EDHEC-Risk Concept Industry Analysis Featured Analysis Latest EDHEC-Risk Surveys Features Interviews Indexes and Benchmarking FTSE EDHEC-Risk Efficient Index Series FTSE EDHEC-Risk ERAFP SRI Index EDHEC-Risk Alternative Indexes EDHEC IEIF Quarterly Commercial Property Index (France) Hedge Fund Index Research Equity Index Research Amundi "ETF, Indexing and Smart Beta Investment Strategies" Research Chair Rothschild & Cie "Active Allocation to Smart Factor Indices" Research Chair Index Regulation and Transparency ERI Scientific Beta Performance and Risk Reporting Hedge Fund Performance Performance Measurement for Traditional Investment CACEIS "New Frontiers in Risk Assessment and Performance Reporting" Research Chair Asset Allocation and Alternative Diversification Real Assets Meridiam Infrastructure/Campbell Lutyens "Infrastructure Equity Investment Management and Benchmarking" Research Chair Natixis "Investment and Governance Characteristics of Infrastructure Debt Instruments" Research Chair Société Générale Prime Services (Newedge) "Advanced Modelling for Alternative Investments" Research Chair CME Group "Exploring the Commodity Futures Risk Premium: Implications for Asset Allocation and Regulation" Strategic Research Project Asset Allocation and Derivative Instruments Volatility Research Eurex "The Benefits of Volatility Derivatives in Equity Portfolio Management" Strategic Research Project SGCIB "Structured Investment Strategies" Research ALM and Asset Allocation Solutions ALM and Private Wealth Management AXA Investment Managers "Regulation and Institutional Investment" Research Chair BNP Paribas Investment Partners "ALM and Institutional Investment Management" Research Chair Deutsche Bank "Asset-Liability Management Techniques for Sovereign Wealth Fund Management" Research Chair Lyxor "Risk Allocation Solutions" Research Chair Merrill Lynch Wealth Management "Risk Allocation Framework for Goal-Driven Investing Strategies" Research Chair Ontario Teachers' Pension Plan "Advanced Investment Solutions for Liability Hedging for Inflation Risk" Research Chair Non-Financial Risks, Regulation and Innovations Risk and Regulation in the European Fund Management Industry Index Regulation and Transparency Best Execution: MiFID and TCA Mitigating Hedge Funds Operational Risks FBF "Innovations and Regulations in Investment Banking" Research Chair EDHEC-Risk Publications All EDHEC-Risk Publications EDHEC-Risk Position Papers IPE EDHEC-Risk Institute Research Insights AsianInvestor EDHEC-Risk Institute Research Insights P&I EDHEC-Risk Institute Research for Institutional Money Management Books EDHEC-Risk Newsletter Events Events organised by EDHEC-Risk Institute EDHEC-Risk Smart Beta Day Amsterdam 2017, Amsterdam, 21 November, 2017 EDHEC-Risk Smart Beta Day North America 2017, New York, 6 December, 2017 Events involving EDHEC-Risk Institute's participation EDHEC-Risk Institute Presentation Research Programmes Research Chairs and Strategic and Private Research Projects Partnership International Advisory Board Team EDHEC-Risk News EDHEC-Risk Newsletter EDHEC-Risk Press Releases EDHEC-Risk in the Press Careers EDHEC Risk Institute-Asia EDHEC Business School EDHEC-Risk Executive Education EDHEC-Risk Advances in Asset Allocation Blended Learning Programme 2017-2018 Yale School of Management - EDHEC-Risk Institute Certificate in Risk and Investment Management Yale SOM-EDHEC-Risk Harvesting Risk Premia in Alternative Asset Classes and Investment Strategies Seminar, New Haven, 5-7 February, 2018 Investment Management Seminars Contact EDHEC-Risk Executive Education Contact Us ERI Scientific Beta EDHEC PhD in Finance
Fixed Income Investing - November 28, 2016

Time appears ripe for focusing on smart beta in fixed income

In this interview, we talk to Riccardo Rebonato, Professor of Finance at EDHEC Business School and Member of EDHEC-Risk Institute, about the reasons behind his decision to join EDHEC, his previous experience at PIMCO, his insights on fixed-income investing, and his current and future research projects.

Riccardo Rebonato

You joined EDHEC as professor of finance at the beginning of May. Could we ask what motivated your choice of EDHEC?

Riccardo Rebonato: Before joining EDHEC I had accumulated more than 25 years of experience in the financial industry (and had been an academic before that). I knew EDHEC well from its excellent research papers that I was reading for my professional work, and from the reputation of its faculty. I was struck by the nice combination of intellectual rigour and practical relevance of the work produced by my now-colleagues. So, when the opportunity arose to interview for a professorial position at EDHEC, I really seized the opportunity with both hands, and I am very glad to be on board.

Before joining EDHEC, you were Global Head of Rates and FX Research at PIMCO. Will that professional experience have an impact on your academic work?

Riccardo Rebonato: I have always believed that theory and practice work best together (in my previous academic life as a physicist, I use to combine theory and experiments – something that was already unusual at the time, and almost unheard of now). So, yes, I think that what I have learnt about the practice of finance and the empirical aspect of the behaviour of asset prices can be very relevant to inform my research and my teaching at EDHEC. My research focus in the industry was more geared towards identifying the best timing of various strategies – say, discovering and testing robust return-predicting factors in fixed income. My focus now is far more towards the cross-sectional analysis, but I see the two approaches as complementary, rather than in opposition. After all, a solid approach to both styles of investing is grounded in the same financial theory: the theory of how risk factors are priced. So, I really believe that what I have learnt in the industry will give my colleagues and I useful input for our work.

Fixed-income investing in a zero rate environment is a strategic area of development for our institute; what are your insights on this important subject?

Riccardo Rebonato: EDHEC-Risk Institute has a strong reputation and a first-class pedigree for smart beta investing. I find this area very exciting, and very appealing, both intellectually and practically. Recently, there has been a spate of activity in fixed-income smart beta – and, certainly, the current super-low rate environment is giving a salient topicality to the topic. In this environment, investors in general, and institutional investors such as pension funds in particular, are truly struggling to find suitable fixed-income investment opportunities: it is not just that nominal yields are so low. Despite very low inflation and inflation expectations, real yields are also extremely low (and often negative!). For pension funds, such a low yield environment is a toxic ‘double whammy’: not only do these low nominal and real yields depress expected returns on new investments, but they also increase the value of the pension liabilities (via discounting). So, providing sound and attractive investment solutions for this class of investors would be really important and socially useful.

You are a specialist in interest rate risk modelling with applications to bond portfolio management and fixed-income derivatives pricing. Could you tell us a little about your current and future research projects?

Riccardo Rebonato: In the light of the above, derivatives pricing is unlikely to be the answer for the institutional investors I referred to above. For this and other reasons, in the last few years my research focus has moved away from derivatives and exotic products in particular, and more towards the fundamental aspects of fixed-income asset pricing. What would be extremely useful in the current environment would be the identification of true risk factors in the fixed-income space, with an adequate compensation for the exposure they entail. When I say ‘true’ risk factors, I mean economically justifiable factors, and not just ‘anomalies’ (let alone artefacts of data mining). The distinction matters, because true risk premia are, broadly speaking, a compensation for being paid well in good states of the world and poorly in bad states of the world. As a consequence, by discovering a risk factor, one does not make it disappear – if the compensation has a solid economic justification, it will still be there tomorrow. Anomalies, instead, are just that – anomalies: if exploitable, once revealed, they can be arbitraged away. The process of discovering, understanding and justifying true risk factors is at the heart of smart beta investing in general. As I said, the time seems to be ripe for focusing on smart beta in fixed income. If, with my colleagues, I could make a contribution in this area, it would give me an enormous satisfaction.

About Riccardo Rebonato

Riccardo Rebonato is Professor of Finance at EDHEC Business School, member of EDHEC-Risk Institute and author of journal articles and books on Mathematical Finance, covering derivatives pricing, risk management and asset allocation. Prior to this, he was Global Head of Rates and FX Analytics at PIMCO. Academically, he is an editor of financial journals and was until recently a visiting lecturer at Oxford University and adjunct professor at Imperial College’s Tanaka Business School. He sits on the board of trustees for the Global Association of Risk Professionals (GARP). Previously, he was global head of market risk, head of research and head of complex derivatives trading for European banks. He was a Research Fellow in Physics at Corpus Christ College, Oxford, a Visiting Scientist at Brookhaven National Laboratory, and a Chercheur Invite’ at the Institute Laue-Langevin (Grenoble). He holds a doctorate in nuclear engineering (University of Milan) and a PhD in condensed matter physics/science of materials from Stony Brook University, NY.