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Investment Management - December 16, 2009

Risk and clients matter. With the creation of the Executive MSc in Risk and Investment Management, EDHEC-Risk Institute unveils a major initiative for asset managers and professional investors.

In this month's interview, Noël Amenc, Director of EDHEC-Risk Institute, discusses the launch of the EDHEC-Risk Institute Executive MSc in Risk and Investment Management. This new programme is designed for investment management professionals and other finance practitioners. It is offered in Asia—from Singapore—and in Europe—from London and Nice, is designed to be completed in seventeen months of part-time study and is formatted to be compatible with professional schedules.

Noël Amenc

You have described the launch of the EDHEC-Risk Institute’s Executive MSc in Risk and Investment Management as a “major initiative.” In what way is it a major initiative?

Noël Amenc: It is a major initiative because it is clear that risk and investment management can no longer be conducted in the same way as before the financial crisis.

The financial crisis of 2007/2008 was a risk management crisis and it is obvious for example that there is more to effective risk management than diversification and counting on decorrelation alone to protect investors’ assets. Also, if we refer to the commonly used risk measures, we can say that Value at Risk should be considered a soft constraint, when what is required for investors is a hard downside risk constraint such as maximum drawdown or minimum solvency ratio. EDHEC-Risk are in a position to comment authoritatively on these issues because we have been studying the benefits of diversification and decorrelation for several years and we know that they do not suffice.

In fact, the asset management industry has to understand that diversification can only serve to improve the Sharpe Ratio. It cannot protect the investor against brutal fluctuations in the markets. Investment management has to integrate risk insurance in its processes, because this is the only approach that enables hard constraints to be managed in asset management and asset-liability management. One should stop opposing these two techniques and start to make them compatible instead. Traditional asset allocation based on diversification enables optimal strategies to be constructed when it integrates the assets’ horizons and life cycles, but it does not allow implicit or explicit short-term constraints to be satisfied. It is only with risk insurance concepts and techniques that managers and investors can hope to reconcile the short term and the long term.

While an investment manager cannot guarantee the direction of the markets, he should at least ensure that his clients’ risk budgets are respected through dynamic allocation or risk budget management methods, whatever the circumstances. The promise of mean reversion in the long term is not an excuse for short-term inertia.

You mentioned that clients’ needs have to be respected. Could you give some practical examples?

Noël Amenc: The Executive MSc in Risk and Investment Management is a response to the search for meaning in the industry following the crisis. The goal is not sophistication in itself, but the right technique that will satisfy clients’ needs. Financial engineering in investment management must be used for this purpose.

Practical examples include designing life cycle funds to prepare for retirement, integrating objectives, constraints and liabilities in private wealth management, and reconciling short-term constraints and long-term investment horizons in institutional investment. For sovereign wealth funds, it means taking the risks that affect future contributions into account in asset allocation.

On a more general level, it means addressing questions such as how to protect against major risks, such as inflation, in an effective and efficient manner. The integration of clients’ needs should guide financial engineering. From this point of view, and notably in the area of constructing LDI solutions, the Executive MSc in Risk and Investment Management provides participants with first-rate knowledge on the integration of new asset categories or techniques for constructing a robust liability-hedging portfolio that is not costly in terms of performance. It is clear that deleverage and limitations on resorting to derivatives to hedge institutional investors’ liability risk pose a problem in terms of the cost and therefore the performance of cash-oriented LDI solutions.

What are some of the practical arrangements that potential candidates for the Executive MSc in Risk and Investment Management should be aware of?

Noël Amenc: The Executive MSc in Risk and Investment Management is offered in Asia—from Singapore—and in Europe—from London and Nice. It is designed to be completed in seventeen months of part-time study and is formatted to be compatible with professional schedules. It is designed for professionals in the investment management industry who wish to progress, or maintain leadership in their field, and for other finance practitioners who are contemplating lateral moves. It appeals to senior executives, investment and risk managers or advisors, and analysts.

The core and elective course requirements of the programme represent fifty full days. In Asia, they are delivered over three residential weeks and nine three-day blocks (from Thursday afternoon to Sunday morning). In Europe, they are delivered over three residential weeks and ten three-day blocks (from Thursday morning to Saturday afternoon). Some of the blocks may be taken as distance-learning sessions. This eases management of the demands of work, programme, and personal life and allows participation not only of London- and Singapore-based practitioners, but also of professionals who regularly travel to these cities.

In addition to the actual classes taught in Singapore, London and Nice, the executive classrooms used for the Executive MSc in Risk and Investment Management programme allow on-demand Internet broadcasting of class sessions. Executive MSc in Risk and Investment Management candidates can access the multimedia recordings of all core and elective courses given in London, Nice, and Singapore.

If you had to sum up the Executive MSc in Risk and Investment Management in one sentence, what would that sentence be?

Noël Amenc: The Executive MSc in Risk and Investment Management will enable practitioners to integrate effective risk management in the investment management process and design and manage products that genuinely correspond to clients’ needs.

For more information

EDHEC-Risk Institute

Executive MSc Admissions – Ms Mélanie Ruiz

393-400 Promenade des Anglais

BP 3116 - 06202 Nice Cedex 3 - France

Tel.: +33 493 187 819 - Fax: +33 493 184 554

Web: execmsc.edhec-risk.com

Email: melanie.ruiz@edhec-risk.com

About Noël Amenc

Noël Amenc is professor of finance and director of development at EDHEC Business School, where he heads the EDHEC-Risk Institute. He has a masters degree in economics and a PhD in finance and has conducted active research in the fields of quantitative equity management, portfolio performance analysis, and active asset allocation, resulting in numerous academic and practitioner articles and books. He is a member of the editorial board of the Journal of Portfolio Management, associate editor of the Journal of Alternative Investments and a member of the scientific advisory council of the AMF (French financial regulatory authority).