Appointment of François-Serge Lhabitant as Associate Professor at Edhec
An interview with François-Serge Lhabitant, Associate Professor at Edhec and author of a new book on hedge funds.François-Serge Lhabitant has joined Edhec as an Associate Professor. In this capacity, he will be responsible for the alternative investment classes that have been set up as part of the finance major on the campus of Nice. He will also continue to participate actively in the work of the Edhec Risk and Asset Management Research Centre, with which he has been affiliated as research associate since the end of 2002.
François-Serge has just written a new book, "Hedge Funds: Quantitative Insights", published by Wiley (1).
François-Serge Lhabitant
You have decided to join Edhec as associate professor. Your international reputation must bring you numerous offers from international academic institutions, why Edhec?
François-Serge Lhabitant: There are several reasons. Firstly, I consider Edhec to be the best research centre in Europe today dedicated to risk management and alternative investments. Secondly, Edhec aims to provide solutions that practitioners may use in their day to day business. This means that there is a very strong connection between the research, the teaching, and the "real" world. This is what I like at Edhec.
You have just published a new book on the quantitative aspects of hedge funds. Is there not a contradiction with the fact that the core part of the risks and management problems of hedge funds is related to the operational side?
François-Serge Lhabitant: Assessing operational risk is an essential part of hedge fund investing, because hedge funds are unregulated or at least lightly regulated. For me, it is a crucial part, but it is not the only one. Actually, the situation is very similar to choosing a restaurant: if it looks bad, you do not want to go in and try it. But if it looks good and you go in, you still need the chef and his recipes to be convinced. It is the same with hedge funds. Once satisfied with the operations, you can use quantitative techniques to assess what is really going on and build a portfolio that makes sense. I am still surprised by the number of people who build portfolios with no idea of how the components interact with each other.
In your book, you devote a large amount of space to the analysis of hedge fund risks, and Edhec has just disseminated a document on FoHF reporting. Is there not a risk, by talking too much about the subject, that hedge funds will only be seen as risks? The alphas that are the source of the success of the HF industry aren't mentioned much by "academics". Might they have disappeared?
François-Serge Lhabitant: Alphas and Betas are two sides of the same coin. To produce an alpha, you need to take on some risk, and therefore some beta. The question is therefore: what are the exact risks that you are taking? Even if you hedge the market risk, you are still left with other risk exposures, and therefore, other risk premiums. It is therefore essential to identify them and acknowledge them. Now, regarding the alphas, they are increasingly harder to identify in the growing world of hedge fund managers. I would say that maybe a small percent of the entire universe is capable of generating alpha. The rest is just noise.
You participate in the Edhec alternative index committee and you are an alternative investment professional yourself. What's your assessment of the utilisation of the Edhec alternative indices?
François-Serge Lhabitant: The question in the alternative industry is no longer "Should we use indices?", but rather "Which indices to use?". The approach proposed by Edhec is innovative and solves two essential problems: the pureness of a style, and the representativeness of the industry. Thus, the Edhec indices have been widely well-accepted by practitioners, both as benchmarks and as useful tools for quantitative analysis.
(1) Hedge Funds: Quantitative Insights, François-Serge Lhabitant, Wiley, 2004.
