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This paper is divided into five main sections. The first section reviews the regulation in place which aims to manage the potential risk exposures that alternative investments and derivatives present. This provides a useful backdrop for then evaluating the current market practices of pension funds’ investment in such instruments. The second section canvases the implementation issues that a number of pension funds have faced in attempting to implement their investment strategies with the inclusion of alternative and derivative instruments.
The third section highlights the potential risks that pension funds face when investing in alternative investments and derivatives, followed by the fourth section reviewing current risk management practices observed by pension funds in managing these risk exposures.
The paper finally concludes with observations which can be translated into lessons for consideration by supervisory authorities when developing future pension fund regulation and supervision practices of alternative investments and the use of derivatives, whilst also taking into account the IOPS Good Practices.