Aaron-Micael Beydoun has estimated the depletion of Abu Dhabi's oil reserves in 93 years in a course on investment management at Harvard University. Managing the USD 620 Billion of the Emirate's sovereign wealth vis-à-vis the Abu Dhabi Investment Authority, ADIA, he has proposed the following: Although an optimization of financial assets has established the portfolio strategic asset allocation, this ignores that underlying commodity asset i.e. oil, that forms the majority of client’s implied existing portfolio. Since the oil that forms the bulk of implied national wealth is highly volatile, then traditional portfolio investment risk management that only includes invested financial assets may not properly account for total wealth risk. Therefore, so as to properly account for national wealth risk, we recommend a strategic asset allocation that broadens the asset base to include the non-monetized commodity asset i.e. oil so as to properly account for national wealth risk.

1. Abu Dhabi Investment Authority (ADIA)
Harvard University: Aaron N. Beydoun

2. Abu Dhabi Investment Authority
• ADIA was created in 1979 to preserve and maintain the real value of
the Emirates’ wealth for future generations. While Abu Dhabi has a
healthy overall trade surplus, the Emirate has a deep non-oil trade
deficit that has reached as high USD 21 Billion. With limited potential
for further increases in oil production in light of production levels
already close to capacity, client recognizes the need to diversify away
from carbon economy. The fund is currently valued at USD 627 billion.
UAE Proven Reserves (000' barrels) 98,000,000
Abu Dhabi Reserves (000' barrels) 92,120,000
Daily Production (000' barrels) 2,700
Years till Depleted 93
Source: Abu Dhabi National Oil Company

3. United Arab Emirates: Hydrocarbon
Economy

4. United Arab Emirates: Investment
Prerogatives
• Abu Dhabi is focused on diversifying its local economy and is
investing aggresively. The following core sectors that have been
recognized by the Emirate as priority, are planned to grow at an
aggregate annual rate exceeding 7.5%. The objective is to help Abu
Dhabi achieve a neutral non-oil trade balance by 2030.

5. Investment Policy Statement
• Return requirement: Since the portfolio comprises total national
wealth, it must also incorporate total national wealth risk. If the
Investment Committee were to value the portfolio value exclusively
looking at financial assets under management, it would ignore the
underling commodity asset that forms the majority of the Emirate’s
implied existing portfolio. Therefore, to more accurately account for
total national wealth risk, the portfolio receives a discounted cash flow
from existing wealth through the monetization of oil..
• Risk tolerance: To reconcile the portfolio’s considerable ability to
accommodate risk and client’s apparent preference for lower risk,
the overall risk tolerance is described as “average”. The target VAR at
a 1% risk threshold is 1.6% monthly. The target standard deviation is
3.75%. The target Sharpe ratio is .79.
• Time horizon: long-term, multi-stage.
• Investment approach: ALM (asset-liability management).

6. Investment Policy Statement: Time Horizon
Stage 1: Carbon Economy 2012 - 2030
Stage 2: Neutral Economy 2030-2104
Stage 3: Post-Carbon Economy 2105 - Beyond

7. Investment Policy Statement: Return
Objective
• The investment portfolio must replace oil that supports more than
60% the National Budget. Oil is expected to deplete by 2105. The
portfolio must also fund the National Deficit (about U$20 billion
annually), until 2030. Using an ALM Discounted Cash Flow method,
a discount rate of 8.081% will effectively immunize the perpetual
national liability.
Discount Rate 8.081%
Management costs 0.075%
Expected inflation 2.1%
Required rate of return 10.4%

8. Investment Policy Statement: DCF Required
Return

9. Immunizing Portfolio vis-à-vis Liabilities
• ALM approach: client currently receives an average of USD 62 billion
from oil, we must meet that liability by 2105 when production will end.
• Cash-flow matching: client must satisfy the average government
budget deficit of USD 20 billion through 2030.
• The discount rate or minimum required return that satisfies our first
liability is 8.082% and the liquidity requirement of 3% satisfies our
second liability.

10. ADIA Investment Partners
• The portfolio is considered a U.S. domestic fund, by practice.
• Money managers include: Blackrock, Alliance Bernstein, PIMCO, J.P.
Morgan, Lazard, Morgan Stanley, Nomura Asset Management, in
addition to less known managers such as Piedmont Ventures
(Durham, NC USD 3.4 Billion), Rigel Capital Management (Seattle, WA
USD 516 Million), Taiyo Pacific Partners (Kirkland, WA USD 2 Billion).
• ADIA is currently investing in at least 240 distinct funds.

11. Capital Market Expectations: Investment
Themes
• Central bank easy-money policies likely to translate into inflation risk.
Policymakers are pumping liquidity into the global economy to
cushion against private-sector deleveraging and austere government
policies in heavily indebted markets. With interest rates near historic
lows inflation likely to increase as the global economy recovers, we
anticipate increased riskiness holding long-term fixed-income assets
and recommend a greater weighting in short and intermediate-term
fixed-income securities in the strategic asset allocation.
• Slow growth and contagion risks depress prospects. Deleveraging and
slow economic growth will continue to hinder equity returns in many
countries. We see better growth opportunities in emerging-market
economies with favorable demographic trends and lower-debt levels.
U.S. corporate profits continue positive trajectory with a greater
proportion of profits coming from overseas. We believe the U.S. is the
global benchmark for equity expectation as it is the largest and most
developed national equity market.

12. Capital Market Expectations: U.S.
Corporate Profit

13. Capital Market Expectations: U.S. Large-
Caps

14. Capital Market Expectations: Investor
Holdings
Real
Year Deposits Bonds Equities
Estate
1999 Q4 41.7% 14.5% 9.4% 34.4%
2005 Q4 56.5% 14.6% 10.0% 18.9%
2012 Q1 44.6% 20.8% 12.3% 22.3%
1982-2012 AVG 50.4% 19.9% 10.6% 19.1%
Source: Federal Reserve, Wells
Fargo

15. Capital Market Expectations: Forecasts
Asset Class Geometric Return Annual Standard Deviation Downside Risk
Cash alternatives 3.49% 1.50% 1.05%
Short-term taxable fixed income 3.98% 2.25% 0.34%
Intermediate-term taxable income 4.38% 5.00% -3.51%
Long-term taxable fixed income 4.57% 9.50% -9.86%
Short-term tax-exempt fixed income 2.73% 2.25% -0.91%
Intermediate-term tax exempt fixed
3.15% 4.50% -3.98%
income
Long-term tax-exempt fixed income 3.47% 9.50% -10.95%
International fixed income 4.70% 8.00% -7.62%
High-yield fixed income 7.23% 15.00% -14.54%
Emerging-market debt 6.91% 13.50% -12.93%
Real estate investment trust (REIT) 7.34% 16.00% -15.67%
Large-cap value 7.87% 16.20% -15.41%
Small-cap growth 9.09% 22.00% -20.97%
Small-cap value 8.86% 21.00% -20.08%
International equity 8.26% 18.25% -17.49%
Emerging-market equity 9.97% 25.50% -23.84%
Commodities 7.29% 18.00% -18.13%
Gold 5.21% 13.00% -13.94%
Source: Wells Fargo,adjusted based on
CMEs

16. Asset Class Correlations
Foreign
U.S.
U.S. Lg Cap U.S. Lg Cap U.S. Mid Cap U.S. Mid Cap U.S. Sm Cap U.S. Sm Cap Industrialize Emerging U.S. High Non-U.S. Commoditie
Investment Cash Real Estate
Growth Value Growth Growth Growth Val d Mkts Mkts Stks Yield Bonds Bonds s
Grade bonds
Stocks
U.S. Lg Cap
Growth 1 0.848 0.896 0.74 0.856 0.718 0.582 0.517 0.189 0.528 0.005 0.023 0.124 0.444
U.S. Lg Cap
Val 0.848 1 0.778 0.899 0.743 0.844 0.586 0.537 0.23 0.577 -0.008 0.052 0.141 0.588
U.S. Mid Cap
Growth 0.896 0.778 1 0.776 0.98 0.792 0.558 0.559 0.125 0.562 -0.019 -0.019 0.162 0.515
U.S. Mid Cap
Val 0.74 0.899 0.776 1 0.767 0.957 0.536 0.512 0.212 0.62 -0.015 -0.002 0.15 0.678
U.S. Sm Cap
Growth 0.856 0.743 0.98 0.767 1 0.805 0.539 0.56 0.097 0.581 -0.036 -0.035 0.161 0.541
U.S. Sm Cap
Val 0.718 0.844 0.792 0.957 0.805 1 0.516 0.517 0.16 0.644 -0.032 -0.013 0.157 0.701
Foreign
Industrialize
d Mkts 0.582 0.586 0.558 0.536 0.539 0.516 1 0.667 0.17 0.398 0.288 0.052 0.181 0.389
Stocks
Emerging
Mkts Stks 0.517 0.537 0.559 0.512 0.56 0.517 0.667 1 0.036 0.432 0.025 0.003 0.201 0.343
U.S.
Investment 0.189 0.23 0.125 0.212 0.097 0.16 0.17 0.036 1 0.382 0.447 0.237 -0.107 0.157
Grade Bonds
U.S. High
Yield Bonds 0.528 0.577 0.562 0.62 0.581 0.644 0.398 0.432 0.382 1 0.082 0.01 0.039 0.499
Non-U.S.
Bonds 0.005 -0.008 -0.019 -0.015 -0.036 -0.032 0.288 0.025 0.447 0.082 1 0.229 -0.076 -0.001
Cash 0.023 0.052 -0.019 -0.002 -0.035 -0.013 0.052 0.003 0.237 0.01 0.229 1 -0.163 -0.05
Commoditie
s 0.124 0.141 0.162 0.15 0.161 0.157 0.181 0.201 -0.107 0.039 -0.076 -0.163 1 0.159
Real Estate 0.444 0.588 0.515 0.678 0.541 0.701 0.389 0.343 0.157 0.499 -0.001 -0.05 0.159 1
Source: Morningstar

17. Asset Class Correlations: Crude Oil
Consumer Consumer Health Technolog
S&P 500 Energy Financials industrials Materials Telecom Utilities Oil Gold Dollar Long Bond
Disc. Staples Care y
S&P 500 0.64
Consumer
Disc. 0.53
Consumer Staples 0.50
Energy 0.69
Financials 0.51
Health
Care 0.56
industrials 0.59
Materials 0.61
Technolog
y 0.59
Telecom 0.24
Utilities 0.26
Oil 0.64 0.53 0.50 0.69 0.51 0.56 0.59 0.61 0.59 0.24 0.26 1.00 0.43 -0.52 -0.46
Gold 0.43
Dollar -0.52
Long Bond -0.46
Source: Bespoke
Investments

18. Key Investment Sectors of 2030 Initiative
• Energy: Abu Dhabi is making significant investments in refining facilities
outside the Emirate, including in Asia, North Africa, and Europe.
• Chemicals: Already positioning itself with highly successful fertilizer,
ethylene, and polyethylene ventures. Emirate is capturing larger
share of hydrocarbon value chain and is investing in companies with
valuable know-how.
• Other core segments Abu Dhabi is concentrating on include metals
and mining, aviation, aerospace, defense, pharmaceuticals,
biotechnology, and life sciences. There are already large existing
investments in hotels, restaurants, media, and financial services.
Investing in foreign companies provides Abu Dhabi with invaluable
know-how and further perpetuates their goal of diversifying their
economy and reducing their non-oil trade deficit.

19. Management Mechanism: Equities
• Equities capital market expectations: Deleveraging and slow economic
growth dampen equity prospects. Still, one of the most durable
trends in last 60 years has been the ability of U.S. corporations to
increase profits vis-à-vis successive financial crises and a changing
global economy. As profits grow, return potential on assets tied to
those profits grows.
• Equities strategy: Invest in companies that have considerable
exposure to emerging and developing markets. Given client’s IPS and
risk/return objective, there is an inclination to invest in companies with
a proven track record and that trade in more liquid, transparent, and
regulated markets e.g. U.S..
• Management selection criterion: Identify managers that excel at
market oriented management focused on value investing alpha
generating strategies with at least 7-10 years of sound returns
surpassing benchmarks.

20. Management Mechanism: Fixed-Income
• Fixed-income capital market expectations: Given current asset
holdings many funds have an above-average allocation to deposits
and fixed-income assets given overall macro environment and at the
behest of central bank easy-money policies. Risk of inflation in the
future leads us to be inclined towards short and intermediate-term
fixed-income instruments.
• Fixed-income strategy: Given clients unique risk/return profile and our
subsequent ALM approach to the portfolio construction, we
recommend increased investment in high-quality debt.
• Management selection criterion: Since much of the portfolio is
entrenched in Fixed-Income we require Active Management in the
form of Enhanced indexing by matching primary risk factors. This
type of management gives the portfolio flexibility, while also managing
cost. The fund manager will need to have strong prior returns versus
benchmark over an extended time period (7-10 years).

21. Management Mechanism: Alternatives
• Alternative investment capital market expectations: Given rising inflation
in key emerging markets, namely China and Brazil, and the likelihood
of rising inflation in the U.S. due to Federal Reserve policies,
alternative investments will allow the Investment Committee to better
hedge the portfolio.
• Alternative investment strategy: Invest in real estate, commodities, and
natural resources. Real assets, particularly farmland, have
outperformed inflation during the last 15 years. The Investment
Committee has invested in farmland from Argentina to Iowa.
• Management selection criterion: Since alternative investments are less
transparent in terms of available information than bonds or equities they can
offer greater potential for adding value through management. We selected
managers based on past performance (7-10 years performance beating
benchmark).

22. Resampled Efficient Frontier
#
Port # Return Risk
Assets
27 9.1% 8.3% 55
28 9.3% 8.8% 54
29 9.6% 9.5% 55
30 9.8% 10.2% 56
31 10.0% 11.1% 55
32 10.3% 12.0% 56
33 10.5% 13.0% 55
34 10.7% 14.1% 54
35 10.9% 17.2% 54

23. Group Bounds: Minimum/Maximum
Optimized Allocation
Fixed-income: Emerging
Equities: U.S. Small Cap 5% 20% 2% 10%
Markets
Fixed-income: Mortgage-
Equities: U.S. Large Cap 5% 25% 1% 10%
backed
Equities: Emerging Market 1% 20% Fixed-Income: High-yield 4.0% 10%
Fixed-income: Non-
Equities: International Developed 2% 15% 7.0% 12%
government
Equities: Telecom (Hedge) 5% 10% Alternatives: Private Equity 10% 25%
Fixed-income: U.S. Treasuries 2% 7% Alternatives: Natural Resources 3% 7%
Fixed-income: U.S. Government
2% 10% Alternatives: Hedge Funds 5% 15%
Bonds
Fixed-income: TIPS 2% 10% Alternatives: Real Estate 5% 7%
Fixed-income: MUNIS 2% 10% Alternatives: Commodities 5% 9%
Fixed-income: Inv.-grade Short
2% 10% Alternatives: Real Assets 2% 7%
Duration
Fixed-income: Inv.-grade Long
2% 10%
Duration

24. Portfolio Comparison with Strategic
Allocation
Optimized Allocation
Fixed-income: Emerging
Equities: U.S. Small Cap 14.0% 9% 2.0% -4%
Markets
Fixed-income: Mortgage-
Equities: U.S. Large Cap 8.0% -7% 1.0% -2%
backed
Equities: Emerging Market 2.0% -3% Fixed-Income: High-yield 4.0% -1%
Fixed-income: Non-
Equities: International Developed 2.0% -3% 7.0% 4%
government
Equities: Telecom (Hedge) 5.0% 3% Alternatives: Private Equity 12.1% 6%
Fixed-income: U.S. Treasuries 2.0% -3% Alternatives: Natural Resources 2.0% 0%
Fixed-income: U.S. Government
5.9% 1% Alternatives: Hedge Funds 5.0% 3%
Bonds
Fixed-income: TIPS 2.0% -2% Alternatives: Real Estate 7.0% 5%
Fixed-income: MUNIS 2.0% -3% Alternatives: Commodities 5.0% 2%
Fixed-income: Inv.-grade Short
2.0% -5% Alternatives: Real Assets 7.0% 2%
Duration
Fixed-income: Inv.-grade Long
2.0% 0%
Duration

25. Portfolio Comparison with Strategic
Allocation
Strategic Allocation Optimized Allocation Difference
Equities 32.0% 31.0% -1%
Fixed-Income 45.0% 29.9% -15%
Alternatives 20.0% 38.1% 18%

26. Recommendation
• Although an optimization of financial assets has established the
portfolio strategic asset allocation, this ignores that underlying
commodity asset i.e. oil, that forms the majority of client’s implied
existing portfolio. Since the oil that forms the bulk of implied national
wealth is highly volatile, then traditional portfolio investment risk
management that only includes invested financial assets may not
properly account for total wealth risk. Therefore, so as to properly
account for national wealth risk, we recommend a strategic asset
allocation that broadens the asset base to include the non-
monetized commodity asset i.e. oil so as to properly account for
national wealth risk.

27. Portfolio Risk vis-à-vis National Wealth Risk
• We recommend that the client’s portfolio optimization include returns
and volatility from oil prices in conjunction with investable financial
asset classes. Consequently, we introduce the investment criteria of
a highly volatile asset i.e. oil in deriving an overall optimal portfolio that
is more suitable for the sovereign wealth of the Emirate. To account
for changes in national wealth vis-à-vis oil, we include oil prices in the
form of benchmark indices e.g. Arab Light Crude, Brent Crude, and
iPath S&P GSCI Crude Oil Total Return. However, oil is only
considered an anchor asset; the optimizer is set to maximize risk-
adjusted returns by allocating optimal weights in any asset class
except oil. With oil returns and volatility added, the optimal portfolio
will allocate more towards low-risk equity and high-quality fixed-
income. Thus, investing in less volatile asset classes will moderate the
high volatility of oil prices. As oil reserves are gradually depleted, client
can proportionally allocate a higher percentage to higher-risk asset.
This can be simulated by gradually detaching the anchor asset i.e. oil
from the optimization.

28. Monte Carlo Simulation
• The optimizer pushes the optimal portfolio down the efficient frontier to
safer equities and more fixed income.
Oil Volatility Portfolio
Optimal
9.46%
PortReturn
Optimal
9.17%
PortRisk

29. Monte Carlo Optimal Portfolio

30. Risk Management: Governance Statement
• Identifying loss exposures to the entire portfolio using VAR measurements,
variance-covariance methods to determine the relationship between asset
movements, and measuring market risk (beta) against benchmark asset
classes (beta).
• Independently managing asset classes, having fund managers responsible
for managing the risks inside of their respective portfolios, and only actively
managing assets where we have specialized knowledge. Still, there will be
a dedicated Risk Director who will monitor and aggregate portfolio
positions.
• Maintaing a minimum 3% i.e. USD 20 Billion of assets in cash and cash
equivalents to mitigate liquidity risk and meeting average National Deficit.
• Managing financial risk using all disposable analyses and financial
instruments such as option, futures, and forward contracts.
• Monitor the portfolio’s risk and make monthly adjustments when necessary
according to VAR, standard deviation, and Sharpe ratio measurements.

31. Risk Management: Market, Currency,
Liquidity,
• Market Risk
• The Investment Committee will maintain a monthly VAR at 99% confidence
i.e. USD 6.3 Billion.
• Optimize the portfolio’s standard deviation by identifying non-correlated
assets. The target standard deviation of the portfolio is 3.75%.
• Calculate the key risk metrics on a monthly basis; asset/portfolio standard
deviation, Sharpe ratio, and changes in bond duration. The target Sharpe
Ratio is .79
• Liquidity Risk
• Maintain a minimum of 3% in cash and cash equivalents i.e. meet budget
deficit.
• Limit the use of leverage based on asset class.
• Currency Risk
• The Investment Committee has appointed a currency overlay manager.
• Given the fact that transactions are executed in multiple currencies, namely

32. Risk Management: Political Risk
• Political Risk
• There are two Directors dedicated to working with the Abu Dhabi
National Oil Company (ADNOC) and the government concerning
National Wealth risk. The Emirates’ internal and external fundamentals
must constantly be monitored e.g. war, politics vis-à-vis Iran, Arab
Spring, etc.
• Portfolio decisions have political implications and much as the client is
an institution, investment behavioral tendencies come into play
because of politics.
• Other Risk
• Corridors will be used to established minimum/maximum weights for
asset classes.
• Utilizing financial instruments to immunize the portfolio and prevent
default risk e.g. CDS’s.

33. Performance vis-à vis S&P 500: + 3.10%

34. Performance vis-à vis DJIA: + 2.86%

35. Performance vis-à vis NASDAQ: + 6.77%

36. Performance vis-à vis Composite: + 2.71%

37. 5 Month Performance: + $30.1 Billion
(5.29%)
Emerging Mkts Debt Fund $31,349,994,625
Natural Resources ETF $6,266,859,607
Other $44,666,685,801
Large-Cap Stock $151,138,553,413
Small-Cap Stock $216,635,421,910
Mid-Cap Stock $61,856,858,517
Long/Short Equity ETF $18,384,634,021
Intl Real Estate ETF $1,112,084,614
Intl Income ETF $12,539,999,274
Infl Protected ETF $12,540,683,654
Corp Debt BBB Rtd ETF $10,457,095,723
Emerging Mkts Debt ETF $12,540,004,606
Commodities ETF $6,270,557,768

38. Trade Execution: Strategies
• Passive strategies: The majority of the assets will be invested by
external managers, particularly in asset classes the Investment
Committee feels it has a competitive advantage in manager
selection. Further, and given the large size of the portfolio and it’s
long-term strategic outlook, transactions will occur infrequently and
only when asset class corridors are exceeded. Consequently,
transaction costs will be minimized and will also be cleared through
large brokerage houses that can provide advantageous fee
structures.
• Active strategies: A key investment objective is to reduce market
impact when trades are executed. Given the high-profile nature of
any SWF and the large positions taken, trade orders which are
greater than 1% of the float of a traded asset are partitioned and
executed over several days, whether through internal or external
managers. Further, limit orders are used when appropriate to obtain
the most cost-efficient pricing.

39. Dynamic Asset Management: Policy
• Capital Market Expectations are reviewed annually and asset classes
are optimized using mean-variance.
• The portfolio is monitored monthly on the first trading day of each
month. If securities within an asset class exceed policy corridors by
3% they are sold and the proceeds are used to purchase assets in a
separate asset class with the most underweight being first.
• Performance of alternative assets, particularly private equity
allocation, will utilize the Internal Rate of Return (IRR).

40. Abu Dhabi Investment Authority (ADIA)
Thank you