving target so investors need to be active on the bottom-up side (on-going research) and able to increase/decrease strategies, which could prove to be cyclical. All the while, keeping in mind that the goal is to invest in uncorrelated strategies with a diversified, regulated and liquid format. These strategies offer long and short exposures to the main liquid asset classes, aiming to provide lowcorrelated returns and downside mitigation. The asset/style allocation approach should be an ongoing process and based upon current market environment and investor expectations. Given the blurring of non-traditional and traditional universes, we believe the distinct advantage lies with investors that have long-standing experience of investing in alternatives and Liquid Alternatives. An investor should pay attention to the risks involved in allocating to a liquid alternative manager by adopting a multi-angular approach. Principally, there are three headline factors that investors should focus on: FACTOR 01: INVESTMENT RESEARCH Firstly, understanding the Liquid Alternatives managers edge how they generate alpha within a broad and complex alternatives universe. Investors must be comfortable with the investment process, portfolio construction and risk management practices of the target fund. The objective for investors here is to access a stream of returns that are unavailable elsewhere and additional scrutiny should be paid to the repeatability of performance rather than market-driven returns alone. Investors should look to avoid return-chasing behaviour - buying when past returns are high. An example of this is the peak in the dotcom bubble in One must remember that the best performing strategy is not necessarily the most suitable for investors, but must meet the needs of the overall portfolio. Clear understanding of manager mandate, investment edge and qualitative and quantitative reasoning as to why a prospective fund may be relevant. Levels of transparency and access to information going forward. Fund structures and terms including redemption terms. Organisational structure including identification of key investment personnel, their history, track records and business development strategy. Detailed understanding of the investment strategy focusing on sources of return, target returns, performance in normal and abnormal markets and analysis versus peers. A review of the markets traded, the underlying instruments, the hedging strategy and the trading systems used. A step-by-step analysis of the investment process covering idea generation, portfolio construction, the decision-making process and portfolio diversification principles. A detailed assessment of risk monitoring procedures and risk management controls.

9 9 3 FACTOR 02: NON-INVESTMENT RESEARCH Secondly, understanding the non-investment related risks, for example business or operational risks such as whether a management company is properly resourced, structured, financially viable and organised to support the fund s investment strategy and if the fund s structure conforms to industry operational standards. There are many differing ways of accessing Liquid Alternatives and the underlying structuring can differ between UCITS liquid alternative managers this is why it is important to check that initial preconceptions are correct and that there are no hidden surprises. FACTOR 03: QUANTITATIVE ANALYSIS Objectively understanding the performance and risk numbers, relative to market and alternative indices as well as analysing the target fund s value-added attributes is key. For example, allocating to a volatile manager in itself is not a bad thing, as long as the position is sized correctly within the context of your overall portfolio and risk parameters. In fact, adding an uncorrelated volatile manager can reduce the overall risk of a portfolio. Additional value may be achieved by adding a proposed portfolio to simulate whether it adds value and how it would have performed through various equity and credit stress test scenarios. Investors must also focus on downside risk management, and strive to identify the reasons behind periods of poorer performance and try to establish what is likely to cause future drawdowns and the magnitude of those drawdowns. Portfolios should be decomposed to breakdown the sources of risk and return, ensuring that each new manager included adds incremental value. By looking at factors such as top holdings, position overlap, turnover of holdings, capitalisation focus, value versus growth bias, concentration of positions, investors can obtain an in-depth view on risk exposures. WHAT ARE THE RISKS THAT INVESTORS NEED TO UNDERSTAND? Direct investment in a fund and the resultant indirect investment in underlying securities is speculative and prospective purchasers should consider the following risks before subscribing for shares: The investment may not be suitable for all investors. It may only be intended for investors who can accept the associated risks including a substantial or complete loss of their investment. No guarantee or representation can be made that the company or any fund will achieve its investment objective (as all securities and investments risk the loss of return of capital). Prospective investors should fully understand the risk factors described in the relevant prospectus. Maximum comprehension of systematic and non-systematic risks should be a priority for investors. Portfolio risk factors should be identified by performing sensitivity analysis, correlation analysis and principal component analysis at a product level. The investor s portfolio should be analysed against risks such as equities, credit, bonds, oil, gold etc. to assess broad market risks. Allocation risk can be minimised through thorough due diligence, yet in our view investors should also prioritise areas such as drawdown management. At a strategy level, rebalancing and re-weighting portfolios should be completed gradually, as underperforming months in a certain strategy should typically lead to an examination of the strategy conditions rather than an automatic reduction or redemption of a position. On perceiving a longer-term fundamental change within a sector, this exposure should be adjusted accordingly over time. Individual manager sizing should aim to reflect an understanding of both potential losses in a market dislocation and also quantitative assessment of expected potential losses under more normalised conditions. When considering manager removal, if investors witness a performance dip, having a predetermined performance criterion to sell may be unwise. Instead, this should lead an investor identifying what difficulty a particular manager may be having rather than issuing an immediate sell order. Managers may experience periods of under-performance, relative to their peers, for perfectly acceptable reasons. It is however important that investors fully understand these issues so that they are able to take an objective view concerning the future status of that investment. When reweighting an investor s portfolio, it can be beneficial to run portfolio simulations and stress test the portfolio under historic extreme market events, decomposing and analysing performance and risk attribution, identifying inter-manager and inter-strategy correlations as well as identifying up/down market participation. Regarding redemptions from an underlying manager, an immediate closure of a position could be worthwhile if there is style drift, cessation of agreed levels of transparency, excessive leverage over expected limits, poor risk management, manager dishonesty, or key person departure.

10 10 4 Section 4: How Alternative Mutual Funds have Performed and are Likely to Perform in the Future? Since the Global Financial Crisis and given the asset price appreciation effects of QE, some investors have been disappointed on a relative basis, with the absolute return of non-traditional mutual fund strategies versus traditional investments. From a top-line performance perspective, alternative strategies have in general delivered relatively muted returns, but this does not take into account the risk-adjusted contribution. Indeed, sometimes it can take extreme events to show a strategy s vital qualities. For example, when Chinese Equity markets caused market turbulence in August 2015, Liquid Alternatives achieved their primary goal. These non-traditional mutual funds aim to provide risk-adjusted returns with low correlation to traditional equity and bond markets. Although UCITS compliant non-traditional mutual funds posted declines in August 2015 with the HFRU Hedge Fund Composite Index returning -2.5% (this is an index of hedge funds compliant with established UCITS guidelines), this was muted when compared with the S&P 500 Index returning -11.1% for the same period. August 2015 Return -2.5% -11.1% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% S&P 500 Index HFRU Hedge Fund Composite Index Source: Bloomberg. Period covers 30 July August Investors should not expect an alternatives allocation to provide a complete panacea as Liquid Alternatives do not offer investors tail-risk protection. Managing a diversified multi-strategy portfolio that aims for downside protection means maintaining a balance within underlying strategies and low correlations, and this protection comes at a cost limiting some of the potential upside capture. The indices in the above chart show that within the context of this time period, that if the majority of the investors risk had been in portfolios derived from equities, then a multi-strategy approach to alternatives investing may have served to mitigate the downside. To understand how liquid alternative strategies could perform, we believe it is necessary to look towards unregulated strategies that utilise a similar approach. Hedge fund strategies have historically performed well in rising rate environments, with returns driven by idiosyncratic security selection rather than interest rate sensitivity. Investors anticipating a rate increase may be looking towards relative value strategies as a means to provide protection, low volatility and diversification. Strategies that are less directional and more focused on stock selection and company valuations appear to us to be among the most suitable to employ. Investors should not expect an alternatives allocation to provide a complete panacea as Liquid Alternatives do not offer investors tail-risk protection.

11 11 4 HOW MIGHT TRADITIONAL INVESTMENTS REACT IN A SELL-OFF ACROSS ASSET CLASSES, AND HOW CAN LIQUID ALTERNATIVES HELP INVESTORS? Correlations tend to increase between traditional asset classes in periods of market stress, negating the benefits of diversification, as witnessed most notably during and post the Global Financial Crisis of Liquid Alternatives, as shown in the chart below, have effectively mitigated the downside experienced by both equity and bond markets, acting as a shock absorber and making them an effective hedge against traditional risk. Investors should not focus on the magnitude of the drawdown alone, but also how quickly the strategy recovered from the drawdown. Liquid alternative strategies may have the ability to offset their beta exposures during periods of declining market returns. Effective Drawdown Management 0% -10% -20% -30% -40% -50% -60% Global Bonds Liquid Alternatives Global Equities Source: Pioneer Investments, Bloomberg. Data based on monthly returns from 01 January 2008 until 31 December Other time periods may produce differing results. Past performance does not guarantee future results. This chart is for illustrative purposes only and is not meant to represent the performance of any particular investment. Indices used: Liquid Alternatives HFRU Hedge Fund Composite Index; Global bonds - Barclays Capital Global Aggregate Bond Total Return Index; Global equities - MSCI ACWI Index. HOW SHOULD I MEASURE AND ASSESS THE PERFORMANCE OF AN ABSOLUTE RETURN PRODUCT? Absolute return products aim to reduce investor s market volatility, whilst producing absolute returns in differing market environments. These funds aim to provide a smoother investment experience than traditional long-only strategies, as absolute return approaches have typically had tighter distributions of returns (fewer losing periods than traditional equities and bonds, and with lower average losses over the period). While we understand that performance is a crucial issue for investors, performance expectations in relation to absolute return products need to be realistically managed. Alternative managers employ differing investment techniques versus traditional strategies - aiming to produce a positive return regardless of the market direction. Also, performance should not be viewed on a short-term basis and should be assessed over the medium-term time horizon and not on a monthly basis. Alternative funds are not constrained by a benchmark and the majority of absolute return products are referenced against cash returns yet this measure can be quite meaningless when cash levels have been so low over the last few years. So how does an investor make a reasonable assessment of the relative performance of a multi-strategy product? The HFRU Indices are a good starting point as a performance reference point for non-traditional strategies compliant with established UCITS guidelines. There are many different types of alpha strategies that can be employed and relative indices to measure against. The HFRU Indices are representative of the complete universe of UCITS hedge funds, including four strategy indices (Equity Hedge, Event Driven, Macro and Relative Value Arbitrage) and an aggregate HFRU Hedge Fund Composite Index (containing over 500+ underlying constituents).

12 12 4 WHAT PORTFOLIO STATISTICAL MEASURES SHOULD I FOCUS ON AND WHAT DO THESE MEAN? The key aspect here is what measures investors should focus on when accessing their portfolio. There is no such thing as a good or bad absolute number when comparing statistics, but only its relative relationship and these measures should be utilised in conjunction with one another and not in pure isolation. Ideally, investors should focus on risk-adjusted statistics when comparing funds to narrow the list of investment possibilities. They should also continue to monitor and run these analyses to help ensure that the chosen investment is designed to provide the best investment option relative to other opportunities. Continued use of quantitative tools can provide investors useful insight for ongoing monitoring of their investments. α β ALPHA measures the difference between a portfolio s actual return and a market index as a relevant risk-free rate, and is viewed as a measurement of the value added by the manager. A positive Alpha indicates a return that is over and above that of the market return. BETA measures a portfolio s sensitivity or the systematic risk of a portfolio in comparison to a benchmark or the market as a whole. A Beta of 1 indicates that a portfolio will move in line with the market. A Beta of less than 1 indicates that a portfolio will be less volatile than the market. A Beta of more than 1 indicates that a portfolio is more volatile than the market. CORRELATION a statistical measure of how portfolio s move in relation to each another or an index. A measure of 1 means a security moves up and down alongside another security (displays perfect positive correlation); whilst a measure of -1 means a security moves in the opposite direction to another (displays perfect negative correlation); whilst a correlation of 0 infers no correlation. SHARPE RATIO the measurement of the average return earned in excess of the risk-free rate over the standard deviation and is a measurement of the risk adjusted performance. The higher the value of the Sharpe ratio, the more attractive the risk-adjusted return (this measure is not relevant if negative). STANDARD DEVIATION statistical absolute volatility of a portfolios return, measuring an investment s volatility. The higher the standard deviation the more historically volatile the fund s investment. Please note that this does not necessarily mean that the fund is risky or will lose money. In fact, volatility is can be a good thing, provided it is on the upside. DOWNSIDE DEVIATION similar measure to the standard deviation except this measure considers only returns that fall below a minimum acceptable return (MAR) rather than the arithmetic mean. The advantage of this measurement is that this can be tailored to a client s risk profile as each investor has a different MAR. This is a good measure of a fund s ability to achieve its return goal. Note that downward deviation is a backwards-looking calculation; it cannot be used to predict performance. But, that said the measure can be a useful indication of a fund s historic ability in meeting its return goal. VALUE AT RISK (VAR) the Value at Risk measures the potential loss in value of a portfolio over a defined period for a given confidence interval. This measure focuses on downside risk and potential losses.

13 13 CONCLUSIONS Conclusions Investors have never been in greater need of a diversified, low volatility complement to their existing portfolios. We believe, new or alternative thinking is required to help investors achieve their objectives. Investing in Liquid Alternatives can provide access to strategy diversification, which can complement an investor s broader portfolio and by integrating absolute return products can potentially lead to a more stable return stream. Understanding the potential risks and benefits that these non-traditional mutual funds can offer remains a key part of the investment decision. Not all liquid alternative offerings work in the same way and investors should ensure a comprehensive understanding all the mechanics involved in allocating to a manager, prior to committing any capital. A multi-angular approach can prove to be a key aspect for investors looking to identify and understand the underlying risks of investing in a Liquid Alternatives manager. Alternatively, by outsourcing this professional oversight, portfolio construction and on-going manager monitoring can be of benefit to an investor s portfolio, as this can offer a single investment solution in respect of time, knowledge and resources.

14 14 IMPORTANT INFORMATION IMPORTANT INFORMATION Alternative investments products involve a high degree of risk, often engaging in leveraging and other speculative investment practices that may increase the risk of investment loss. Alternative investments can be highly illiquid, are not always transparent, and can increase the risk of loss. Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of 04 May Unless otherwise stated, all views expressed are those of Pioneer Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. Please contact your local Pioneer Investments representative for more current performance results. This material is not a prospectus and does not constitute an offer to buy or a solicitation to sell any units of any Fund or any services, by or to anyone in any jurisdiction in which such offer or solicitation would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. For additional information on Pioneer Investments Luxembourg range of funds, a free prospectus should be requested from Pioneer Global Investments Limited ( PGIL ), 1 George s Quay Plaza, George s Quay, Dublin 2, Ireland. Call Fax or your local Pioneer Investments sales office. This information is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities or services in the United States or in any of its territories or possessions subject to its jurisdiction to or for the benefit of any Restricted U.S. Investor (as defined in the prospectus of the fund). The fund has not been registered in the United States under the Investment Company Act of 1940 and units of the Fund are not registered in the United States under the Securities Act of This document is not intended for and no reliance can be placed on this document by retail clients, to whom the document should not be provided. The content of this document is approved by Pioneer Global Investments Limited. In the UK, it is directed at professional clients and not at retail clients and it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH. Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority ( FCA ) are available from U.S. on request. The Fund is an unregulated collective investment scheme under the U.K. Financial Services and Markets Act 2000 and therefore does not carry the protection provided by the U.K. regulatory system. Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA ( PFD ), a U.S.-registered broker-dealer, provides marketing services in connection with the distribution of Pioneer Investments products. PFD markets these products to financial intermediaries, both within and outside of the U.S. (in jurisdictions where permitted to do so) for sale to clients who are not United States persons. For Broker/Dealer Use Only and not to be Distributed to the Public. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: 3 June 2016 Doc ID: Follow us on: REF-401