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ALM and Asset Allocation Solutions

The Lyxor "Risk Allocation Solutions" Research Chair

The aim of the three-year research chair is to develop academic insights that can be used towards the design of high-performance multi-asset investment solutions, based on specific investor needs.

The first year's research will focus on the next generation of risk parity, which may suffer from one major shortcoming, namely the fact that it is not explicitly sensitive to changes in economic conditions.

To find optimal ways to allocate risk budgets in investors’ portfolio construction, EDHEC-Risk Institute will in particular develop a dynamic risk allocation approach through three major topics:

  • Extending standard risk budgeting techniques to time-varying equity and bond volatility levels;
  • Extending standard risk budgeting techniques to downside risk measures with an asymmetric response to decreases in bond yield levels;
  • Extending standard risk budgeting techniques to mean-reverting risk premia for equity and bond markets.
The Chair involves a research team led by Lionel Martellini, Director of EDHEC-Risk Institute with Vincent Milhau, Deputy Scientific Director. Nicolas Gaussel, CIO of Lyxor and Thierry Roncalli, Head of Quantitative Research will participate in the Scientific Committee of the Research Chair.

[Press release announcing the launch of the research chair: 07/10/13]


Research output:

Factor Investing and Risk Allocation: From Traditional to Alternative Risk Premia Harvesting
June 2016
Jean-Michel Maeso, Lionel Martellini
This study extends the analysis of factor investing beyond traditional factors and seeks to investigate what the best possible approach is for harvesting alternative long short-risk premia. There is a growing interest amongst sophisticated institutional investors in factor investing. It is now well accepted that the average long-term performance of active mutual fund managers can, to a large extent, be replicated through a static exposure to traditional factors, which implies that traditional long-only risk premia can be most efficiently harvested in a passive manner. While the replication of hedge fund factor exposure appears to be a very attractive concept, we find that hedge fund replication strategies achieve in general a relatively low out-of-sample explanatory power, regardless of the set of factors and the methodologies used. Our results also suggest that risk parity strategies applied to alternative risk factors could be a better alternative than hedge fund replication for harvesting alternative risk premia in an efficient way. A key challenge for the alternative investment industry remains the capacity to develop investable efficient low-cost proxies for harvesting alternative risk premia not only in equity markets but also in the fixed income, currencies and commodity markets. [Press release announcing the publication of the research: 21/06/16]

Factor Investing: A Welfare-Improving New Investment Paradigm or Yet Another Marketing Fad?
July 2015
Lionel Martellini, Vincent Milhau
This paper examines the relative efficiency of standard forms of practical implementation of the factor investing paradigm based on commonly-used factors in the equity, fixed-income and commodity universes. Investment practice has recently witnessed the emergence of a new approach known as factor investing, which recommends that allocation decisions be expressed in terms of risk factors, as opposed to standard asset class decompositions. To answer the question of whether factor investing is truly a welfare-improving new investment paradigm or whether it is merely yet another marketing fad, the paper identifies mathematical conditions under which it is expected to generate welfare gains for asset owners and provides an empirical measure of such gains. [Press release announcing the publication of the research: 08/09/15]

Towards Conditional Risk Parity — Improving Risk Budgeting Techniques in Changing Economic Environments
April 2014
Lionel Martellini, Vincent Milhau, Andrea Tarelli
This paper introduces three distinct conditional risk parity strategies, explicitly designed to optimally respond to changes in state variables that have been used in the literature as proxies for the stochastically time-varying opportunity set. In an empirical analysis, the paper documents the superiority in various economic regimes of such conditional risk parity strategies with respect to standard unconditional risk parity techniques. [Press release announcing the publication of the research: 16/06/14]


About Lyxor Asset Management

Lyxor Asset Management - The Expert in all modern investment techniques

Lyxor Asset Management, a subsidiary of Société Générale Group, was founded in 1998 and counts 600 professionals worldwide managing US$ 127.9bn* of assets. Lyxor customizes active investment solutions as the expert in all modern investment techniques: ETFs & Indexing, Alternative, Structured, Active Quantitative & Specialized investments. Supported by strong research teams and leading innovation capabilities, Lyxor’s investment specialists strive to optimize performance and risks across all asset classes.

Experience driven by acknowledged research

Recognized in the industry and among academics alike for its research in macroeconomics, quantitative and alternative investments, Lyxor is also known for the publication of proprietary portfolio management models and white papers, which have been widely referenced in the most important financial research publications. The close synergies established between portfolio managers and Lyxor’s independent research department allow for the development of reliable and innovative investment solutions in each of Lyxor’s areas of expertise.

Advanced risk management culture

Alternative, ETFs & Indexing, structured, active quantitative & specialized investments, Lyxor’s investment solutions all have to address risk issues. Lyxor’s ability to offer transparent and sustainable sources of performance results from its established experience in risk management. The Risk Department thus ensures independent risk monitoring throughout the entire lifecycle of all investments relying on rigorous portfolio management processes and constant monitoring.

*USD 127.9 bn - Equivalent to EUR 116.3 bn - Assets under management and advisory as of May 31st, 2015.

Contact:

Website: www.lyxor.com