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    Towards truly efficient equity indices    

EDHEC-Risk Institute has been running a major research programme on Indices & Benchmarking since the institute was founded in 2001. This programme involves two aspects of research into indices and benchmarks in traditional and alternative investment. The first aspect looks at the quality of indices, the criteria institutions use to select

them, and revisits modern portfolio theory to develop new approaches to building efficient indices. The second aspect of this research programme examines the use of index products in the core-satellite approach to investment management, and includes the "Core-Satellite and ETF Investment" research chair sponsored by Amundi. More...

    
 
Industry Analysis
Asset Management
Scandals in US asset management
Accusations of dark behaviour in two separate situations threaten to undermine the probity of the asset management industry on a global basis, with far-reaching ramifications. The issues of corruption and criminality are rearing their ugly heads in two important sectors of the US asset management industry, hedge funds and pension funds. The first embraces what, in its October cover story, Institutional Investor refers to as the “dark underworld of the US public pension system” and the second has to do with insider dealing.  More...
Business Analysis
Roles, rights and powers of shareholders
The banking crisis and the furore about bonuses have sparked two major debates. The first concerns how the company profits pie should be divided between employees and shareholders. The second has to do with the latter’s role in corporate governance, given perceived shareholder failure to reign in bank excesses. This debate has led to radical changes being put forward for shareholder ownership structures. More...
Research News
Indexes
Fundamental Indexation via Smoothed Cap Weights
Chen Chen, Rong Chen, Gilbert W. Basset. Cap-weighted indices were developed on the assumption that the market portfolio is mean-variance efficient. As the validity of this assumption has not been confirmed, however, alternative weighting systems have been proposed. Among them are the fundamental indices introduced by Arnott, Hsu, and Moore (2005).  More...
EDHEC-Risk Publications
Performance Measurement
How Do Performance Measures Perform?
Georges Hübner The relevance of the information ratio and the alpha, two leading performance measures for multi-index models, depends on the type of portfolio held by investors. This paper compares these measures with the generalized treynor ratio (GTR) on the quality of the rankings they produce. A precise measure yields similar rankings with alternative benchmarks.  More...
 
Interviews
   The investment world is going through a period of reflection and change - an interview with Mark Makepeace  
   
  In this month's interview, Mark Makepeace, Chief Executive Officer of FTSE Group, discusses the newly-launched FTSE EDHEC-Risk Efficient Index series, the prospects for alternatively weighted indices with respect to market-cap weighted indices, and the future growth drivers for FTSE Group. Mark Makepeace established FTSE Group as an autonomous company in 1995 and has been responsible for the company's global expansion since. More...  
Features 
  Indices and Benchmarking
Efficient Indexation: An Alternative to Cap-Weighted Indices
This paper introduces a novel method for the construction of equity indices that, unlike their cap-weighted counterparts, offer an efficient risk/return tradeoff. The index construction method goes back to the roots of modern portfolio theory and focuses on the tangency portfolio, the portfolio that weights index constituents so as to obtain the highest possible Sharpe ratio. More...
EDHEC-Risk News
Executive Education
Distinguished recognition for the EDHEC-Risk Institute Executive MSc in Risk and Investment Management
Following a formal review of the academic quality of the programme’s curriculum and faculty, the Monetary Authority of Singapore (MAS) has announced that it has added the Executive MSc in Risk and Investment Management offered by EDHEC-Risk Institute to the list of approved programmes under the Finance Scholarship Programme (FSP).  More...
Indices and Benchmarking
EDHEC-Risk Equity Indices and Benchmarks Seminar Series
At special presentations to be held in Asia, Europe and North America, starting in Tokyo and London in March, Lionel Martellini, Scientific Director of EDHEC-Risk Institute, drawing on research from the centre’s "Indices & Benchmarking" research programme, will be exploring enhanced index and optimal benchmark construction and looking at new forms of indices and benchmarks.  More...
Asset Management Education
CFA Institute and EDHEC-Risk Institute Extend Cooperation to Asia-Pacific
In an effort to better serve the investment management community in the Asia-Pacific region, CFA Institute and EDHEC-Risk Institute have reinforced their executive education partnership to offer their Advances in Asset Allocation seminar in Singapore.  More...
Research News
Indexes
Equal Weight Indexing: Five Years Later
Srikant Dash, Keith Loggie. The authors note that most indices created in the wake of the S&P 500, that is, since 1957, are capitalisation weighted, as recommended by the capital asset pricing theory and the efficient market hypothesis. At the same time, there has been controversy about the degree of efficiency of the market. In other words, a broad capitalisation-weighted index may not be the most efficient investment.  More...
Hedge fund performance
Investing in hedge funds when the fund's characteristics are exploitable
J. Joenväärä and H. Kahra. Can hedge funds’ characteristics be exploited to pick hedge funds? Is a characteristics-based strategy more profitable than a naïve strategy? Joenväärä and Kahra address these questions by using three hedge fund characteristics—managerial incentives, the length of the notice period, and fund size. This approach is derived from a previous paper by Brandt, Santa-Clara, and Valkanov (2008), who exploited the characteristics of equities to build an optimal equity portfolio. The authors’ work assumes that these characteristics impact hedge fund performance, as looked into by other studies that focus on explicit micro-factor models. More...
Hedge Fund Replication
Replicating the properties of hedge fund returns
N. Papageorgiou, B. Remillard and A. Hocquard. The authors propose an extension of the payoff-distribution approach, one of three possible replication approaches, along with the factor-based and rules-based approaches. The authors propose a modified version of Kat and Palaro’s method, arguing that it remedies some of the shortcomings. In their view, one of the weaknesses of Kat and Palaro’s method comes from the use of a Black-Scholes framework that ignores the higher moments of the distributions, while “the hedge fund returns and traded assets are clearly non-normal”.  More...
Indexes
International Diversification from a UK Perspective: Exploring the Risk-Reduction Effects of Diversification for UK Investors
Oleg Ruban, Dimitris Melas. In view of the recent unprecedented volatility of UK equities, the authors examine the potential benefits, to UK investors, of international diversification. These benefits can be evaluated in terms of risk reduction and risk-return enhancement.  More...
Indexes
Is Minimum-variance Investing Really Worth the While? An Analysis with Robust Performance Inference
Patrick Behr, André Güttler, Felix Miebs. There are two interesting portfolios on the efficient frontier: the tangency portfolio and the minimum-variance portfolio. The minimum-variance portfolio is interesting because it does not require computation of expected asset returns, but only of the covariance matrix, which is more stable. Many researchers have estimated the performance of this portfolio and compared it to other portfolios and identified an advantage in terms of performance for this portfolio.  More...
Sovereign Wealth Funds
Sovereign wealth fund investment patterns and performance
Bortolotti, B., Fotak, V., Megginson, W. and Miracky, W. Investments made by sovereign wealth funds have come in for considerable public scrutiny. Although initial regulatory attempts to control sovereign investments are already underway, empirical evidence on the investment patterns of sovereign funds is scarce. Bortolotti, Fotak, Megginson and Miracky provide the most comprehensive empirical analysis of sovereign fund transactions to date. Their results yield interesting insights into the investment behaviour of sovereign wealth funds and their market impact.  More...
EDHEC-Risk Publications
Transaction Cost Analysis
Fairness in Trading — A Microeconomic Interpretation
Stephen Satchell, Bernhard Scherer We show that non-linear transaction costs generate external effects between accounts due to trade volume dependent marginal transaction costs. For an asset manager with multiple clients this raises the question of fairness. How do I ensure I treat all clients fairly? In general, two possible solutions exist. A revisited version of this paper was published in the Winter 2010 issue of the Journal of Trading. More...
Asset Allocation
Optimal Investment Decisions When Time Horizon is Uncertain
Christophette Blanchet-Scalliet, Nicole El Karoui, Monique Jeanblanc, Lionel Martellini Many investors do not know with certainty when their portfolio will be liquidated. Should their portfolio selection be influenced by the uncertainty of exit time? In order to answer this question, we consider a suitable extension of the familiar optimal investment problem of Merton (1971), where we allow the conditional distribution function of an agent’s time horizon to be stochastic and correlated to returns on risky securities. In contrast to existing literature, which has focused on an independent time horizon, we show that the portfolio decision is affected. A revisited version of this paper was published in the December 2008 issue of the Journal of Mathematical Economics. More...
Commodities
A Long-Term Perspective on Commodity Futures Returns
Hilary Till This paper reviews 75 years of literature on the commodity futures markets, examining various theories on what motivates participants in the futures markets, including hedgers, speculators, and now investors. It then discusses how term structure should be the primary driver of (historical) long-term commodity futures returns.  More...
Monetary Policy
Optimal Interest Rate Smoothing under Model Ambiguity
Abraham Lioui, Patrice Poncet This paper solves for the equilibrium of a standard real business cycle model with money under model ambiguity. It first shows that monetary certainty is a sufficient condition for an interest rate smoothing rule to be optimal even under preferences for model robustness on the part of private agents. It then derives the necessary and sufficient condition for a stochastic (but stationary) monetary policy to reproduce the equilibrium of the real economy and compute the optimal (constant) level of the nominal interest rate.  More...
Business Analysis
The Undesirable Effects of Banning Short Sales
Abraham Lioui An in-depth study of the short-selling market calls into question both the reasons for the decision to ban short selling and the prejudices that weigh on those who short. According to recently published data (for the United States in particular), a large majority of short sellers are market makers who are hedging their bets on the options markets. They were not affected by the ban, which means that those who were using options to take synthetic short positions continued to do so. The others involved in short selling are mainly hedge funds.  More...
Regulation
A Welcome European Commission Consultation on the UCITS Depositary Function, a Hastily Considered Proposal
Noël Amenc, Samuel Sender The European Commission is seeking to harmonise the depositary fonction and to strengthen protection mechanisms. EDHEC believes that beforehand there should be an in-depth study of the practices of the parties in the value chain and the regulations to which they are subject and that, beyond a minimum protective threshold, complementary protection should be optional, which supposes clear disclosures of the degree of protection and of its cost.  More...
Risk
Fees at Risk
Bernhard Scherer Hull (2007) writes: “For an asset manager the greatest risk is operational risk”. In 2008, however, asset management companies came under severe pressure not from operational risk, but from market risk. What had been seen as an annuity stream that was thought to expose firms to little or no earnings risk turned out to be directional stock market exposure combined with high operational leverage. A revisited version of this working paper is forthcoming in the Journal of Applied Corporate Finance. More...

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