EDHEC-Risk - EDHEC-Risk in the Press

EDHEC-Risk in the Press

EDHEC-Risk Institute has been cited widely in the business and industry press. A selection of articles may be found below.

[2012] [2011] [2010] [2009] [2008] [2007] [2006] [2005] [2004] [2003]

June 2013

Citywire Wealth Manager (12/06/2013)
How Smart Beta 2.0 can place the investor firmly in control
"(…) Fahd Rachidy, one of the designers of EDHEC’s ‘Smart Beta 2.0’, discusses how the concept works and how it can be applied to portfolios. (...) Q: How does ‘Smart Beta’ 2.0 work? A: The idea is initially a critique and an improvement on the first range of smart beta indices, which were designed and based on a bundle of embedded risks. If you take a fundamental or minimum volatility approach, for example, the way they are designed is the index provider chooses the parameters and risk they want to be exposed to. Investors should know the risks they are taking when they choose an index. If it’s an index with a small cap bias, for example, the risks should be well documented and the contribution to performance from those risks should be obvious. Smart Beta 2.0 deals with those issues by giving investors full control of their smart beta investment, so they can choose their own risk factors. It is a choice the investor should make, not the provider. For example, if you want smaller companies or a value bias, you can select your own universe of stocks and the weighting scheme. If you were to use Smart Beta 1.0 for minimum volatility exposure, you have a strong concentration of defensive stocks. You could argue outperformance is not from the minimum volatility but actually the large sector bet, because utilities and other defensives will outperform. So in order to gain pure minimum volatility exposure, you can control the factors. Investors can control sector constraints, geographical exposure, stock selection and weighting schemes, as well as tracking error. (…)"
Copyright Citywire [Full text]
Funds Europe (June 2013)
EDHEC Research: New Index Trackers
"(…) Despite a broad range of exchange-traded funds, investors still want more product development. As a result, says Felix Goltz at EDHEC-Risk Institute, specialised investments, such as infrastructure ETFs, are in demand. (...) Investors demand more product development when it comes to exchange-traded funds (ETFs) to better address their specific needs, research by EDHEC-Risk Institute shows. The EDHEC European ETF Survey 2012, which was supported by Amundi ETF as part of the core-satellite and ETF investment research chair at EDHEC-Risk Institute, examined investors’ usage and perceptions of ETFs in the region. There are three main areas of the survey where investors see a need for further product development. Most interest is seen in the emerging market equities segment, where 49% of respondents want further product development. Existing products in this segment have seen important inflows with approximately a five-fold increase of inflows between 2011 and 2012. There is interest from investors for further product development in high yielding fixed income assets, such as emerging market bonds, corporate bonds and high yield bonds. While all segments of the exchange-traded product (ETP) fixed income sector have grown in terms of assets in 2012, particularly pronounced increases have been within high yield fixed income sub-sectors such as high yield corporate bonds, which has seen an $11 billion (€8.5 billion) increase, and emerging market debt, which has seen a $5 billion increase. There is interest by investors for development of ETFs based on new forms of indices, with 37% of investors interested in further product development. Interest has increased despite a number of ETF launches, which track new forms of indices – also known as smart beta. (...)"
Copyright Funds Europe [Full text - Registration required]
FT Adviser (05/06/2013)
ETPs and ETFs ready to break the $1 trillion barrier
"(...) EDHEC’s European ETF study in 2012 found that 67 per cent of the institutions planned to increase their use of ETFs and ETPs while only 4 per cent of the respondents expected their use of ETFs and ETPs to decline. Investor satisfaction with their use of ETFs is high and has been high for the past seven years the study has been conducted. The expectations for future use of ETFs is much more positive than investors’ expectations for their use of other alternative index products. Thirty per cent of the institutions expected to decrease their use of total return swaps while 11 per cent expected to increase their use, 26 per cent expected to increase their use of index funds while 24 per cent expected to decrease, and 28 per cent expected to increase their use of futures while 9 per cent expected to decrease their use. (...)"
Copyright FT Investment Adviser [Full text]
Financial Standard (05/06/2013)
Lonsec expects growth in smart beta ETFs
"(...) Investment research house Lonsec believes Australia can expect the market for exchange traded funds (ETFs) tracking "smart beta" or non-traditional indices to grow in popularity as a focus on risk since the global financial crisis has resulted in greater demand for volatility targeted equity products. Smart beta indices reject traditional market capitalization index weights in favour of other rules-based weightings designed to isolate a particular performance characteristic. Surveys by the business school of the EDHEC-Risk Institute in France show that 40% of institutional investors are using smart beta-type index approaches in their equity portfolios. Lonsec general manager of specialised research Michael Elsworth said smart beta ETFs are on the rise because they represent a cost efficient way of investing in active management. "Smart beta ETFs resemble passive investments, but the deviations from capitalisation weighted indices reflect active investment decisions," Elsworth said. (...)"
Copyright Rainmaker Group [Full text]
Asia Asset Management (June 2013)
A challenge and a dilemma: Inflation-linked bonds in long-term investment
Article by Romain Deguest, Lionel Martellini, and Vincent Milhau
"(…) Inflation-linked bonds may be useful instruments for long-term investors. Here we look at the benefits of sovereign, municipal and corporate inflation-linked bonds in long-term investment decisions. While a dominant fraction of inflation-linked debt is still issued by sovereign states, there has been recent interest amongst various state-owned agencies, municipalities and corporations, in particular utility or financial-services companies, in issuing inflation-linked bonds. Intuition suggests that if a firm’s revenues tend to grow with inflation, then having some inflation-linked issuance can be a natural hedge. Issuing inflation-indexed bonds has two main benefits for firms, municipalities or states. First, it leads to a reduction in the cost of debt since the issuing party is selling insurance against inflation and receives the associated premium. Secondly, issuing inflation-linked bonds, as opposed to nominal bonds, reduces uncertainty in net profits when revenues (tax revenues for states and municipalities, or operating cash-flows for corporations) are positively related to changes in inflation. (…)"
Copyright Asia Asset Management [Full text - Registration required]
Les Echos (04/06/2013)
Les stratégies d'« indices intelligents », la nouvelle martingale des gérants
"(...) « C'est un nouveau nom pour une bien vieille histoire », explique Noël Amenc, directeur de l'EDHEC-Risk Institute. Selon lui, cette notion correspond à plus de cinquante années de recherche en construction de portefeuille, connue parfois sous d'autres noms comme par exemple celui de l'« advanced beta », une dénomination que l'on retrouve aujourd'hui chez State Street par exemple. « Ce sont Markowitz et Sharpe qui ont commencé à étudier cette notion d'indice intelligent avec leur théorie s'appuyant sur la réduction de la variance d'un portefeuille par utilisation de la covariance des titres », explique Noël Amenc. (...) En France, l'EDHEC-Risk Institute est l'un des derniers à s'être lancé. L'institut de recherche a mis en place une plate-forme d'indices « smart beta » qu'elle produit elle-même et qui accueillera jusqu'à 10.000 indices d'ici à dix-huit mois. Les principaux indices se veulent gratuits, contrairement aux indices privés, totalement transparents et répliquables. Le créneau de l'EDHEC est en effet d'affirmer que les indices privés « smart beta » sont trop peu transparents pour pouvoir vérifier les historiques de performance qu'ils publient, parfois sur des dizaines d'années. (...) Comme toute solution d'investissement le « smart beta » comporte des risques. « Ce sont des risques systématiques et des risques spécifiques », résume Noël Amenc. Au regard de la profusion d'indices intelligents en train de se développer, certains vont rendre possible une exposition plus ou moins importante à des secteurs ou des styles et, au final, avoir plus ou moins de « tracking error » vis-à-vis des indices « capi-pondérés » ou encore disposer de plus ou moins de liquidité. « Mais on peut contrôler ces risques », assure Noël Amenc. (...)"
Copyright Les Echos [Full text - French - Registration required]
IPE (June 2013)
Top 400 Asset Managers: Active and passive come together
Article by Noël Amenc, professor of finance at EDHEC Business School, director of the EDHEC-Risk Institute and CEO of ERI Scientific Beta
"(…) Far from being a threat to traditional active management, smart beta could represent a great opportunity for active managers, argues Noël Amenc. (...) Our research has shown that it is possible to use a smart beta benchmark as a starting point for an active stock-picking strategy. The results show that for the same capacity to select outperforming stocks, active managers who adopt a smart beta benchmark transfer their stock-picking value on top of this new benchmark. They ultimately benefit from the double added value of the stock picking and the smart weighting scheme that allows them to continue to outperform smart beta index investing. We also observe that asset management firms that have decided not to enter the competition on pure passive investment, but which have fundamental and quantitative research capabilities, can successfully develop so-called ‘active’ smart beta strategies that outperform smart beta indices. These indices should moreover be considered as references for measuring the performance and risks of these new active smart beta strategies. (...) Far from being a threat, the convergence between active investment and passive investment could be a fantastic opportunity for active investment. Today, there are more smart beta indices than stocks. These are great ingredients either for added value from diversified managers who will favour selection and diversification of these smart beta building blocks, or for managers who will be able to analyse the sensitivity of the smart beta building blocks to market conditions and, using their timing capacity in those conditions, to construct tactical allocation strategies between the building blocks. In both cases the added value to be created is enormous and justifies higher management fees than for simple replication of an index. The value proposition of active allocation between smart betas is all the greater in that unlike stocks, smart beta indices or building blocks are exposed in a very stable way to risk factors that are highly decorrelated and to specific risks that are measurable and fairly easy to diversify. These two qualities constitute the Holy Grail for all asset allocators and more globally for all managers. (…)"
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IPE (03/06/2013)
Switzerland: Smart on beta benchmarks
"(…) Swiss pension funds have mostly shied away from alternatively weighted benchmark strategies. Cécile Sourbes finds that adoption will depend on thorough analysis and transparency of data (...) Beyond the question of costs lies the issue of performance. As Noël Amenc, director at EDHEC-Risk Institute says, index providers traditionally justify the use and costs of alternative benchmarks by claiming they outperform cap-weighted indices. “But, investors should be aware that smart beta benchmarks can also have periods where they underperform,” he says. “As a result, investors should have access not only to the performance data provided by index providers but also to the risks to which those indices are exposed,” he adds. (…)"
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May 2013

Funds Europe (30/05/2013)
ETF investors develop exotic taste
"(…) The view is supported by Felix Goltz, of the EDHEC-Risk Institute. In an ETF report in the upcoming issue of Funds Europe (June) he says despite a broad range of ETFs available, investors still wish for future product development to address specific needs. (...) The EDHEC-Risk Institute found that most interest in new products is seen in the emerging market equities segment, in the area of high yielding fixed income assets and ETFs based on new forms of indices. (...)"
Copyright Funds Europe [Full text - Registration required]
Index Universe (30/05/2013)
UCITS Risk Concerns Threaten Brand Split
"(...) UCITS (Undertakings for Collective Investment in Transferable Securities) is the Europe-wide brand for funds approved for sale to retail investors. UCITS’ assets have multiplied eightfold in 20 years, according to statistics from the European Fund and Asset Management Association, and now total over €6.5 trillion. (...) UCITS is now a brand of global importance: according to a 2010 estimate by business school EDHEC, up to 40 percent of UCITS fund sales are to non-European investors, particularly in Asia. (...)"
Copyright Index Universe [Full text]
Asia Asset Management (29/05/2013)
EDHEC-Risk Institute and CACEIS introduce new research chair on risk assessment and performance reporting
"(…) Asset servicing banking group CACEIS and EDHEC-Risk Institute have announced the creation of a new research chair at EDHEC-Risk Institute entitled “New Frontiers in Risk Assessment and Performance Reporting”. This new three-year chair will follow on from the previous CACEIS research chair at EDHEC-Risk Institute on “Risk and Regulation in the European Fund Management Industry”. (...) Jean-Marc Eyssautier, chief risk and compliance officer for CACEIS Group and member of the CACEIS executive committee, said: “CACEIS is delighted to support a new chair at EDHEC-Risk Institute on “New Frontiers in Risk Assessment and Performance Reporting”. We believe that this work will result in another step forward for our business as it is at the crossroads of the needs of our clients (which are constantly growing due to regulatory changes) and the services a major custody and depositary player should be able to offer the asset management industry. (…)"
Copyright Asia Asset Management [Full text - Registration required]
Global Custodian (28/05/2013)
CACEIS and EDHEC-Risk Create New Research Chair on Risk Assessment and Performance Reporting
"(…) CACEIS and EDHEC-Risk Institute have created a new research chair at EDHEC-Risk Institute focusing on risk assessment and performance reporting. This new three-year chair, entitled “New Frontiers in Risk Assessment and Performance Reporting”, will follow on from the previous CACEIS research chair at EDHEC-Risk Institute on “Risk and Regulation in the European Fund Management Industry.” Led by Professor Noël Amenc, Director of EDHEC-Risk Institute, and Professor Lionel Martellini, Scientific Director of EDHEC-Risk Institute, the research chair team will examine new advances in risk measurement and reporting. The goal is to explore, for the benefit of institutional investors and asset managers, both new concepts and innovative applications of concepts that are popular in the investment world. (…)"
Copyright Global Custodian [Full text - Registration required]
HedgeWeek (28/05/2013)
EDHEC-Risk Institute and CACEIS launch research chair on risk assessment and performance reporting
"(...) The chair will focus on two major ideas: • The consequences for the reporting of both institutional investors and asset managers of the change in conceptual paradigm from asset allocation to risk allocation, increasingly present within institutional investment and asset management, which is leading to a focus no longer on categories of assets but on categories of risk. • An improvement in extreme risk measures and reporting for funds and institutional investment management. (...) Amenc says: “With the support of CACEIS, we very much look forward to advancing research in the different areas covered by this new research chair – improved risk reporting, by shifting from asset allocation to risk factor allocation; enhanced risk measurement for diversified equity portfolios; and better geographic segmentation for equity investing.” (...)"
Copyright GFM Limited [Full text]
Insurance Journal (28/05/2013)
EDHEC-Risk Institute and CACEIS Launch Risk Research Chair
"(...) CACEIS, the European asset servicing banking group, and EDHEC-Risk Institute jointly announced the creation of a new research chair at EDHEC-Risk Institute entitled “New Frontiers in Risk Assessment and Performance Reporting.” The new three-year chair will “follow on from the previous CACEIS research chair at EDHEC-Risk Institute on “Risk and Regulation in the European Fund Management Industry,” said the bulletin. “Led by Professor Noël Amenc, Director of EDHEC-Risk Institute, and Professor Lionel Martellini, Scientific Director of EDHEC-Risk Institute, the research chair team will examine new advances in risk measurement and reporting. The goal is to explore, for the benefit of institutional investors and asset managers, both new concepts and innovative applications of concepts that are popular in the investment world.” (...)"
Copyright Wells Media Group, Inc. [Full text]
HedgeWeek (27/05/2013)
Three members join EDHEC-Risk Institute’s international advisory board
"(...) Three new members have joined EDHEC-Risk Institute’s international advisory board, which brings together scholars, representatives of regulatory bodies and senior executives from business partners and other leading institutions. The role of the international advisory board is to validate the relevance and goals of the research programme proposals presented by the centre’s management and to evaluate research outcomes with respect to their potential impact on industry practices. The 40 members of the board also advise on the objectives and contents of projects deriving from the expertise of the research centre, thereby ensuring that graduate and executive programmes remain at the forefront of developments in the marketplace. The three new members are: Henrik Gade Jepsen, chief investment officer, ATP; David Iverson, head of asset allocation, Guardians of New Zealand Superannuation; Thomas Laux, chief risk officer, Eurex Clearing (...)"
Copyright GFM Limited [Full text]
Financial Times (24/05/2013)
‘Smart beta’, a new weapon in your armoury
"(...) If you want an insight into some of the ideas that have been backtested and turned into indices, go to www.scientificbeta.com, a new website run by European investment research organisation called EDHEC Risk. Click on their flagship indices and you’ll find an academic description of all the strategies, along with the results of backtesting since 2002. It all sounds very exotic and complicated, with names such as the US Value Maximum Deconcentration index or the Developed Low Volatility Maximum Deconcentration index. The term “deconcentration” comes up frequently. It effectively means an index where there’s a lot of diversification between the companies and not much concentration in just a few top stocks based on market capitalisation. The easiest deconcentration strategy of all is to buy all the constituents of an index in equal portions, rather than by market capitalisation. Low volatility is another popular smart beta idea. It entails ranking all the stocks in an index such as the FTSE 100 based on their recent share price volatility and then either exclude the most volatile, or give the biggest weightings to the least volatile shares. The idea is to get equity-like returns but with fewer wild gyrations. (...)"
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Hedge Fund Journal (24/05/2013)
New members for EDHEC-Risk advisory board
"(...) EDHEC-Risk Institute is has announced that three new members have joined its international advisory board, which brings together distinguished scholars, representatives of regulatory bodies as well as senior executives from business partners and other leading institutions. The role of the international advisory board is to validate the relevance and goals of the research programme proposals presented by the centre’s management and to evaluate research outcomes with respect to their potential impact on industry practices. The 40 members of the board also advise on the objectives and contents of projects deriving from the expertise of the research centre, thereby ensuring that graduate and executive programmes remain at the forefront of developments in the marketplace. The three new members are as follows: Henrik Gade Jepsen, Chief Investment Officer, ATP; David Iverson, Head of Asset Allocation, Guardians of New Zealand Superannuation; Mr Thomas Laux, Chief Risk Officer, Eurex Clearing AG. (...)"
Copyright Hedge Fund Journal [Full text]
HedgeWeek (24/05/2013)
Three members join EDHEC-Risk Institute’s international advisory board
"(...) Three new members have joined EDHEC-Risk Institute’s international advisory board, which brings together scholars, representatives of regulatory bodies and senior executives from business partners and other leading institutions. The role of the international advisory board is to validate the relevance and goals of the research programme proposals presented by the centre’s management and to evaluate research outcomes with respect to their potential impact on industry practices. The 40 members of the board also advise on the objectives and contents of projects deriving from the expertise of the research centre, thereby ensuring that graduate and executive programmes remain at the forefront of developments in the marketplace. (...)"
Copyright GFM Limited [Full text]
IPE (24/05/2013)
Friday people roundup
"(…) EDHEC-Risk Institute – Three new members have joined EDHEC's advisory board: Henrik Gade Jepsen, CIO at ATP; David Iverson, head of asset allocation at Guardians of New Zealand Superannuation; and Thomas Laux, chief risk officer at Eurex Clearing. The role of the 40-member international advisory board is to validate the relevance and goals of the research programme proposals presented by the centre's management. (…)"
Copyright IPE [Full text - Registration required]
L'Agefi Hebdo (23-29/05/2013)
Gérer le « risque construction » dans les investissements infrastructures
"(...) L’EDHEC-Risk Institute insiste sur le besoin de diversification des institutionnels souhaitant s’exposer aux « infrastructures », avec un peu de « greenfield ». (...) En cette époque où les investisseurs institutionnels s’intéressent de plus en plus aux infrastructures, la question du « risque construction », par opposition au « risque d'exploitation » qu'ils semblent privilégier, méritait d’être posée. Elle a fait en grande partie l’objet des premiers travaux des deux chaires de l’EDHEC-Risk Institute récemment créées sur « la dette infrastructures », avec le soutien de Natixis, et sur « l’investissement en fonds propres dans les infrastructures », avec le soutien de Meridiam et de Campbell Luytens. « Le problème se pose bien sûr dans une logique d’allocation d’actifs, mais aussi de politique publique : les fonds de pension et assureurs ne devraient-ils pas investir plus dans les nouveaux projets ? », note Frédéric Blanc-Brude, directeur des deux recherches. (...)"
Copyright L'Agefi Hebdo [Full text - French - Registration required]
Citywire Wealth Manager (22/05/2013)
EDHEC-Risk Institute builds series of ‘smart beta 2.0’ indices
"(…) EDHEC-Risk Institute has built a series of indices it has dubbed ‘smart beta 2.0’, which are free to use and designed to enable investors to shape the risk profile of a benchmark. The not-for-profit organisation has launched 30 flagship indices under the ERI Scientific Beta brand with a view to growing this to 100 over the next year, covering a range of strategies, including fundamentally-weighted, style bias and optimal liquidity. The institute said that all of its indices are underpinned by rigorous research and back-testing and are only published after being approved by its scientific management team. ‘These smart beta 2.0 indices avoid investors being subject to the risks to which the first generation of smart beta indices are exposed, and allow them to control and choose the risks by differentiating the choice of weighting scheme from the choice of risk factors of the indices that implement those weighting choices,’ EDHEC said. ‘So, for the same diversification scheme, for example, each investment will be able to choose different risk criteria to which they wish, or do not wish, to be exposed. (…)"
Copyright Citywire [Full text]
HedgeWeek (22/05/2013)
Hedge funds extend gains in April
"(...) Eleven out of 13 of the EDHEC-Risk Alternative Indexes recorded positive returns in April. Equity-focused strategies all exhibited returns consistent with their modelled exposure which has been rather low lately, with a slightly negative implied alpha however: long/short equity (0.65 per cent), equity market neutral (0.00 per cent) and event driven (0.82 per cent). The convertible arbitrage strategy (0.54 per cent) maintained its positive trend but did not show the usual alpha in addition to its risk factor exposures. CTA global (2.08 per cent) was the best performing strategy this month. The funds of funds strategy, with a 0.70 per cent gain, and six consecutive positive months, confirmed a good start to the year 2013. Short selling was the only index to finish the month in negative territory recording a return of −2.90 per cent for the month. (...)"
Copyright GFM Limited [Full text]
CNBC (16/05/2013)
Stock investors look again to earnings in search for winners
"(...) That gradual shift has been a boon for hedge funds that buy certain stocks or sectors and borrow others to sell on in order to capture the movement in price between the two, data from the EDHEC-Risk Institute showed. Such a strategy, most often employed by long-short hedge funds, has returned more than double its long-term monthly average since Draghi spoke, while funds that base their investments on macroeconomic factors have seen returns slide. (...)"
Copyright CNBC LLC [Full text]
Investment Europe (16/05/2013)
"Quality Growth" approach pulls awards for Comgest
"(...) Independent asset management company Comgest, with assets under management of €15.5bn (as of 31/12/12) now tops the Alpha League Table. The Table, based on the consistency of risk-adjusted returns, was launched by French rating agency Europerformance and academic research house EDHEC-Risk Institute in 2005. Paris-based Comgest has received multiple awards from across Europe since the beginning of the year for the performance of its funds, along with the quality of its management and services. (...)"
Copyright Incisive Media [Full text]
Banking & Finance (16/05/2013)
First multi-strategy platform for smart beta investing
"(...) EDHEC-Risk Institute has inaugurated its new smart beta index design and production activity, ERI Scientific Beta. This activity aims to revolutionise the index world through, firstly, a new approach to smart beta investing called Smart Beta 2.0, which enables investors to choose and control the risks of these new benchmarks, and secondly, total transparency on the methodologies and compositions of the indices available on the platform. Through its ‘More for Less’ initiative, ERI Scientific Beta intends to promote a more transparent and efficient index market for the benefit of investors. As such, ERI Scientific Beta is taking initiatives that are at odds with those of traditional index providers, by supplying information on its flagship smart beta indices free of charge, allowing investors to choose and control the risks of their smart beta investment, and, finally, by not asking institutional investors for fees on assets under management (AUM) to replicate its indices. (...)"
Copyright International Financial Publishers nv/sa [Full text]
Hedge Funds Review (May 2013)
Triple-scoring strategy for commodities generates superior risk-adjusted performance
Article co-authored by Joëlle Miffre, professor of finance at EDHEC Business School and member of EDHEC-Risk Institute
"(…) An analysis of commodity futures produces a strategy combing two ‘traditional’ signals – momentum and term structure – with idiosyncratic volatility in an easy to deploy triple-scoring scheme. (...) Commodity futures have become widespread investment vehicles for both strategic and tactical asset allocation purposes. It is well known that commodity momentum and term structure signals enable long/short strategies with superior performance to long-only positions such as passive S&P-GSCI tracking (Erb and Harvey, 2006; Miffre and Rallis, 2007; Szakmary et al, 2010; Fuertes et al, 2010; Gorton et al, 2012; Basu and Miffre, 2013). The momentum strategy essentially exploits a measure of relative average past performance because good past performers are expected to do better than poor past performers. The term structure strategy exploits the past average roll yield, measured as the price differential for front and second-nearest contracts, given that backwardated commodities with high average roll yields are deemed to outperform contangoed commodities with low average roll yields. (...)"
Copyright Hedge Funds Review [Full text]
IPE (15/05/2013)
Index transparency and the false promises of governance
"(…) EDHEC-Risk Institute's Frédéric Ducoulombier calls for full transparency of methodology and historical information for indices. In the context of the ongoing regulatory debate on financial benchmarks and the recent consultations by the International Organisation of Securities Commissions (IOSCO) and the European Securities and Markets Authority (ESMA)/European Banking Authority (EBA), EDHEC-Risk Institute wishes to underline that transparency is both crucial to allowing users to assess the risks, relevance and suitability of indices and the most powerful tool to mitigate conflicts of interest existing across the indexing industry. EDHEC-Risk Institute is concerned that discussions pertaining to define an "adequate level of transparency" and balance the needs of index users with the purported necessities of confidentiality or intellectual property protection may result in a framework that falls short of providing users with the information they need to discharge their due diligence responsibilities (at a reasonable cost or at all). (…)"
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etfexpress (13/05/2013)
Special Report Smart Beta 2013: The Smart Beta 2.0 approach
Article by Noël Amenc
"(...) Interest in new forms of indexation, referred to as smart beta strategies, has grown in recent years. Investors are attracted by the performance of these indices compared to traditional cap-weighted indices. However, by departing from cap-weighting, smart beta equity indices introduce new risk factors for investors, and sufficient attention is not presently given to the evaluation of these risks. In addition, the smart beta market appears to be inefficient today, due to restricted access to information, as well as lack of independent analysis. EDHEC-Risk Institute recently put forth a new approach to smart beta investment, called the “Smart Beta 2.0” approach. A first important step towards a better understanding of smart beta strategies is to conduct proper analysis of risk and performance of smart beta strategies rather than relying on demonstrations of outperformance typically conducted by the providers of the strategies. Secondly, Smart Beta 2.0 allows investors not only to assess, but also to control the risk of their investment in smart beta equity indices. Rather than only proposing pre-packaged choices of alternative equity betas, the Smart Beta 2.0 approach allows investors to explore different smart beta index construction methods in order to construct a benchmark that corresponds to their own choice of risks. (...)"
Copyright GFM Limited [Full text]
etfexpress (13/05/2013)
Special Report Smart Beta 2013: The risks and opportunities of smart beta investments
"(...) Greater transparency is something that EDHEC-Risk Institute is calling for improvements on, arguing that too many smart beta products are pre-packaged and sold to investors who have no idea what risks are being taken or how alternatively weighted indices are being constructed. “Investors don’t have enough controls over the risk parameters being used in smart betas. The risk exposures are already chosen for investors to a certain extent. Our viewpoint is that they should be allowed to make those choices themselves. They should choose which risks they want to be exposed to, and which ones they don’t,” says Peter O’ Kelly, ERI Scientific Beta’s Director of Marketing. (...) EDHEC-Risk refers to this investor-centric approach to managing risk and having access to better transparency as “Smart Beta 2.0”. The authors behind this study, Noël Amenc, Felix Goltz and Lionel Martellini show that Smart Beta 1.0 indices present systematic and specific risks that are neither documented nor explicitly controlled by their promoters. They argue that specific risk, which is often characterised as model and parameter estimation risk, can be both measured and managed. Being able to better diversify the specific risk of smart beta products significantly lowers the specific risk of smart beta benchmarks says the authors. “We’re in favour of investors having the ability to do research effectively on a smart beta product and be in control of the risks before they allocate. They should be deciding what’s in the product, rather than being presented with it,” says O’ Kelly. (...)"
Copyright GFM Limited [Full text]
Index Universe (09/05/2013)
Russell Joins Debate On Free Index Data
"(...) Indexing market participants are speaking out against making indexing data free for the public good, after one institution launched a free data provision service on its smart beta indices. The debate comes as competition in the indexing market is heating up. Last month EDHEC-Risk Institute announced that it would offer investors free access to data on a wide range of so-called "smart beta" indices. The move is likely to put pressure on commercial index providers’ business models, and the—normally quiet—index providers have started speaking out. (...) EDHEC-Risk, the financial research institute of France-based EDHEC business school, publishes a wide range of data covering popular smart beta equity indices on a new website, scientificbeta.com. It is part of a broader drive by EDHEC-Risk to increase transparency in the indexing sector. Earlier this week the institute said that regulators should insist on the full transparency of financial benchmarks to allow index users to assess potential risks. (...) Noël Amenc, CEO of ERI Scientific Beta at EDHEC-Risk, is keen to ensure they are seen as operating in the smart beta space. "We don’t want to compete with cap-weighting and with providers of indices that use this methodology. Differentiation amongst such firms is primarily a question of brand, as cap-weighted indices on the same markets are very highly correlated with each other.” (...)"
Copyright Index Universe [Full text]
Funds Europe (May 2013)
EDHEC Research: The dangers of UCITS
"(…) Greater regulatory harmonisation is needed to strengthen the Ucits regime, say Noël Amenc and Frédéric Ducoulombier at EDHEC-Risk Institute. (...)"
Copyright Funds Europe [Full text - Registration required]
Index Universe (08/05/2013)
Deutsche Börse Launches New Corporate Bond Indices
"(...) Deutsche Börse has launched a new range of corporate bond indices. The launch comes three months after a report from EDHEC Risk found that investors found there was an unsatisfactory range of indices currently available. (...) The launch of the corporate bond indices follows a report from EDHEC Risk over concerns that there was an unsatisfactory range of indices currently available, and that corporate bond indices were too risky. The EDHEC-Risk Institute report, called “A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures,” surveyed investors and found that only 41 percent of respondents were satisfied or very satisfied with corporate bond indices. "A level which confirms that current corporate bond indices do not meet investors’ needs," the report says. (...)"
Copyright Index Universe [Full text]
Asia Asset Management (May 2013)
Article by Lionel Martellini, Lixia Loh, Stoyan Stoyanov
The relevance of local and regional volatility indicators
"(…) Stock market volatility is an important input to asset allocation and risk management. Here we examine whether local and regional volatility factors could be more effective for equity exposure to a given market than exposure to US volatility. With the increase in stock market uncertainty and the recent financial crises, there has been growing interest in volatility not only as a sentiment indicator, but also as an asset class. Investors and asset managers increasingly rely on over-the-counter (OTC) or exchange-traded volatility derivatives using volatility indices as underlyings to alleviate losses during market downturns, based on the negative correlation between equity returns and volatility that has been well-documented in the academic literature. To be able to trade in volatility requires availability of volatility products which depend on the method for measuring volatility. The most popular volatility index is the VIX, which is built from prices of equity index options on the S&P 500. Although there is both empirical and theoretical support for investors’ willingness to seek to diversify or hedge equity exposures through a long exposure to equity volatility, there is no strong evidence in the academic literature for the default suggestion for the volatility exposure to be VIX irrespective of the type of equity exposure. (…)"
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The Asset (07/05/2013)
First risk efficient index fund for Japanese investors licensed to Nikko AM
"(…) FTSE Group has licensed the FTSE EDHEC Risk Efficient Developed ex Japan Index to Nikko Asset Management Co. to create the first risk-efficient index fund for Japanese investors. The FTSE-EDHEC Risk Efficient International Developed Countries Index Fund aims to offer Japanese institutional investors a transparent means of capturing equity market returns with the potential for improved risk/reward efficiency. The universe derives from the FTSE Developed ex Japan (FTSE Kaigai) index. The FTSE EDHEC Risk Efficient Index Series was developed in association with EDHEC Risk Institute and systematically weights portfolio constituents to maximize the Sharpe ratio and achieve the highest possible reward-to-risk efficiency. The index series incorporates FTSE’s methodology and is managed in accordance with transparent index rules as well as FTSE’s strong, independent governance processes. (…)"
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IFA Online (03/05/2013)
New approach to smart beta investing
"(...) The EDHEC-Risk Institute has devised what it describes as a new and free approach to smart beta investing. The Institute has launched 30 flagship indices which allow investors to choose different risk criteria to which they wish or do not wish to be exposed. For example, investors will be able to avoid exposure to value, small cap, or liquidity risk factors. (...) The 30 flagship indices under the brand name Scientific Beta are free of charge. The flagship indices represent popular smart beta strategies in the area of diversification, but ERI Scientific Beta will subsequently be producing indices for other strategies (style, fundamentally-weighted, factor replication, and optimal liquid). In a year's time, ERI Scientific Beta intends to have around one hundred free flagship indices that are representative of all the possible smart beta choices. The provision of information on the flagship indices includes daily transparency and allows all investors to replicate the indices without charge. (...)"
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IPE Asia (03/05/2013)
EDHEC-Risk launches smart beta index platform
"(…) EDHEC stresses all indices would be selected "rigorously". It adds: "ERI Scientific Beta does not wish to promote strategies that are not based on a rigorously conceptual approach, but only those for which the past performance at least stems from a rigorous and transparent process where the risks have been documented and the methodology does not entail too many ad hoc choices." According to EDHEC, these Smart Beta 2.0 indices shield investors from the risks to which the first generation of smart beta indices exposed them. Amenc adds that each institution would be able to tailor its own benchmark by modifying the risk of the standard index, called the flagship index. "For instance," he says, "if a pension fund or an asset manager is interested in a global minimum variance index but is less so by the sector risk offered by this benchmark and prefers to be sector neutral, the platform will allow it to change those components." Tomas Franzén, chief investment strategist at Swedish buffer fund AP2 and chairman of EDHEC-Risk Institute's international advisory board, says the Scientific Beta initiative is a "major mover" of the whole concept of using equity indices. "It is important to better understand the dynamics of different alternative weightings and, at least, to be better prepared for market episodes when market-cap indices actually outperform." (…)"
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April 2013

NEWSManagers (30/04/2013)
L'EDHEC-Risk Institute crée la plate-forme scientificbeta.com
"(…) Le 22 avril, l'EDHEC-Risk Institute a démarré son activité de conception et de production d'indices de beta intelligent, ERI Scientific Beta, qui met en oeuvre des produits destinés à l'investissement Smart Beta 2.0, annonce l'EDHEC le 29 avril. L'information sur ces indices sera distribuée gratuitement. La mise au point de cette infrastructure, disponible sur la plate-forme stratégique scientificbeta.com, a coûté plus de 6 millions d'euros. Elle a occupé une trentaine de personnes pendant ces deux dernières années et il est prévu de doubler cet effectif sur les deux ans qui viennent. Depuis le 22 avril, la plate-forme Scientific Beta propose 30 indices vedettes destinés aux stratégies de beta intelligent dans le domaine de la diversification. Ultérieurement, ERI Scientific Beta lancera des indices pour d'autres stratégies (style, pondération fondamentale, réplication de facteurs, liquidité optimale). L'objectif est d'avoir d'ici un an une gamme d'une centaine d'indices flagship gratuits couvrant tous les choix possibles de beta intelligent. L'information sera transparente sur une base journalière et permet aux investisseurs de répliquer gratuitement ces indices. A terme, l'offre comportera 2.242 indices sur mesure. (…)"
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HedgeWeek (30/04/2013)
EDHEC-Risk Institute launches multi-strategy platform for smart beta investing
"(...) EDHEC-Risk Institute has launched its smart beta index design and production activity, ERI Scientific Beta. The aim is to revolutionise the index world through, firstly, a new approach to smart beta investing called Smart Beta 2.0, which enables investors to choose and control the risks of these new benchmarks, and secondly, total transparency on the methodologies and compositions of the indices available on the platform. Through its More for Less initiative, ERI Scientific Beta intends to promote a more transparent and efficient index market for the benefit of investors. ERI Scientific Beta is taking initiatives that are at odds with those of traditional index providers by supplying information on its flagship smart beta indices free of charge, allowing investors to choose and control the risks of their smart beta investment, and, finally, by not asking institutional investors for fees on assets under management (AUM) to replicate its indices. (...)"
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L'Agefi (30/04/2013)
EDHEC-Risk Institute launches scientificbeta.com platform
"(...) As of April 22, 2013, EDHEC-Risk Institute (ERI) has inaugurated its new smart beta index design and production activity, ERI Scientific Beta. These products a designedto implement Smart Beta 2.0 investments, EDHEC said on April, 29th. From April 22, ERI Scientific Beta has been offering 30 flagship indices free of charge under the brand name Scientific Beta. These flagship indices represent popular smart beta strategies in the area of diversification, but ERI Scientific Beta will subsequently be producing indices for other strategies (style, fundamentally-weighted, factor replication, and optimal liquid). In a year's time, ERI Scientific Beta intends to have around one hundred free flagship indices that are representative of all the possible smart beta choices. The provision of information on the flagship indices includes daily transparency and allows all investors to replicate the indices without charge. Ultimately, the Smart Beta 2.0 approach will provide investors with a choice of 2,442 customised indices. In total, if the costs of the launch are included, more than EUR6m will have been spent to create this unique smart beta platform. More than 30 people have been working on this project for over two years and the plan is to double the team in the next 24 months. (...)"
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Funds Europe (29/04/2013)
Free smart beta indices launched to "revolutionise" industry
"(…) EDHEC-Risk Institute, which recently criticised providers of smart beta indices, has launched a venture to design and license its own set of benchmarks. With ERI Scientific Beta, the name of the venture, EDHEC-Risk claims it will “revolutionise” the index world with a second-generation approach to smart beta. ERI Scientic Beta will offer 2,442 customised indices, growing to 6,000 in 18 months, making it the world’s largest source of alternative benchmarks, EDHEC-Risk says. Also, complete information on 30 flagship indices will be made available free of charge online. Information includes daily transparency and enables all investors to replicate indices without charge. In a year’s time ERI Scientific Beta intends to offer around 100 free flagship indices. (...)"
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IPE (29/04/2013)
EDHEC-Risk Institute launches smart beta index platform
"(…) EDHEC-Risk Institute has launched a smart beta index platform giving investors the ability to choose and control the risks of those benchmarks. According to EDHEC, the ERI Scientific Beta provides "total" transparency on the methodologies and compositions of the indices available on the platform. Noël Amenc, director at EDHEC-Risk Institute and chief executive at ERI Scientific Beta, told IPE investors needed to understand the strategy of alternative indices and the risk associated with them. "Traditionally, index providers justify the use of alternative benchmarks and their price by saying they outperform cap-weighted indices," he said. "However, investors should be aware smart beta benchmarks can also have periods where they underperform. "The reason for this is not necessarily due to the fact these benchmarks are badly designed but simply because they are exposed to a series of risk factors, called beta." Amenc added that, as a result, investors should have access not only to the performance data provided by index providers but also to the risks to which those indices are exposed. With its new platform, EDHEC will therefore provide its own analysis on each smart beta index. The provision of information on the flagship indices includes daily transparency and allows all investors to replicate the indices without charge. Since last week, the institute has been offering 30 flagship indices, which represent popular smart beta strategies in the area of diversification. However, EDHEC hopes to offer style, fundamentally weighted, factor replication and optimal liquid indices in future. Amenc added that the platform would grow "extensively" in the coming months. In a year's time, ERI Scientific Beta intends to have around 100 free flagship indices representative of all the possible smart beta choices. (…)"
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Citywire Wealth Manager (29/04/2013)
Smart beta 2.0 to "revolutionalise" index world as investors take control of risk
"(…) The EDHEC-Risk Institute is pioneering a new approach to beta investing by allowing investors to choose and control the risk of benchmarks on its new platform, ERI Scientific Beta. The new approach, which EDHEC has dubbed Smart Beta 2.0, will give total transparency on the methods and composition of benchmarks, while allowing investors to choose and control the risks of their investments. Investors will also be given free information on 30 flagship ERI indices and institutional investors replicating them will not be charged a fee on assets under management. Tomas Franzen, chair of EDHEC's international advisory board, said: "The Scientific Beta initiative is a major mover of the whole concept of using more appropriate equity indices, or rather, better constructed equity portfolios. "The initiative is also a very good example of the general need for solutions rather than products in investing." By making use of Smart Beta 2.0, investors will be able to control and choose risk by differentiating their choice of weighting from a selection of indices. This means they will be able to benefit from new forms of index without being exposed to value, smaller company or liquidity risk factors, as is often the case with first generation commercial offerings. (…)"
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Financial News (29/04/2013)
MSCI gets to grips with index wars
"(...) A revolution is shaking the world of indices as providers use different stock rankings to win business from clients increasingly sensitive to cost. The price war is fiercest between providers of commoditised cap-weighted indices, which underpin the vast majority of exchange-traded funds. (...) Elsewhere, EDHEC-Risk Institute, the French academic institution, has set up a platform that will give investors the chance to compile and manage lists of stocks for free. It is starting with 30 flagship indices and wants to move to 100 within a year. Tomas Franzen, chairman of EDHEC’s advisory panel and chief strategist of Swedish pension scheme AP2, said: “This initiative also is a very good example of the general need for solutions rather than products in investing.” (...)"
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ETF Strategy (29/04/2013)
EDHEC-Risk Institute’s Scientific Beta aims to revolutionise index world
"(...) The launch of EDHEC-Risk Institute’s Scientific Beta platform, the culmination of a €6 million investment and more than two years of research and development, is yet another mark of the immense innovation and intense competition that is fizzing through the index industry. With its Scientific Beta initiative, EDHEC-Risk Institute aims to further spice up this industry and establish itself as a leading provider of alternative, so-called smart beta, indices. To achieve these lofty ambitions, the French academic institution espouses a new approach to smart beta investing – what it refers to as ‘Smart Beta 2.0’ – which enables investors to choose and control the risks of benchmarks. Second, it has committed itself to providing total transparency on index methodology and composition. And third, it has taken the bold step to supply information on its flagship indices free of charge and not to impose ad valorem license fees on funds seeking to replicate these indices. (...)"
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Morningstar (25/04/2013)
The Top Factors to Consider When Selecting an ETF
"(...) The Total Expense Ratio (TER) has increased in importance when selecting an ETF, according to a survey presented by the EDHEC-Risk Institute at its annual European conference recently. While the survey was conducted amongst European investors, we believe these considerations would be broadly applicable to Asian investors. (...) The EDHEC-Risk survey asked ETF-related questions to 212 European investors ranging from institutional investment managers to private wealth managers. (...)"
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Financial News (22/04/2013)
ETF industry wary of transaction tax
"(...) As European policymakers continue to thrash out the details of the proposed European financial transaction tax, the exchange-traded funds industry says the levy could hit its products disproportionately, significantly increasing costs for investors, reducing the use of independent counterparties and weighing on trading volumes. (...) Noel Amenc, director of the EDHEC-Risk Institute, said different types of ETFs and indices could lead to more taxes being charged. He said: “If you have an actively managed ETF or invest in a strategy index, you have greater turnover. It could have a very strong negative impact.” (...)"
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Financial Standard (22/04/2013)
Aurora targets retail investors with liquid hedge fund
"(...) The need for daily liquidity is restricting retail investors from satisfying their increasing appetite for alternative investment products, according to Aurora Investment Management. The US-based hedge fund boutique said that difficult market conditions had led many investors who wouldn't otherwise consider hedge funds, to increase their allocations. Though traditionally viewed with suspicion, particularly in Australia where bonds and equities remain the favoured assets, hedge funds are now reviewing their offerings to open themselves up to a new breed of investor, according to Aurora. Hedge funds are marketed on their ability to derive a stronger return from the market than other collective investment schemes. However, many derive their returns by exploiting price inefficiencies in illiquid assets, which means many are unsuitable for retail investors. Many even have redemption limits in their terms of investment. (...) A recent comparison of 24,000 hedge fund strategies by France-based research house the EDHEC-Risk Institute showed that those which offer greater liquidity tend to return less. (...)"
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FTfm (22/04/2013)
EDHEC to launch free smart beta indices
"(...) The EDHEC-Risk Institute has unveiled plans to revolutionise index-based investing by offering sophisticated alternative benchmarks for free. The move will pitch the Nice-based research body into direct competition with commercial providers of financial indices. EDHEC-Risk director Noël Amenc said he intends to become the leading alternative index provider within five years. “Our desire is to shake things up and to make sure that the smart beta index market becomes more transparent, that the risks of the strategies are better documented, and that investments are made in the best cost conditions,” said professor Amenc. EDHEC started offering 30 “smart beta” indices for free on April 15 via a dedicated web platform as part of an initiative to promote transparency within index based investing. The institute intends to expand its offering to 100 free indices over the next 12 months covering a range of smart beta benchmarks. Tomas Franzén, chief investment strategist at AP2, the Swedish pension fund, said EDHEC’s initiative would make an important contribution to the development of better constructed equity portfolios. (...)"
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Index Universe (22/04/2013)
EDHEC-Risk: Index Information Should Be Free
"(...) We’ve been researching benchmark construction for years and we believe that a large part of the performance an investor receives ultimately comes down to the quality of the benchmark. For the last decade many people have been talking about alpha and how to add value through manager skill. Obviously alpha is interesting, but the first-order question for most asset managers and institutional investors is which beta, that is which benchmark to choose. Although we are an academic institution, we differ from some other academics in that we consider a good research paper to be only a starting point. The research should be useful for practitioners and it is our duty to make the research available to practitioners in the best conditions possible. More recently we packaged some of our research into alternative weighting methodologies into indices, and we partnered with FTSE in 2010 to launch a risk-efficient index series. We had requests from a lot of institutional investors to explain our methodology and to disclose the data behind the indices, in order to help them compare our strategy with other smart beta indices. But we were constrained from sharing this information by the rules of the traditional index business, which do not allow for such sharing of data. So in the launch of our new ERI Scientific Beta venture, which is an open platform, we are seeking to do two things: first, to base the choice of the numerous strategies that we are offering on our platform on academic rigour; and, second, to allow people access to the underlying information so that they can perform their own due diligence. (...)"
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Index Universe (22/04/2013)
Shaking Up Fund Fees
"(...) The implications of EDHEC-Risk’s decision to offer free constituent information for thirty “smart beta” strategies reach far beyond the index business. EDHEC’s transparency push is clearly a challenge for index firms who seek to charge for smart beta investment strategies on the basis of a percentage share of assets under management. EDHEC says it will hand index constituent data out for nothing, only charging for the information if you wish to use its name in a fund you wish to promote. But the initiative is arguably a bigger threat to the asset-based fees charged by fund management firms of all types. (...)"
Copyright Index Universe [Full text]
Citywire Wealth Manager (19/04/2013)
Even monkeys can beat the market! Does beta need to get smarter?
"(…) It would seem ‘smart beta’, then, is perhaps not always as smart as it might appear. Indeed, the EDHEC-Risk Institute highlighted in a recent paper risks associated with traditional smart beta indices and is proposing a new approach to take account of these risks. The industry body said this new approach, called ‘smart beta 2.0’, will allow investors to measure and control the risks of their benchmark. ‘Smart beta 1.0 indices present systematic and specific risks that are neither documented nor explicitly controlled by their promoters,’ EDHEC said. ‘This inadequate level of information, and of risk management, calls into question the robustness of the performance presented and implies considerable risk-taking that is not controlled by investors when they choose new equity benchmarks.’ In a sort of role-reversal, the EDHEC-Risk Institute suggests investors take control of the risk, rather than the index providers. The group recommended the choice of systemic risk factors for smart beta indices not only needs to be clearly explicit, but needs to be made by the investor. ‘The choice, and therefore the associated risk control, is not incompatible with smart beta benchmark performance, as shown by the research results presented in the “Smart Beta 2.0” study,’ the group said. ‘It is thus possible to maintain performance objectives with Smart Beta 2.0 indices without excessively exposing these new benchmarks to size or liquidity risk in comparison with cap-weighted indices.’ (…)"
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International Adviser (17/04/2013)
Investors demand more EM ETFs
"(…) Appetite for emerging market bond and equities products among European investors is strong with just under half wanting to see more product innovation in this area, according to a survey conducted by the EDHEC Risk Institute. A total 49% of investors would like to see more emerging market equities products brought to market, while 43% are looking for new emerging market fixed income ETFs. Demand for these products is also reflected in inflows into existing emerging market equities ETFs, which increased five-fold between 2011 and 2012. The survey found that half of investors use ETFs to access new asset classes, and they are also rated as the most diverse of products when it comes to offering exposure to a range of both asset classes and indices. In terms of satisfaction in returns generated by ETFs, equities have been the most consistent, although there has been a slight decline in investor satisfaction with these products over the past year. (…)"
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Reuters (17/04/2013)
Rothschild seeks to buy U.S. fund of funds businesss
"(...) Rothschild is looking to double the size of its fund of hedge funds business via a U.S. acquisition to give it the scale it needs to flourish in an industry now dominated by a handful of big players. (...) New products include some using risk management technology developed by France's EDHEC business school aimed at limiting downside risk while still providing positive returns. "It's good for everybody but it's geared essentially to respond to the Solvency II regulatory restraints" faced by insurers, who are limited in their ability to invest in hedge funds by proposed risk-capital rules due to take effect in the coming years, Laurens said. (...)"
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Portfolio Adviser (16/04/2013)
Investors demand more EM ETFs
"(…) Appetite for emerging market bond and equities products among European investors is strong with just under half wanting to see more product innovation in this area, according to a survey conducted by the EDHEC Risk Institute. A total 49% of investors would like to see more emerging market equities products brought to market, while 43% are looking for new emerging market fixed income ETFs. Demand for these products is also reflected in inflows into existing emerging market equities ETFs, which increased five-fold between 2011 and 2012. The survey found that half of investors use ETFs to access new asset classes, and they are also rated as the most diverse of products when it comes to offering exposure to a range of both asset classes and indices. In terms of satisfaction in returns generated by ETFs, equities have been the most consistent, although there has been a slight decline in investor satisfaction with these products over the past year. (...)"
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Financial News (15/04/2013)
Institutional appetite for ETFs keeps growing
"(...) In its European ETF survey for 2012, EDHEC-Risk Institute found that 67% of respondents expect institutional investors to increase their use of exchange-traded funds while only 4% expect a decline. Investor satisfaction with ETFs has been consistently high over the seven years the study has been conducted. Investors are much more positive about ETFs than they are about alternative index products: 30% of survey respondents expect to decrease their use of total return swaps, with 11% foreseeing an increase; 26% plan to increase their use of index funds while 24% said they would use them less; and 28% indicated they would use more futures, compared with 9% expecting to decrease their use. This corresponds with the findings of several other studies in the past few months highlighting the growth in both ETF users and the assets held by them. Performance and costs of active funds have been factors driving investors to embrace ETFs. The S&P Indices Versus Active Scorecard, which serves as the scorekeeper of the active versus passive debate, found that most active managers in the US in all categories, apart from large-cap growth and real estate funds, underperformed their benchmarks last year. Performance lagged behind the benchmark indices for 63.25% of large-cap funds, 80.45% of mid-cap funds and 66.5% of small cap funds. The performance figures are equally unfavourable for active funds when viewed over three and five years. (...)"
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Index Universe (15/04/2013)
Index Battle Heats Up
"(...) A battle for commercial influence is intensifying in an industry that, despite its association with transparent, index-tracking funds, has traditionally been coy about the precise nature of its sources of income(...) In March this year EDHEC-Risk, the financial research institute of France-based EDHEC business school, announced that it would shortly offer the general public free access to a wide range of data covering so-called “smart beta” equity indices, reportedly the types of benchmark offering index firms the highest profit margins. (...)"
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Financial News (15/04/2013)
Regulators mull ‘gaps’ in chain of responsibility
"(...) As the number of service providers in the financial services industry continues to grow, UK regulator the Financial Conduct Authority is concerned that firms trying to limit their liability could create gaps in the chain of responsibility. Speaking at a panel discussion during EDHEC-Risk Institute’s annual conference last month, Tony Hanlon, asset management team manager at the Financial Conduct Authority, cited exchange-traded fund index providers as an example of the growing number of service providers. “What we’re concerned about is gaps opening up between each provider,” he said. Hanlon said there was a need for more clarity about the distinct responsibilities of the asset manager that creates a product, and the index provider that creates the index on which that product is based. He said the regulator needed to ensure that someone took responsibility for any errors that might lead to investor losses at some point in the long chain of service providers. (...)"
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Financial News (14/04/2013)
Investors get a grip on buy-and-hold
"(...) In spite of their name, trading is not uppermost in the minds of most exchange-traded funds investors, with many now holding ETFs as strategic, long-term investment tools. The EDHEC-Risk Institute’s annual survey of institutional investors in Europe, published at the end of last month, shows almost two-thirds of respondents (64%) said they used ETFs for buy-and-hold investments. Less than half identified “tactical bets” on short-term price movements as a use for the products. The findings are counter-intuitive, according to Eric Shirbini, EDHEC-Risk’s business development director in Europe and co-author of the report into the findings of the ETF survey. He said: “One of the main benefits of ETFs is that they provide liquidity, so you would expect people to use them for tactical allocation. In fact, they are used more for long-term investments.” (...) The evolution in ETFs from vanilla index trackers to encompass more complex, active strategies and alternative indices is also an incentive to use them more strategically, according to market participants. Respondents to Edhec’s survey indicated that they were increasingly interested in smart beta strategies, which attempt to use non-traditional or alternative benchmarks to outperform traditional market cap-weighted indices. They tend to be more strategic tools, according to Shirbini. He said: “Smart beta is not something you would expect to outperform over two or three months. You want to hold them longer-term to reap the benefit over cap-weighted indices.” (...)"
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L'Agefi (12/04/2013)
EDHEC highlights compatibility of risk management and investment horizons
"(...) A new EDHEC-Risk Institute publication, “Hedging versus Insurance: Long-Horizon Investing with Short-Term Constraints,” produced as part of the BNP Paribas Investment Partners (BNPP IP) research chair on “Asset-Liability Management and Institutional Investment Management,” demonstrates that failing to separate long-term risk-aversion and short-term loss-aversion may lead to poor investment decisions. As an illustration, the research points to a 32% opportunity cost when managing maximum drawdown constraints inefficiently through an excessive level of hedging. This survey mainly shows that relatively simple solutions exist that can be implemented as dynamic asset allocation strategies in order to control short-term risk levels while maintaining access to long-term sources of performance, and that these solutions are a substantial improvement over traditional strategies without dynamic risk control, which inevitably lead to under-spending of investors' risk budgets in normal market conditions, with a strong associated opportunity cost, and over-spending of investors' risk budget in extreme market conditions. (...)"
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The Washington Sun (11/04/2013)
EDHEC-Risk Institute: UCITS hedge funds outperform their non-UCITS rivals, shows new study
"(...) This new research is drawn from the Newedge research chair on “Advanced Modelling for Alternative Investments” at EDHEC-Risk Institute. UCITS hedge funds are typically more volatile and underperform their non-UCITS hedge fund rivals, a new comprehensive comparative study by the EDHEC-Risk Institute has found. The finding, also show that the domicile of a fund is an important indicator of a fund’s likely performance with European domiciled funds delivering lower risk-adjusted returns compared to funds domiciled in other regions. The EDHEC-Risk Institute study, which examined an aggregate hedge fund dataset that consisted of more than 24,000 unique hedge funds, is one of the most comprehensive analyses of the performance and risks of UCITS hedge funds and non-UCITS hedge funds undertaken in recent times. (...)"
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Investment Europe (11/04/2013)
Short term risk control not incompatible with long term investment performance - EDHEC
"(...) Adjusting asset allocation to control short term risk need not impact on long term investment performance, according to latest research published by EDHEC Business School's research facility EDHEC-Risk Institute. The publication Hedging versus Insurance: Long-Horizon Investing with Short-Term Constraints looked at the short versus long term challenge, because of consensus that investors with longer term outcomes in mind may be more partial to higher exposure to risk assets, such as equities, but which can in the short term cause problems of risk. However, the research authors Romain Deguest, Lionel Martellini and Vincent Milhau, concluded that "while it is widely perceived that a tension exists between a focus on hedging long term risk and a focus on insurance with respect to short term constraints, we cast new light on this debate by arguing that long term objectives and short term constraints need not be mutually exclusive." The authors conclude that there are "relatively simple solutions exist that can be implemented as dynamic asset allocation strategies in order to control short-term risk levels while maintaining access to long-term sources of performance," and that "these solutions are a substantial improvement over traditional strategies without dynamic risk control, which inevitably lead to under-spending of investors' risk budgets in normal market conditions, with a strong associated opportunity cost, and over-spending of investors' risk budget in extreme market conditions." (...)"
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Hedge Fund Journal (11/04/2013)
Study: UCITS underperform non-UCITS rivals
"(...) This new research is drawn from the Newedge research chair on “Advanced Modelling for Alternative Investments” at EDHEC-Risk Institute. UCITS hedge funds are typically more volatile and underperform their non-UCITS hedge fund rivals, a new comprehensive comparative study by the EDHEC-Risk Institute has found. The finding, also show that the domicile of a fund is an important indicator of a fund’s likely performance with European domiciled funds delivering lower risk-adjusted returns compared to funds domiciled in other regions. The EDHEC-Risk Institute study, which examined an aggregate hedge fund dataset that consisted of more than 24,000 unique hedge funds, is one of the most comprehensive analyses of the performance and risks of UCITS hedge funds and non-UCITS hedge funds undertaken in recent times. Commenting on the results of the survey, Noël Amenc, Director of EDHEC-Risk Institute, said: “Investors are increasingly considering hedge funds as part of their investment universe, but are also searching for access to sophisticated risk management techniques within the regulated and transparent world of mutual fund products. We are delighted that this study supported by Newedge has been able to shed light on the way in which techniques are converging in the mutual fund and hedge fund universes and we think that the research will be of particular interest to institutional investors”. (...)"
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Les Echos (09/04/2013)
Actions : le palmarès des sociétés de gestion qui offrent le plus de valeur ajoutée
"(...) EuroPerformance et l'EDHEC-Risk Institute livrent la septième édition de l'Alpha League Table. Le dépassement de leur indice de référence a été difficile l'an dernier pour les gérants actions. Qu'ont fait les gérants de fonds actions basés en France l'an dernier en termes de surperformance ? Qui a réussi à trouver le « Graal » que recherche tout investisseur et donc tout gérant ? Le « Graal », ou plus exactement l'« alpha », qui permet à un fonds d'apporter plus de rendement que son indice de référence. Celui qui convainc l'investisseur que le gérant a une vraie utilité par rapport à la gestion indicielle et passive. Avec l'aide de l'EDHEC-Risk Institute, c'est ce qu'EuroPerformance tente de révéler chaque année dans son classement de l'Alpha League Table sur l'intensité d'alpha. Sur la base des performances 2012, pas moins de 278 sociétés de gestion peuvent concourir dans la classe actions. Et les résultats du dernier classement sont surprenants. Après trois années consécutives de hausse, l'alpha moyen généré est en recul. (...)"
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FTfm (05/04/2013)
Hedge funds performance versus liquidity
"(...) Investors in hedge funds face a choice between the higher returns delivered by lightly regulated offshore vehicles and the superior liquidity offered by more tightly regulated onshore products, according to the Nice-Based EDHEC-Risk Institute. EDHEC analysed 24,000 hedge funds in a study supported by Newedge, the broker, to compare the returns delivered by offshore and onshore vehicles as growing numbers of alternative managers are packaging their strategies into traditional mutual funds to better appeal to institutional and retail investors, particularly in Europe. EDHEC found that European mutual funds (Ucits) that employ hedge fund strategies (UHFs) underperform non-Ucits offshore hedge funds (HFs). “There is an important liquidity-performance trade-off,” said professor Robert Kosowski, one of the authors of the study. The gaps in performance between UHFs and HFs were explained by differences in the use of derivatives, both for portfolio protection and to enhance returns, along with variations in how leverage was employed to boost performance. Both average management fees (1.37 per cent) and performance fees (13.3 per cent were slightly lower for UHFs than for HFs (1.58 per cent and 18.8 per cent). Professor Kosowski said these differences in compensation structures and managerial incentives also contributed to the performance gap between UHFs and HFs. (...)"
Copyright Financial Times Fund Management [Full text]
Asia Asset Management (April 2013)
Corporate bond indices: Much room for improvement
"(…) A recent “call for reaction” by EDHEC-Risk Institute canvassed opinions on previous research that had been critical of the quality of corporate bond indices. In this article, Felix Goltz, head of applied research at EDHEC-Risk Institute, reports on the results. A 2011 paper from EDHEC-Risk Institute, entitled ‘A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures’, concluded that corporate bond index construction methodologies tend to be sub-optimal. The paper analysed two sets of four corporate investment-grade bond indices each, one for the US market and the other for the euro-denominated bond market. The authors reviewed the uses of bond indices and the challenges involved, and then analysed the risk-return properties and the heterogeneity of the indices in each set. The research showed that credit and interest rate risk exposures were relatively unstable for the indices examined. This naturally has significant implications for investors’ allocation decisions and for the consequences of those allocation decisions over time. A recent “call for reaction” by EDHECRisk Institute invited finance practitioners to comment on this previous EDHEC-Risk research, which indicated that current corporate bond indices are inappropriate for many investors. (…)"
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Global Custodian (05/04/2013)
UCITS Hedge Funds Underperform Their Non-UCITS rivals, Says Research from EDHEC-Risk Institute
"(…) New research from EDHEC Risk Institute has found that UCITS Hedge funds underperform their non-UCITS rivals. The research, drawn from the Newedge research chair on “Advanced Modelling for Alternative Investments” at EDHEC-Risk Institute, is set against the backdrop of the convergence of mainstream long-only asset management and alternative hedge funds, which has recently gathered significant momentum. However, despite their underperformance, the research finds UCITS hedge funds have more favourable liquidity terms and when comparing liquidity-matched groups of UCITS hedge funds and non-UCITS hedge funds EDHEC-Risk finds that their performance seems to converge. The EDHEC-Risk Institute study examined an aggregate hedge fund dataset that consisted of more than 24,000 unique hedge funds. Two main forces are currently accelerating the convergence trend, says the research. The first of these forces, from the supply side, was the amendment of the UCITS framework, which allowed mainstream fund managers to supply regulated forms of hedge fund-type products to their traditional customer base, while also permitting hedge funds to reach out to the same customers. This research paper, titled ‘An Analysis of the Convergence between Mainstream and Alternative Asset Management’, examines the convergence between the mainstream and the alternative asset management industry by studying UCITS and non-UCITS hedge funds. The paper also provides an academic analysis of the main techniques that are currently used by hedge fund managers and that could be transported to the mutual fund and alternative UCITS space in a straightforward manner so as to provide better forms of risk management in a regulated environment. (…)"
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Benefits and Pensions Monitor (05/04/2013)
UCITS Underperform Hedge Fund Rivals
"(...) UCITS (Undertakings for Collective Investment in Transferable Securities) hedge funds are typically more volatile and underperform their non-UCITS hedge fund rivals, says a study by the EDHEC-Risk Institute. Its findings also show that the domicile of a fund is an important indicator of a fund’s likely performance with European domiciled funds delivering lower risk-adjusted returns compared to funds domiciled in other regions. It also found UCITS hedge funds underperform non-UCITS hedge funds on a total and risk-adjusted basis. However, they have more favourable liquidity terms and when liquidity matched groups of UCITS hedge funds and non-UCITS hedge funds are compared their performance seems to converge. There is a liquidity-performance trade-off in the sample of UCITS hedge funds. Non-UCITS hedge funds generally have lower volatility and tail risk than UCITS hedge funds, which is consistent with hurdles to the transportation of risk management techniques. (...)"
Copyright Benefits and Pensions Monitor [Full text]
Asia Asset Management (05/04/2013)
UCITS hedge funds underperform non-UCITS rivals
"(…) This new research is drawn from the Newedge research chair on “Advanced Modelling for Alternative Investments” at EDHEC-Risk Institute. UCITS hedge funds are typically more volatile and underperform their non-UCITS hedge fund rivals, a new comprehensive comparative study by the EDHEC-Risk Institute has found. The finding, also show that the domicile of a fund is an important indicator of a fund’s likely performance with European domiciled funds delivering lower risk-adjusted returns compared to funds domiciled in other regions. The EDHEC-Risk Institute study, which examined an aggregate hedge fund dataset that consisted of more than 24,000 unique hedge funds, is one of the most comprehensive analyses of the performance and risks of UCITS hedge funds and non-UCITS hedge funds undertaken in recent times. Commenting on the results of the survey, Noël Amenc, director of EDHEC-Risk Institute, said: “Investors are increasingly considering hedge funds as part of their investment universe, but are also searching for access to sophisticated risk management techniques within the regulated and transparent world of mutual fund products. We are delighted that this study supported by Newedge has been able to shed light on the way in which techniques are converging in the mutual fund and hedge fund universes and we think that the research will be of particular interest to institutional investors”. (…)"
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L'Agefi (05/04/2013)
UCITS HFs underperform non-UCITS products
"(...) Overall, UCITS-compliant hedge funds are more volatile and underperform their counterparts which are not subject to the UCITS directive, and the country of domicile of a fund is a significant indicator of its potential performance, as those based in Europe show a risk-adjusted performance lower than those registered elsewhere. These are the findings of a survey conducted by the EDHEC-Risk Institute of a sample of more than 24,000 individual hedge funds. The study finds that UCITS-compliant hedge funds underperform non-UCITS hedge funds, in total performance as well as risk-adjusted performance. However, UCITS-compliant funds are characterised by more favourable liquidity, and, when the liquidity parameter is taken into account, returns for UCITS and non-UCITS hedge funds tend to converge. EDHEC also points out that non-UCITS hedge funds in general have volatility and risk far lower than those of non-UCITS hedge funds, which is clearly due to obstacles to the transposition of risk management techniques. (...)"
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L'Agefi (05/04/2013)
Les hedge funds coordonnés sous-performent les "non UCITS"
"(...) Par solde, les hedge funds coordonnés sont plus volatils et sous-performent leurs homologues qui ne sont pas conformes à la directive OPCVM, sachant que le domicile d'un fonds constitue un indicateur important de sa performance potentielle, ceux basés en Europe affichant une performance ajustée du risque inférieure à ceux enregistrés ailleurs. Tel est le résultat d'une enquête effectuée par l'EDHEC-Risk Institute sur un échantillon de plus de 24.000 hedge funds individuels. Dans le détail, cette étude fait ressortir que les hedge funds coordonnés sous-performent les non coordonnés aussi bien en performance totale qu'en performance ajustée du risque. Cependant, les fonds coordonnés se caractérisent par une liquidité plus "favorable" et, en incluant le paramètre de la liquidité, les performances entre hedge funds coordonnés et non coordonnés ont tendance à converger. D'autre part, l'EDHEC souligne que les hedge funds non coordonnés affichent en général une volatilité et des risques extrêmes inférieurs à ceux des hedge funds coordonnés, ce qui s'explique aisément par les obstacles à la transposabilité des techniques de gestion du risque.(...)"
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Funds Europe (04/04/2013)
Non-Ucits hedge funds show lower volatility and risk
"(…) Non-Ucits hedge funds tend to have both lower volatility and tail risk, while broadly outperforming their Ucits counterparts, research from EDHEC-Risk Institute suggests. Volatility and tail risk is often lower among non-Ucits funds owing to hurdles to the transportation of risk management techniques in Ucits funds. Ucits hedge funds, however, have more favourable liquidity terms, measured on a total risk-adjusted basis. The research suggests that the domicile of a fund is an important indicator of likely performance. Funds domiciled in Europe typically delivering lower risk-adjusted returns, compared with those domiciled in other regions. The EDHEC-Risk Institute analysed an aggregate hedge fund dataset that consisted of more than 24,000 unique hedge funds. Its research is drawn from the Newedge research chair on Advanced Modelling for Alternative Investments at EDHEC-Risk Institute. (...)"
Copyright Funds Europe [Full text]
Asset International (04/04/2013)
Volatile and Underperforming: The Disillusionment of Ucits Hedge Funds
"(...) Hedge funds wrapped in a supposedly structure have inflicted higher volatility and tail risk on their owners, while underperforming their mainstream rivals, research has found. Following the revelation of the Madoff scandal, many hedge fund managers were convinced to offer investors vehicles that were compliant with the stringent Ucits wrapper to boost confidence in the sector. Products using this wrapper were forbidden from using certain financial instruments, including a wide range of derivatives, and were, above all, intended to be very liquid. But these features have been the funds' undoing, according to the Edhec Risk Institute. Ucits wrapped hedge funds offer more volatility and tail risk than their mainstream counterparts - and crucially, they underperform. Risk management techniques used in hedge funds that are forbidden in Ucits products help to dampen volatility, the report said. "Overall average performance results… show that hedge funds seem to outperform Ucits hedge funds," the report said. "Consistently across time-periods and portfolio weighing schemes, standard performance measures are higher for HFs even after accounting for tail risk." In addition, the report found systematic risk exposure was higher for Ucits hedge funds than traditional rival funds.(...)"
Copyright Asset International [Full text]
Hedge Funds Review (April 2013)
Ucits hedge funds continue to underperform hedge funds
Article by Robert Kosowski, affiliate professor, EDHEC-Risk Institute, and Juha Joenväärä, assistant professor, University of Oulu
"(…) Recent research conducted as part of the Advanced Modelling for Alternative Investments research chair at EDHEC Risk Institute, supported by the prime brokerage group at Newedge, had two objectives. The first is to provide an academic analysis of the main techniques that are currently used by hedge fund managers and that could be transported to mutual funds and alternative Ucits in a straightforward manner so as to provide better forms of risk management in a regulated environment. We categorise techniques according to three groups: risk management, alpha generation and leverage. Within the group of risk management techniques, we review techniques based on derivatives, techniques based on dynamic trading strategies, volatility scaling of positions, risk measurement techniques, currency overlay and performance-enhancing compensation and incentive structures. In the context of alpha-creation techniques, we discuss advanced econometric techniques for asset allocation, asset-specific betas and stock-picking, shareholder activism, order execution alpha and currency alpha. Finally, we show how leverage can act as a performance driver and distinguish financial leverage, construction leverage, instrument leverage, risk-parity techniques and value at risk (VaR) techniques and leverage. (...)"
Copyright Hedge Funds Review [Full text]
HedgeWeek (04/04/2013)
UCITS hedge funds underperform their non-UCITS rivals, says EDHEC-Risk study
"(...) UCITS hedge funds are typically more volatile and underperform their non-UCITS hedge fund rivals, according to a comparative study by the EDHEC-Risk Institute. The findings also show that the domicile of a fund is an important indicator of a fund’s likely performance with European domiciled funds delivering lower risk-adjusted returns compared to funds domiciled in other regions. Noël Amenc, director of EDHEC-Risk Institute, says: “Investors are increasingly considering hedge funds as part of their investment universe, but are also searching for access to sophisticated risk management techniques within the regulated and transparent world of mutual fund products. We are delighted that this study supported by Newedge has been able to shed light on the way in which techniques are converging in the mutual fund and hedge fund universes and we think that the research will be of particular interest to institutional investors.” (...)"
Copyright GFM Limited [Full text]
Investment Europe (04/04/2013)
UCITS hedge funds underperform non-UCITS alternatives, EDHEC-Risk finds
"(...) UCITS hedge funds are more volatile and underperform their non-UCITS hedge fund rivals, a new study on 24,000 unique hedge funds published by the EDHEC-Risk Institute has found. The research found that the domicile of a fund is an important indicator of a fund’s likely performance and that European domiciled funds deliver lower risk-adjusted returns compared to funds domiciled in other regions. UCITS hedge funds underperform non-UCITS hedge funds on a total and risk-adjusted basis. However, UCITS hedge funds have more favourable liquidity terms and when we compare liquidity matched groups of UCITS hedge funds and non-UCITS hedge funds we find that their performance seems to converge. There is an important liquidity-performance trade-off in the sample of UCITS hedge funds. Our results also show that non-UCITS hedge funds generally have lower volatility and tail risk than UCITS hedge funds, which is consistent with hurdles to the transportation of risk management techniques. (...)"
Copyright Incisive Media [Full text]
European Pensions (02/04/2013)
ETF market set to grow as European investors plan increased usage
"(…) The exchange-traded fund (ETF) market is set to grow further during 2013 with 67 per cent of European ETF investors planning to increase their usage of this investment vehicle, according to EDHEC-Risk. In a survey of 212 European ETF investors, EDHEC-Risk found that during 2012 there was a significant increase in rates of ETF usage within corporate bonds, real estate and infrastructure. In addition, the survey found that 49 per cent of investors believe that there is room for development concerning emerging market equity ETFs and 43 per cent said that they want to develop emerging market bond ETFs. Findings also found that there has been an increased interest in actively managed ETFs with the number of respondents wanting to see actively managed ETFs increase from 11 per cent in 2011 to 17 per cent in 2012. European investors stated that the increased interest was due to higher levels of disclosure and transparency imposed on actively managed ETFs by the new 2012 European Securities and Markets Authority (ESMA) Guidelines aimed at increasing investor protection. (…)"
Copyright European Pensions [Full text]
Euromoney (April 2013)
Asset management: Investors get smart on asymmetric credit risk
"(…) Persistently low yields are doing funny things to credit. The increasingly desperate hunt for yield is fuelling increasingly irrational behaviour. (...) Aside from blind panic, one reaction from both equity and fixed-income investors has been to search for ways to protect themselves. This is driving some of them away from traditional market cap-weighted indices and towards alternatives. (...) Alternative – or smart – beta has been adopted through static approaches such as indices based on corporate fundamentals rather than market capitalization and through more dynamic strategies such as low-volatility, minimum-variance ETFs. The ease with which equity investors can now gain access to macro strategies through ETFs and swaps is fuelling the development. According to Noel Amenc, director of the EDHEC Risk Institute, 40% of equity investors have now adopted alternative weighting schemes. (…)"
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IPE (02/04/2013)
Felix Goltz, Head of applied research, EDHEC-Risk Institute
"(…) EDHEC-Risk Institute conducted a study on corporate bond indices in 2011 to analyse construction methodologies, risk and return properties, and the stability of their risk exposures. Subsequently, EDHEC-Risk Institute organised a ‘call for reaction’ in which it asked investment professionals to give their reactions to the research. Here, we report on the results. (...) As investors have had concerns about the ability of euro-zone governments to solve the sovereign crisis and look for higher yields, corporate bonds have started to be seen as a substitute when it comes to creating low risk portfolios and many investors have increased their corporate bond exposure. The use of indices for corporate bond investments is starting to become broader, strengthened by the proliferation of fixed-income ETFs which allow access to direct index portfolio strategies. However, given how established corporate bonds are as an asset class, it is surprising that little progress has been made in corporate bond indexing, where indices typically follow a standard debt-weighting scheme. This is in contrast with the world of equity indices, where various styles and construction methodologies are being developed. It is important to analyse how corporate bond index construction deals with the main risk factor exposures for investors in the corporate bond universe. Corporate bond returns are affected by factors such as interest rates, as well as issuer-specific factors, including credit-worthiness. The latter risk factor has prompted an industry of credit rating agencies to emerge, facilitating the standardisation of credit appraisal. Further, the corporate bond market has a structure entirely different from that of equities, with dealer-facilitated trading and low volume, leading to wide bid-ask spreads, opaque pricing, and illiquidity (cf. Biais et al., 2006; Dick-Nielsen et al., 2012). These risk factors and their importance and behaviour in the context of indices were examined in an EDHEC-Risk Institute paper (Goltz and Campani, 2011). The study found unstable risk exposure, and highly unstable duration, across eight indices, in the euro-zone and the US, and with heightened instability in two so-called ‘investable’ indices. (…)"
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Morningstar (02/04/2013)
ETF News: Smart-Beta Indexing Attracting More Attention
"(...) Perhaps the most interesting bit of news in the European exchange-traded products (ETP) industry in March was the EDHEC-Risk Institute's announcement that it would begin providing investors access to data on a range of so-called "smart-beta" indices for free. As part of EDHEC's initiative, they plan to unveil their indices and data on scientificbeta.com in the coming months. Of late, there has been increasing discussion in the European ETP industry focused on "smart-beta", but what exactly is "smart-beta"? Morningstar ETF analyst Al Kellet has written extensively on the subject, saying smart-beta indices are "somewhat of a middle ground {between active and passive management}… encompass{ing} a variety of transparent, rules-based approaches to constructing a portfolio, but with constituent weights decided by factors other than market capitalisation, which tends to hold sway in most purely passive exposures.” In essence, "smart-beta" indices, and by default "smart-beta" ETFs, are attempts to outperform a market-cap weighted index using pre-determined rules for security selection. Morningstar has covered some of these "smart-beta" strategies at length including equal weighted indexing, buy-write strategies, and monthly leveraged exposures. EDHEC, however, may be taking smart-beta to a whole new level. According to Kellet, "EDHEC is trying to refocus the smart beta discussion onto types of risk." Kellet argues that focusing on risk exposures rather than advanced index filtering may help encourage investors to manage portfolio risk more effectively. (...)"
Copyright Morningstar [Full text]
L'Agefi (02/04/2013)
European investors remain very satisfied with ETFs
"(...) The annual EDHEC European ETF Survey 2012, which represents a comprehensive survey of 212 European ETF investors shows that ETFs remain the favourite choice of investors for passive investment, with consistently high satisfaction levels (equity ETF satisfaction rates have been consistently in the region of 90%). It also documents that there has been an increase in the use of ETFs for corporate bonds, infrastructure and real estate. The survey, which was conducted as part of the Amundi ETF research chair at EDHEC-Risk Institute on “Core-Satellite and ETF Investment" shows that demand for innovation is high in different asset categories, with 49% of respondents seeking development of emerging market equity ETFs, and there is also demand for new forms of indices, such as "smart beta" ETFs. It should also be stressed that the great majority of European investors think that ETFs should remain as beta-producing products (81% of respondents). However, 17% of respondents were of the opinion that ETFs should become actively managed, which is an increase from just 11% in 2011. Turning to regulation at large, ESMA recommendations of July 2012 have been warmly welcomed by investors, with 77% agreeing that the guidelines have achieved their stated aim of improving investor protection. And support for the ESMA recommendations is even stronger on the subject of revenues from securities lending. Investors are overwhelmingly in favour of the requirement to return securities lending revenue net of costs to the ETF investor, with 84% of respondents in agreement. The ESMA guidelines appear to have been informative and setting standards in the right direction. The overall issue of index transparency has been very positively viewed by investors. (...)"
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Global Custodian (Winter Plus/Spring 2013)
What does Solvency II mean for hedge funds?
"(…) Research conducted by the Paris-based EDHEC Risk Institute by Mathieu Vaissié, a senior portfolio manager at Lyxor Asset Management, acknowledges a 25% capital charge would be more appropriate for insurers investing into hedge funds. The capital requirements could perversely hurt insurers, Vaissié warns in his paper "Solvency II: A Unique Opportunity for Hedge Fund Strategies". "There is indeed little chance in the current environment that insurance companies will favor hedge fund strategies over traditional performance-seeking assets knowing that the capital charge is currently materially higher," he writes. "In its current form, the Solvency II framework is thus preventing insurance companies from leveraging alternative diversification and implicitly directing them torwards fixed-income instruments, which may not be as safe an investment as one would have assumed. Paradoxically, the directive could put insurers' long-term capacity to control their funding ratios at risk." (…)"
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March 2013

Asset International (29/03/2013)
Satisfaction Levels Keep Improving for ETFs
"(...) Investors have reported increasing levels of satisfaction with exchange-traded funds (ETF) and have demanded more strategies using the passively managed method according to an annual European survey. The EDHEC Risk Institute found satisfaction levels for ETFs using a range of asset classes had, in the main, increased among a large group of investors since 2006 when the survey began. Equity funds have enjoyed satisfaction rates of over 90% since the start of the survey and in 2012, the results showed this to have reached over 95%. This asset class was closely followed by government and corporate bond ETFs, which both received satisfaction levels of around 90% last year. Satisfaction rates for ETFs tracking real estate and hedge funds have been less consistent, however, with dramatic peaks and troughs over the six-year period. Hedge fund ETFs continue to underperform with just over a 50% satisfaction level last year. Overall though, investors want more of these products, the survey said. Some 49% of respondents said they wanted to see more emerging market products and while others demanded some dedicated to smart beta strategies. A report on the survey said: "We can also see that there is strong interest amongst investors for development of ETFs based on new forms of indices with 37% of investors interested in further product development in this area despite the fact that there have recently been a significant number of ETF launches, which track new forms of indices (also known as smart beta)."(...)"
Copyright Asset International [Full text]
Asset International (29/03/2013)
Towers Watson: Smart Beta and the Long-Term Investor
"(...) According to Towers Watson's latest publication, smart beta is currently particularly smart. (...) Another paper on smart beta by the EDHEC-Risk Institute recently underscored the need for vigilance and thoroughness on the part of investors looking to allocate to the strategy. Sales and marketing are powerful forces in this space, it argued, and the more transparency provided about what makes a beta option smart, the better.(...)"
Copyright Asset International [Full text]
L'Agefi (29/03/2013)
Les investisseurs européens très satisfaits des ETF
"(...) Le sondage annuel effectué par l'EDHEC-Risk Institute auprès de 212 investisseurs européens en ETF fait ressortir que le niveau de satisfaction du panel reste aux alentours de 90 % en ce qui concerne les ETF actions et que la demande s'accroît pour les ETF, toujours les favoris en matière d'investissement passif, dans les domaines des obligations d'entreprise, de l'infrastructure et de l'immobilier. L'étude a été réalisée dans le cadre de la chaire de recherche patronnée par Amundi ETF. La demande d'innovation est élevée dans les différentes catégories d'actifs, 49 % des personnes interrogées souhaitant notamment le développement de l'offre d'ETF d'actions émergentes ainsi que de nouvelles formes d'indices, notamment avec des ETF de beta intelligent. Par ailleurs, 81 % du panel estiment que les ETF devraient demeurer des produits de beta, mais 17 % pensent qu'ils devraient être davantage gérés activement (contre 11 % en 2011). Concernant par ailleurs les recommandations de l'Autorité européenne des marchés financiers (AEMF ou ESMA en anglais) de juillet 2012, 77 % des investisseurs considèrent que ces directives ont atteint leur objectif d'amélioration de la protection des investisseurs. (...)"
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Index Universe (28/03/2013)
European ETP Descriptions Still Confusing, Say Investors
"(...) Nearly half of European investors find the current descriptions of exchange-traded products (ETPs) confusing, according to findings from the EDHEC-Risk institute, with those investors saying that product descriptions are insufficient to allow them to distinguish between exchange-traded funds (ETFs) and other non-fund trackers like exchange-traded commodities (ETCs) and notes (ETNs). The results come from the institute’s latest European ETF survey, which found that 48 percent of respondents regarded ETP product descriptions as insufficiently clear. A further 34 per cent of respondents said that, while the descriptions were enough, they could still be improved. Professor Nikolaos Tessaromatis from EDHEC-Risk said at the conference: “There is still a risk of confusion among investors.” The results represent a challenge to the European ETF market’s regulator, the European Securities and Markets Authority (ESMA), which last year set out guidelines seeking clearer labelling of ETPs. (...) EDHEC-Risk’s investor survey also found that 20 percent of investors disagreed with a statement that the new regulatory guidelines from ESMA improved investor protection. (...)"
Copyright Index Universe [Full text]
IPE (28/03/2013)
EDHEC survey shows growing demand for "actively managed" ETFs
"(…) An EDHEC-Risk Institute survey has shown increasing demand from institutional investors and asset managers for actively managed ETF products, which have become more transparent in the wake of new EU guidelines. According to EDHEC's European ETF Survey – conducted as part of the Amundi ETF research chair at the institute – ETFs remain investors' preferred choice for passive investment, with a majority of the 212 respondents being satisfied with this type of product. While 81% of investors think ETFs should remain beta-producing products, 17% believe they should become more actively managed, EDHEC said. It said this interest in actively managed ETFs was due mainly to increased levels of disclosure and transparency resulting from ESMA's recently unveiled industry guidelines. These guidelines require actively managed ETFs to inform investors in their prospectuses and marketing documents how they are actively managed, and disclose how they will meet their stated investment policies, including the intention or not to outperform an index. EDHEC stressed in its survey that investors had welcomed ESMA's recommendations, with 77% agreeing the guidelines had achieved their stated aim of improving investor protection. (…)"
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Investment Europe (28/03/2013)
EDHEC-Risk ETF survey sees satisfaction with ESMA guidelines
"(...) European ETF investors are generally satisfied with the guidelines put forward by ESMA for investor protection, according to the latest EDHEC European ETF Survey 2012. Taking stock of the views of some 212 European ETF investors, the survey was conducted as part of EDHEC-Risk Institute research into core-satellite and ETF investments. Other findings of the latest annual survey include: • ETFs remain the favourite choice of investors for passive investments • Demand for innovation is high in different asset categories • The great majority of European investors think that ETFs should remain as beta-producing products - 81% of respondents • 77% agree that the ESMA guidelines have achieved their stated aim of improving investor protection. Professor Noël Amenc, director of EDHEC-Risk Institute, said: "There is no doubt that the ETF market has evolved considerably in the past year, with a particular focus on the developing regulatory framework. Investors have sent an important message on the need for transparency to both regulators and product providers." (...)"
Copyright Incisive Media [Full text]
Morningstar (27/03/2013)
Is Smart Beta About to Get Smarter?
"(...) As the debate rages on between proponents of traditional market-cap weighted indexing and those that espouse alternative weighting schemes, the EDHEC-Risk Institute is venturing further into the fray as it prepares to launch a series of indices that seek the advantages of existing smart beta methodologies while managing some of their inherent risks. (...) As part of what it is calling “Smart Beta 2.0,” EDHEC is trying to refocus the smart beta discussion onto these types of risk. For example, if a certain fundamental indexing strategy displays a bias towards small cap value stocks, EDHEC essentially asks the question of what would happen if we tweaked that methodology by starting with a universe of only large, growth companies and then running the same model. If other smart beta strategies tended to overweight certain industries, similar tweaks could reduce the tracking error of such strategies by starting with sector neutrality and only then letting the model select stocks to fill each industry bucket. The idea itself is not entirely new; other smart beta index providers may already accomplish these things to some extent through an initial filtering process. Moreover, some investors may like having a small cap, value bias. But EDHEC’s point is that if you’re an institutional investor you should be aware of those risk factors and be able to choose which ones you want to take. (...) EDHEC intends to offer full transparency on its indices’ methodologies and daily constituents, which means that in theory, an investor or fund provider could replicate them on their own, without licensing EDHEC. (...)"
Copyright Morningstar [Full text]
Financial News (27/03/2013)
Investors want more emerging market ETFs
"(...) Investors in exchange-traded funds want to see more products developed that offer exposure to emerging market equities and debt, according to new research. The EDHEC-Risk Institute survey comes as Financial News prepares to host a panel discussion on the opportunities for generating returns in today’s markets. (...) Investors have increasingly sought access to emerging markets over the last decade and 2012 was a year in which global emerging market ETFs reached record levels of inflows and emerging market equities were the third most popular asset class by inflows. Flows into ETFs offering emerging market exposure have slowed this year, but new research from EDHEC suggests that emerging market bond and equity ETFs are the types of products investors would most like to see developed further. An EDHEC survey of 212 members of the European asset management industry found that 49% of respondents want to see equity emerging market ETFs further developed and 43% would like to see more emerging market bond ETFs. After those two types of products, 38% of investors said they would like to see corporate bond ETFs develop further. (...)"
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FTfm (26/03/2013)
Large spike in ETF usage predicted
"(...) Two-thirds of European investors expect to increase their usage of exchange traded funds, with ETFs predicted to experience much stronger growth than competing financial instruments such as futures, index funds and total return swaps, according to the Nice-based EDHEC-Risk Institute. The latest EDHEC-Risk European ETF survey found that just 4 per cent of investors said that they expected their usage of ETFs to decrease while 67 per cent predicted increased use. European investors’ use of ETFs to invest in commodities, corporate bonds, real estate and infrastructure all rose strongly in 2012 compared with the previous year’s survey, suggesting ETF’s penetration into asset classes beyond equities is continuing to increase. Speaking at the institute’s conference in London on Tuesday, professor Nikolaos Tessaromatis said the strength of investors’ preference for ETFs over other financial instruments was striking. In comparison, only 28 per cent of those surveyed expected their use of futures to rise while 9 per cent said they expected a decline. Total return swaps, which are derivative instruments traded in bilateral over-the-counter deals, appear to be declining in popularity with just 11 per cent predicting increased usage and 30 per cent expecting their usage to fall. Investors’ views were balanced on expected usage of index funds which are generally cheaper than ETFs. Just over a quarter (26 per cent) said they expected their usage of index funds to increase while just under a quarter (24 per cent) said their usage would decline. Professor Tessaromatis said ETFs and futures were perceived to have an edge over total return swaps and index funds in terms of liquidity, transparency and cost. “So it would come as no surprise if ETFs and futures were to take further market share from index funds and total return swaps,” said professor Tessaromatis. (...)"
Copyright Financial Times Fund Management [Full text - Registration required]
Index Universe (26/03/2013)
ESMA Index Rules Spark Market Alarm Bells
"(...) "The way that ESMA defines custom indices as being created on the request of one investor or a limited number of investors does not necessarily signal an opposition to innovation or strategy indices," said Frédéric Ducoulombier, director at EDHEC Risk Institute–Asia. "ESMA may be concerned by the possibility of conflicts of interest and abuse whereby an index would be designed under the influence of an investor or group of investors with a view to then offering it to the detriment of third parties." "This reminds me of scandals in the collateralised debt obligation (CDO) space in the US, where some CDO structures were put together at the instigation of certain hedge funds, with the idea of subsequently betting against the vehicles without the knowledge of the long investors," added Ducoulombier. "Esma may be trying to protect investors against this type of scenario." (...) For all the debate surrounding this section, some see its message as simple. "If you don't want to deal with the transparency required, don't offer your strategy as an index," said EDHEC's Ducoulombier. "People love indices so there is a tendency to push the envelope by offering actively managed strategies in an index wrapping. The clarification brought by the Esma guidelines is very good." Added Ducoulombier: "Indices should be managed in a systematic and transparent manner; there is no place for discretion or opacity. Strategies whose methodologies are either discretionary or considered too proprietary to be disclosed to investors can still be offered outside the index world, including as active ETFs." How popular such a course will prove with investors remains to be seen. (...)"
Copyright Index Universe [Full text]
L'Agefi (12/03/2013)
L'EDHEC propose 30 indices « smart beta » gratuits
"(...) L'EDHEC Risk Institute va mettre gratuitement à la disposition des investisseurs une trentaine d'indices smart beta (minimum variance, equal weight...). Ouvert courant avril, un site intemet dédié rassemblera toutes les informations, renouvelées quotidiennement, les concernant. Les indices (une centaine d'ici à un an) couvriront les marchés développés puis les marchés émergents en fin d'année. Le but est de permettre aux investisseurs de disposer gratuitement de l'information la plus transparente possible sur ces indices dits intelligents. L'objectif de l'institut est de se rémunérer sur le conseil et l'analyse additionnelle, et non sur la mise à disposition de l'information comme c'est le cas avec les fournisseurs d'indices traditionnels. (...)"
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Asset International (20/03/2013)
Smart Beta 2.0 – Or How to See Through Biased Marketing
"(...) Investors considering smart beta approaches are being swayed by biased sales and marketing techniques as the real risk and performance of strategies is often hidden, a new paper has claimed. Poor information and limited access to data means investors are often left with a skewed version of events, the EDHEC-Risk Institute has claimed. "Investment in smart beta presupposes measurement of the systematic risk factors and integration of the factors, not only in absolute terms to evaluate the real risk-adjusted performance created by better diversification of the benchmark, but also in relative terms to limit the tracking error risk and therefore the risk of underperformance in comparison with the cap-weighted index," the paper said. However, most providers of the strategy are found wanting in this regard, the paper entitled "Smart beta 2.0 - Taking the risks of new equity benchmarks into account" reported. "What is the minimal level of information which the smart beta investor should possess in order to evaluate genuine performance and risks? In the area of smart beta indices, one is forced to conclude that the situation is currently inadequate," the authors asserted. Access to data on performance, composition, and risk of smart beta indices is either restricted by the provider for proprietary reasons, or too costly for an investor, the paper said, which makes analysis and like-for-like comparisons very tricky. Additionally, research on smart beta has not yet reached sufficiency in either volume or quality for investors to make up their own minds, the organisation claimed. (...)"
Copyright Asset International [Full text]
CNBC (19/03/2013)
Hedge funds miss out on February stock rally
"(...) Global hedge funds missed out on a rally in European and U.S. shares last month, with all investment strategies delivering below-index returns, EDHEC-Risk data shows. Long\short equity hedge funds, which buy shares they expect to rise and take negative bets on those they expect to fall, returned 0.4 percent last month. They underperformed both the U.S. S&P 500 index and the pan-European FTSEurofirst 300, which were up 1.1 percent and 0.6 percent, respectively, not including additional returns from dividends. Equity market neutral strategies, which aim to immunise themselves against the broader market's trend by hedging their positions, returned 0.3 percent and global macro hedge funds, which make calls on economic developments and can invest across asset classes, returned a negative 0.2 percent. Overall, hedge funds invested in distressed securities were the best performers in February, with a 0.7 percent total return, followed by fixed income strategies at 0.6 percent. (...)"
Copyright CNBC LLC [Full text]
Investment Europe (19/03/2013)
EDHEC-Risk warns of hazards of Smart Beta indices
"(...) The EDHEC-Risk Institute has warned that aspects of traditional smart beta equity indices are inadequate and proposes a new approach which enables better measurement and control of the risks. The new approach, called "Smart Beta 2.0" revolutionises the offerings of advanced equity benchmarks, according to authors Noël Amenc, Felix Goltz and Lionel Martellini. They charge that established Smart Beta "1.0" indices present systematic and specific risks that are neither documented nor explicitly controlled by their promoters. Inadequate information and risk management calls into question the robustness of the performance presented, and implies considerable risk-taking that is not controlled by investors when they choose new equity benchmarks, they explain. EDHEC-Risk recommends the choice of systematic risk factors for smart beta benchmarks be explicit, and made by the investor, not the index promoter. (...)"
Copyright Incisive Media [Full text]
Funds Europe (18/03/2013)
Smart beta investors taking “considerable” risk
"(…) Index promoters do not document or explicitly control risks within their smart beta index offerings, researchers claim, which means that investors are taking a “considerable” risk when theychoose these new equity benchmarks. The EDHEC-Risk Institute says the “inadequate” levels of information and risk management about smart beta indices “calls into question” the robustness of their performance. Smart beta indices have risen in popularity in recent years, propelled partly by the hunt for outperformance against traditional benchmarks for fees cheaper than those that active managers charge. (...) In a study - “Smart Beta 2.0” - EDHEC researchers Noël Amenc, Felix Goltz and Lionel Martellini say that to deal with the problem, the choice of systematic risk factors for smart beta benchmarks should be made explicitly clear. Also, the choice should be made by the investor and not by the index promoter, they say. However, the researchers add that the choice of systemic risk factor, and therefore the associated risk control, is compatible with smart beta benchmark performance, meaning it is possible to maintain performance objectives with so-called smart beta 2.0 indices without excessively exposing these new benchmarks to size or liquidity risk in comparison with cap-weighted indices. (...)"
Copyright Funds Europe [Full text - Registration required]
FTfm (15/03/2013)
EDHEC-Risk undercuts index providers
"(...) Providers of financial indices are facing a new challenge from one of Europe’s leading fund industry research bodies which is planning to offer sophisticated alternative benchmarks for free. The Nice-based EDHEC Risk Institute is to offer 30 “smart beta” indices for free on a dedicated web platform, undercutting commercial index providers. EDHEC’s indices, which are the result of two years of development work, will be unveiled at the institute’s London conference which starts on March 26. Smart beta is an umbrella term for a wide range of investment strategies such as minimum volatility or equal risk portfolios. A growing body of academic evidence suggests that smart beta strategies can deliver better risk-adjusted, long-term returns than conventional market capitalisation-weighted benchmarks. (...) Surveys by EDHEC-Risk suggest that more than 40 per cent of institutional investors are now using alternative weighting schemes such as smart beta in their equity portfolios. But Noël Amenc, director of EDHEC-Risk, says index providers are withholding the data required by investors to perform proper due diligence on smart beta indices. “Index providers have to change their business models,” said Mr Amenc, who is leading a campaign to reform an indexing industry which is enjoying unprecedented profitability because of rapid growth in the popularity of passive investment strategies. Mr Amenc says index providers are failing to provide adequate information about the risks embedded in smart beta indices and investors can face damaging periods of underperformance compared with conventional market cap-weighted indices. In new research published on Monday, EDHEC will say that it is straightforward to improve on the current generation of smart beta indices and that investors, not index providers, should be able to choose the risks to which they are exposed. (...)"
Copyright Financial Times Fund Management [Full text]
Index Universe (15/03/2013)
EDHEC-Risk Challenges Commercial Index Firms' Business Models
"(...) EDHEC-Risk Institute is set to offer investors free access to data on a wide range of so-called "smart beta" indices, in a move that is likely to put major pressure on commercial index providers’ business models. EDHEC-Risk, the financial research institute of France-based EDHEC business school, says it will shortly publish a wide range of data covering popular smart beta equity indices on a new website, scientificbeta.com. The launch, which is expected to take place in the second quarter of this year, is part of a broader drive by EDHEC-Risk for increased transparency in the indexing sector. Earlier this week the institute said that regulators should insist on the full transparency of financial benchmarks to allow index users to assess the risks they incur. Smart beta indices are indices that depart from the traditional methodology of weighting constituents by their market size. The smart beta category includes a wide range of construction techniques, including low-volatility, minimum variance, fundamental indexation, and value and momentum “factor” indices. Smart beta is attracting significant interest from investors disillusioned by the high cost of active management and interested in pursuing similar strategies in a low-cost, replicable index format. However, smart beta indices have up to now been offered on a commercial basis by traditional index firms, who charge licensing fees for access to index information, including performance, constituent and weighting data, construction methodologies and risk metrics. Such licensing fees are often charged on the basis of a percentage share of assets under management, often amounting to multi-million revenues for the firms concerned. By contrast, EDHEC says it will shortly give investors free access to the information and data used in over thirty popular smart beta strategies. (...)"
Copyright Index Universe [Full text]
Financial News (15/03/2013)
EDHEC to lift lid on smart beta indices
"(...) EDHEC-Risk Institute plans to take a significant step in its campaign for greater transparency in the index industry by offering for free the methodology and composition of a variety of so-called “smart beta” strategies. The move is aimed at lifting the lid on the strategies, which attempt to use non-traditional or alternative benchmarks to outperform traditional market cap-weighted indices over the long term. The move will also be a challenge to the current business model of index providers, who charge for access to this data. The research group said on Thursday it will release information about the methodology and components of popular smart beta indices that could allow firms that currently pay providers for that data to replicate the benchmarks on their own. EDHEC has spent about €5m over the last two years to acquire data and construct a number of smart beta indices. It has 25 people working on the project. EDHEC-Risk Institute director Noel Amenc said the information that firms marketing smart beta strategies currently provide is inadequate, that data on indices is too costly and that it is difficult to conduct independent research on smart beta given the way the market currently operates. He said: “We will show to index providers that they can survive with transparency.” He added: “If you’re in the index business, you should be totally transparent on the methodology. People should pay for services, not the secret.” The institute will provide information on the composition and methodology of more straightforward strategies for free and charge a subscription fee to recoup the cost of the data for businesses that want access to information on what it calls “Smart Beta 2.0” strategies. Those new strategies by EDHEC aim to identify - and control - the risks of more mainstream strategies. (...)"
Copyright Financial News [Full text - Registration required]
Funds Europe (March 2013)
EDHEC Research: Brand Protection
Article by Noël Amenc, director at the EDHEC-Risk Institute and Frédéric Ducoulombier, director at the EDHEC-Risk Institute – Asia
"(…) Applying the onerous restitution liability standards of the draft Ucits V Directive across the Ucits universe would result in significant costs and opportunity costs for investors. Also, communication around the obligation of restitution may mislead non-professional investors into believing they will always be protected against the non-financial components of investment risk, which will not be the case. For example, acts of nature. Last but not least, the absence of contractual discharge for the liability of the depositary in Ucits V creates adverse selection and moral hazard issues at the expense of depositaries and soundness of the industry. Against this backdrop, in recent research supported by Caceis, EDHEC-Risk Institute has put forward a proposal for a major upgrade of the European fund management industry. The proposal is to create a subcategory of Ucits structured to avoid exposure to non-financial risks by construction. Named “restricted Ucits”, it would be meant for retail investors. This proposal addresses the observation that with the evolution of the Ucits framework, the label is applied to funds that are exposed to widely different levels of non-financial risks. Our recommendation is to align the liability regime of Ucits depositaries with that of the Alternative Investment Fund Managers Directive (AIFMD), and simultaneously encourage the creation of a subset of Ucits that would be covered by an unconditional guarantee of restitution, with relief limited to narrow force majeure situations. The objective is to reduce non-financial risks to an absolute minimum within a subset of the Ucits universe by restricting assets and practices that are inherently risky. (...)"
Copyright Funds Europe [Full text - Registration required]
IPE (14/03/2013)
Public pension liability disclosure a "win for transparency" – MEP
"(…) The chair of the European Parliament's economic committee has welcomed as a "win for transparency and good governance" rules that would force all EU member states to disclose unfunded pension liabilities. (...) A recent study by EDHEC-Risk Institute recently stressed the importance to investors to correctly evaluate the impact of pension liabilities. At the time, it noted that some countries reported liabilities accounting for 400% of GDP if a 3% discount rate was applied, and that the inclusion of liabilities presented investors with a different picture than one ratings agencies would otherwise fashion. "As such, countries with virtuous public finances in the Maastricht sense," it said, citing Sweden, Luxembourg and Denmark for their compliance with the EU's 3% annual deficit cap, "are much less virtuous if their public pension commitments are taken into account, while the situation of countries such as Spain, Italy or even Portugal is relatively better." (…)"
Copyright IPE [Full text - Registration required]
Hedge Fund Journal (13/03/2013)
EDHEC-Risk: Beware false governance promises
"(...) In the context of the ongoing regulatory debate on financial benchmarks and the recent consultations by the International Organisation of Securities Commissions (IOSCO) and the European Securities and Markets Authority (ESMA)/European Banking Authority (EBA), EDHEC-Risk Institute wishes to underline that transparency is both crucial to allowing users to assess the risks, relevance and suitability of indices and the most powerful tool to mitigate conflicts of interests existing across the indexing industry. EDHEC-Risk Institute is concerned that discussions pertaining to define an “adequate level of transparency” and balance the needs of index users with the purported necessities of confidentiality or intellectual property protection may result in a framework that falls short of providing users with the information they need to discharge their due diligence responsibilities (at a reasonable cost or at all). (...) EDHEC-Risk Institute considers that the appropriate level of transparency is full transparency of both methodology and historical information provided on a fair, non-discriminatory basis and at reasonable cost (which is not currently the case). Historical information should include the values, constituents, and weights of indices as well as documentation describing the basis for and justification of each discretionary decision and change of methodology. Such transparency not only allows index users to understand the benchmark and its construction principles but also enables them to independently replicate its track record, gauge the systematic character of its methodology and conduct performance and risk analyses so as to assess its relevance and suitability against their specific goals. (...)"
Copyright Hedge Fund Journal [Full text]
L'Agefi (12/03/2013)
Benchmarks: EDHEC warns against the false promises of governance
"(...) EDHEC-Risk Institute, in a statement published on March 11th, disagrees with the position of the ESMA Securities and Markets Stakeholder Group (SMSG) in its advice to ESMA dated 26 February 2013, which not only makes the assumption that the governance approach and transparency approach are substitutable and that therefore a lack of transparency could be compensated by an improvement in the rules of governance, but also presents the governance approach as the high road and transparency as a fallback solution enabling external monitoring to be carried out in the absence of “sound governance mechanisms.” As an academic institution, EDHEC-Risk Institute wishes to recall that the position of the SMSG is in total contradiction with research results which show clearly that the efficiency and integrity of a market are directly related to the quantity and quality of the information available and not to the goodwill displayed by participants in the market. EDHEC also points out that smart beta indices contain exposures to different risk factors than cap-weighted indices and rely on methodologies that obviously present model and parameter estimation risks. It is therefore essential for investors to be able to carry out risk analysis easily and to avail of non-biased information on the quality of track records and the robustness of the performance displayed by index providers. (...)"
Copyright L'Agefi [Full text]
L'Agefi (07/03/2013)
Indices : l'EDHEC met en garde contre les excès de gouvernance
"(...) L'avis du Securities and Markets Stakeholder Group (SMSG) de l'ESMA en date du 26 février laisse non seulement penser qu'en matière d'indices les approches de gouvernance réglementaires et de transparence seraient interchangeables mais encore que l'approche de gouvernance serait la voie royale tandis que la transparence serait une solution de secours, constate l'EDHEC Risk Institute. Cet organisme tient à souligner en tant qu'établissement universitaire que cette position du SMSG est en totale contradiction avec le résultat de recherche montrant clairement que l'efficience et l'intégrité d'un marché sont directement proportionnelles à la quantité et à la qualité de l'information disponible et non à la bonne volonté dont peuvent faire preuve les intervenants sur ce marché. De plus, l'avis du SMSG va clairement à l'encontre de l'engagement de l'ESMA en faveur de la transparence dans ses directives récentes sur les ETF et d'autres questions liées aux fonds coordonnés. Par ailleurs, l'EDHEC souligne que les nouveaux indices dits de smart beta recouvrent des expositions à d'autres facteurs de risques que les indicateurs capi-pondérés et se fondent sur des méthodologies qui comportent d'évidence des risques d'estimation des modèles et des paramètres. Il est donc essentiel que les investisseurs puissent effectuer facilement une analyse du risque et disposer d'informations non biaisées sur la qualité des historiques de performances et la robustesse de la performance affichée par les fournisseurs d'indices. (...)"
Copyright L'Agefi [Full text - French]
FTfm (11/03/2013)
Call for full index transparency
"(...) European regulators should insist that all financial indices are fully transparent to ensure continued investor confidence in the rapidly growing index funds market, says EDHEC-Risk Institute. EDHEC is concerned that index transparency standards could be diluted if the European Securities and Markets Authority follows recommendations from the Securities and Markets Stakeholder Group (SMSG), a consultation body that advises Esma, the regional regulator. The SMSG wants index providers to be allowed to use an independent third party or committee to oversee the production of indices. But Noël Amenc, director of the EDHEC-Risk Institute, says the SMSG’s position is in “total contradiction with the desire for transparency shown by Esma”. He argues that regulators should resist the temptation to lower transparency standards, which would ensue with the “governance” approach suggested by the SMSG. “Governance mechanisms have too often proved ineffective at ensuring good behaviour,” says Mr Amenc, adding that regulators should be careful not to create a false sense of confidence that the conflicts of interest faced by index providers have been dealt with. Esma is currently considering responses to a consultation paper that seeks to establish principles for the calculation of benchmark indices. Esma, which is working in parallel with the International Organisation of Securities Commissions on benchmarks, is expected to publish its conclusions before the summer. Mr Amenc said EDHEC was supportive of innovations such as “smart beta” or strategy indices that could bring real benefits to investors. But it was essential that methodologies of new indices should be transparent so users could evaluate their distinct risks. “Opacity should not be tolerated as blanket protection against intellectual property infringements or, in the context of indexing, presented as a way to protect the interests of investors,” warned Mr Amenc. (...)"
Copyright Financial Times Fund Management [Full text - Registration required]
Citywire Wealth Manager (11/03/2013)
Index construction: leading body warns against ‘false promises’
"(…) A leading research body has warned against focusing on stronger governance in index construction at the expense of transparency, as it has proven too ‘ineffective’. The EDHEC-Risk Institute’s recommendations on financial benchmarks come in response to European regulator’s consultation papers on the principles that should be used to underpin the creation of indices. The body cautions regulators against the temptation to trade lower levels of transparency against stronger governance or stricter standards, because the latter have proved ‘ineffective at ensuring good behaviour or protecting the interests they are expected to defend.’ EDHEC said as a result, the principles can at best support transparency and at worst ‘exacerbate moral hazard.’ The body said it ‘also wishes to warn regulators against promoting a false sense of confidence by organising or condoning a framework that would give the illusion that conflicts of interest have been dealt with.’ These discussions on governance could pave the way for a regression in terms of transparency for retail funds. EDHEC added it disagrees with the European regulator, Esma, in assuming governance and transparency are interchangeable, and that a lack of transparency could be compensated by an improvement in the rules of governance. The body also disagrees with Esma’s representation of governance as ‘the high road and transparency as a fall-back solution enabling external monitoring to be carried out in the absence of “sound governance mechanisms.”’ The transparency EDHEC advocates allows index users to understand the benchmark and its construction principles. It would also enable them to independently replicate its track record, gauge the systematic character of its methodology and conduct performance and risk analyses so as to assess its relevance and suitability against their specific goals. (…)"
Copyright Citywire [Full text]
Financial Advisor (11/03/2013)
Why Investors Should Care About ETF Index Weightings
"(…) Thirty five years after the first S&P 500 index mutual fund was introduced, the appetite for passive investments continues to grow. But, along with an increased affinity for passive investing has come increasing interest in alternative indexing schemes to the capitalization-weighted approach now dominant in the market. A recent survey of institutional investors by EDHEC-Risk Institute, a financial research center in Nice, France, found that while investors continue to favor passive investments, more than 50 percent see capitalization-weighted indexes as “problematic.” Forty percent of investors surveyed have adopted alternative indexing schemes, according to Noël Amenc, director of the EDHEC-Risk Institute. (...)"
Copyright Charter Financial Publishing Network Inc. [Full text]
Index Universe (11/03/2013)
Insist On Full Index Transparency, Warns EDHEC-Risk
"(...) Regulators should insist on the full transparency of financial benchmarks to allow index users to assess the risks they incur, EDHEC-Risk, the financial research centre of France-based EDHEC business school, said today in a press release. Full index transparency is also the most powerful tool to mitigate conflicts of interest in the indexing business, EDHEC-Risk says. The think tank warned in December that the business of providing financial indices generates multiple conflicts, particularly when an index provider belongs to an entity that trades for its own account or manages portfolios, or if a single firm offers index provision and the provision of stock listing services. EDHEC-Risk’s latest outspoken comments come in response to a recent public statement from the European Securities and Markets Stakeholder Group (SMSG), a consultative body that provides guidance to Europe’s securities market regulator, ESMA. In its statement, released in late February, the SMSG argued that regulators should settle on an approach to index regulation that balances the need for increased transparency with the protection of the intellectual property rights of index providers. The SMSG proposed a dual approach to the regulation of index firms, whereby smaller companies could be forced to reveal details of their indices' make-up and methodology, but larger index firms might be permitted to follow a governance-based regime. Such a governance-based framework would involve an independent committee overseeing the production of indices and benchmarks, with committee members including financial product issuers, as well as investors, suggests the SMSG. However, says EDHEC-Risk, such a dual approach to index regulation risks letting larger benchmark providers off the hook and leaving investors with inadequate information. (...)"
Copyright Index Universe [Full text]
Asia Asset Management (March 2013)
Doing what it says on the tin
"(…) In recent proposals for better management of non-financial risks in the fund management industry, drawn from research supported by CACEIS as part of a research chair at EDHEC-Risk Institute, Noël Amenc, director of EDHEC-Risk Institute, and Frédéric Ducoulombier, director of EDHEC Risk Institute – Asia, sought to limit the risks which emerged during the 2007-2008 crisis and undermined the quality of the UCITS label. In this article, they explain the reasoning behind their proposals. The sophistication of UCITS is one of the principal causes of the rise in non-financial risks in recent years. These risks are not the direct result of positions taken by funds on financial markets and for which they receive a reward proportional to their exposure, but rather produced by the functioning of the value chain of the collective investment management industry itself. Current regulation (AIFMD, UCITS V, MiFID II, IMD II, PRIPS and EMIR), even if it does contain some very positive elements in terms of investor protection against non-financial risks, will not really solve the problem. On the contrary, such security-related discourse pushing for restitution of assets guaranteed by the depositary, which in reality would only relate to a portion of these assets, would give less sophisticated investors, particularly retail investors, a false sense of security, thus leading them to select their funds without taking into account any of the associated non-financial risks. On the other hand, the emphasis put on the depositary’s obligation to return assets (AIFMD and UCITS V) does not directly encourage other stakeholders in the value chain to contribute to the improvement of information and to manage non-financial risks better. (…)"
Copyright Asia Asset Management [Full text - Registration required]
IFAonline.co.uk (07/03/2013)
Level of Asian returns depends on index
"(...) Investors who want to capture the Asian market premium will do so in a better way if they use indices designed with an efficient weighting scheme, according to a study by the EDHEC-Risk Institute. The study found that the standard Asian indices are heavily concentrated in a few large-cap stocks and show severe fluctuations in style and sector exposure. According to the study, most indices allocate as much as 60% of the index weight to only one-fifth of the stocks in the universe. In addition, sector weightings vary widely with the study finding that the weight of Telecom Services stocks in the Hang Seng index fluctuated between less than 10% and 27% over the period analysed. The weight of Consumer Staples stocks in the Indian Nifty Index fluctuated between 3% and 27%. Market indices in more developed countries such as Hong Kong, Japan, Singapore, South Korea and Taiwan demonstrate relatively more stability, whereas market indices in less developed countries China and India display higher variability over time in terms of sector allocation. The research shows that investors who want to capture the Asian market premium will do so in a better way if they use indices designed with an efficient weighting scheme. In addition to carefully considering their geographic exposure, investors clearly need to consider the weighting scheme that will allow them to extract the equity risk premium for a given geography in the best possible way, according to the study. (...)"
Copyright Incisive Media [Full text]
L'Agefi (07/03/2013)
EDHEC : les indices d'actions asiatiques sont déficients
"(...) D'une étude sur les dix principaux indices d'actions asiatiques durant la décennie écoulée, l'EDHEC-Risk Institute tire la conclusion que tous les produits analysés se caractérisent par un « manque prononcé » d'efficience en matière de rendement/risque. Des indices équipondérés utilisant les mêmes composants surperformeraient chacun de ces indices capi-pondérés. Le niveau d'inefficience des indices de marché asiatiques est très comparable à celui des indices européens et américains. L'EDHEC constate que les indices asiatiques standard sont fortement concentrés sur un nombre restreint de grandes capitalisations. La plupart de ces indices attribuent un poids pouvant aller jusqu'à 60 % pour seulement un cinquième des valeurs de l'univers considéré. Cela devrait inciter les investisseurs désireux de construire des portefeuilles d'actions bien diversifiés à rechercher si des solutions plus adaptées peuvent être développées. En outre, l'étude met en évidence que les indices d'actions asiatiques affichent de fortes fluctuations en matière d'exposition sectorielle et de style. (...)"
Copyright L'Agefi [Full text - French]
Hedge Fund Journal (06/03/2013)
Study: Asian stock market indices lack efficiency
"(...) In a study entitled “Assessing the Quality of Asian Stock Market Indices,” researchers at EDHEC-Risk Institute have reported results for 10 major Asian stock market indices over the past decade. Among the key findings of the study: All indices analysed display a pronounced lack of efficiency, in the sense of providing an efficient risk-reward trade-off: for all of them, an equal-weighted index constructed from the same components outperforms the corresponding cap-weighted market index. The levels of inefficiency of Asian market indices were found to be quite comparable to those of European and US indices. The standard Asian indices are heavily concentrated in a few large-cap stocks. Most indices allocate as much as 60% of the index weight to only one-fifth of the stocks in the universe. For investors who are interested in holding well-diversified equity portfolios, one can see these results as a motivation to explore whether more appropriate alternatives can be developed. Asian equity indices show severe fluctuations in style and sector exposures: For example, the weight of Telecom Services stocks in the Hang Seng index fluctuated between less than 10% and 27% over the period analysed. The weight of Consumer Staples stocks in the Indian Nifty Index fluctuated between 3% and 27%. Market indices in more developed countries (Hong Kong, Japan, Singapore, South Korea and Taiwan) demonstrate relatively more stability, whereas market indices in less developed countries (China and India) display higher variability over time in terms of sector allocation. The research shows that investors who want to capture the Asian market premium will do so in a better way if they use indices designed with an efficient weighting scheme. In addition to carefully considering their geographic exposure, investors clearly need to consider the weighting scheme that will allow them to extract the equity risk premium for a given geography in the best possible way. (...)"
Copyright Hedge Fund Journal [Full text]
IPE Asia (06/03/2013)
Asian market indices do not provide an efficient risk/reward trade-off
"(…) Asian stock market indices have displayed a pronounced inability to provide an efficient risk-reward trade-off, according to researchers at EDHEC-Risk Institute. The study of 10 major Asian stock market indices over the past decade - “Assessing the Quality of Asian Stock Market Indices” - shows the standard Asian indices are heavily concentrated in a few large-cap stocks. Most indices allocate as much as 60% of the index weight to only one-fifth of the stocks in the universe.Investors keen to hold well-diversified equity portfolios are advised to be aware of these inefficiencies. “Investors who want to capture the Asian market premium will do so in a better way if they use indices designed with an efficient weighting scheme.” Asian equity indices also show severe fluctuations in style and sector exposures. Market indices in more developed countries (Hong Kong, Japan, Singapore, South Korea and Taiwan) demonstrate relatively more stability, whereas market indices in less developed countries (China and India) display higher variability over time in terms of sector allocation, the study found. “Investors clearly need to consider the weighting scheme that will allow them to extract the equity risk premium for a given geography in the best possible way.” (…)"
Copyright IPE Asia [Full text - Registration required]
Asset International (05/03/2013)
Inefficiency, Thy Name is Asia (Without the Right Index)
"(...) Investors looking to Asian markets for portfolio diversification purposes should be aware of the inefficiencies inherent in the region's equity indices, a new study has claimed. Analysts at the EDHEC-Risk Institute said their research had shown that the region's indices were as inefficient as many in the United States and Europe, but the make-up of indices in Asia was arguably a more important factor for investors to consider. "There has been increasing demand for equity indices in Asia. This is because global investors want to benefit from the region's growth, and consequently from its financial markets," the report from the institute said. "As a lot of US and Europe based investors do not have the expertise to conduct stock picking in Asia, equity investments are often passive for Asian oriented portfolios. Therefore, the question of index quality in Asia is an important issue."(...)"
Copyright Asset International [Full text]
HedgeWeek (05/03/2013)
EDHEC-Risk Institute study highlights inefficiency of Asian stock market indices
"(...) In a study entitled “Assessing the Quality of Asian Stock Market Indices”, researchers at EDHEC-Risk Institute have found that all 10 indices surveyed display a pronounced lack of efficiency in terms of risk-reward trade-off. For all of them, an equal-weighted index constructed from the same components outperforms the corresponding cap-weighted market index. The levels of inefficiency of Asian market indices were found to be quite comparable to those of European and US indices. The standard Asian indices are heavily concentrated in a few large-cap stocks. Most indices allocate as much as 60 per cent of the index weight to only one-fifth of the stocks in the universe. For investors who are interested in holding well-diversified equity portfolios, one can see these results as a motivation to explore whether more appropriate alternatives can be developed. Asian equity indices show severe fluctuations in style and sector exposures. For example, the weight of telecom services stocks in the Hang Seng index fluctuated between less than 10 per cent and 27 per cent over the period analysed. The weight of consumer staples stocks in the Indian Nifty Index fluctuated between three per cent and 27 per cent. Market indices in more developed countries (Hong Kong, Japan, Singapore, South Korea and Taiwan) demonstrate relatively more stability, whereas market indices in less developed countries (China and India) display higher variability over time in terms of sector allocation. The research shows that investors who want to capture the Asian market premium will do so in a better way if they use indices designed with an efficient weighting scheme. In addition to carefully considering their geographic exposure, investors clearly need to consider the weighting scheme that will allow them to extract the equity risk premium for a given geography in the best possible way. (...)"
Copyright GFM Limited [Full text]
Bloomberg Businessweek (05/03/2013)
EDHEC-Risk Institute - Inefficiency in Asian stock market indices
"(...) In a study entitled "Assessing the Quality of Asian Stock Market Indices," researchers at EDHEC-Risk Institute have reported results for 10 major Asian stock market indices over the past decade. Among the key findings of the study: All indices analysed display a pronounced lack of efficiency, in the sense of providing an efficient risk-reward trade-off: for all of them, an equal-weighted index constructed from the same components outperforms the corresponding cap-weighted market index. The levels of inefficiency of Asian market indices were found to be quite comparable to those of European and US indices. The standard Asian indices are heavily concentrated in a few large-cap stocks. Most indices allocate as much as 60% of the index weight to only one-fifth of the stocks in the universe. For investors who are interested in holding well-diversified equity portfolios, one can see these results as a motivation to explore whether more appropriate alternatives can be developed. (...)"
Copyright Bloomberg [Full text]
Investment Magazine (04/03/2013)
Three ways to better manage non-financial risk
Article by Noël Amenc, director of EDHEC-Risk Institute, and Frédéric Ducoulombier, director of EDHEC Risk Institute—Asia
"(…) The recent financial crisis shed light on a number of new sources of risk. On the one hand there was the extreme correlation between the real estate mortgage and equity markets, and on the other hand the extreme price sensitivity of all assets to the counterparty and liquidity risks of the financial system with respect to off-balance-sheet operations such as securitisation. Despite being quite pronounced in 2007/08, the first type of risk was regarded, after the fact, as a logical consequence of increasingly globalised markets and probably of theoretical character – from the perspectives of both investors and regulators – of the very idea of distinct asset classes or categories and the reduction of this risk through its dissemination. The second type of risk led regulators to absolutely want to reduce counterparty and liquidity risks by strongly stressing the need to increase regulatory pressure with regard to proper management of these risks by actors in the financial world. (…)"
Copyright Conexus Financial Pty Ltd. [Full text]
Hubbis (01/03/2013)
Corporate bond indices are not up to the mark, says EDHEC survey
"(...) A recent EDHEC-Risk Institute survey of international investment professionals has found a distinct lack of satisfaction with corporate bond indices. Only 41% of respondents – 74% being asset/wealth managers – said they are satisfied or very satisfied with corporate bond indices. The general consensus was that the fluctuations in corporate bond index risk exposures are unattractive for investors seeking relatively stable exposures. Between 64% and 80% of respondents agreed or strongly agreed that the instability of interest rate risk exposure is problematic. In addition, 45% of respondents agreed or strongly agreed that bond issuers and investors have conflicting interests when it comes to the duration of corporate bonds. The instability of exposure to credit risk was identified as problematic by about two-thirds of respondents, while half of respondents said there is a direct trade-off between an index’s risk factor stability and its investibility. The concerns raised may explain the current relative unpopularity of passive investing in the corporate bond market. (...)"
Copyright Hubbis [Full text]

February 2013

Asia Asset Management (27/02/2013)
EDHEC survey confirms investor dissatisfaction with corporate bond indices
"(…) In a survey entitled ‘Reactions to “A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures”’ researchers at EDHEC-Risk Institute have analysed industry reactions to a previous EDHEC-Risk study on corporate bond indices and confirmed that investors are dissatisfied with the indices currently on offer. (...) As corporate bond indices should allow investors to achieve specific objectives, particularly in managing defined risk factors, it will be increasingly important for index providers to construct indices using methods that account for the stability of these risk factors. We observe unfortunately that the new forms of corporate bond indices do not take this dimension into account. (…)"
Copyright Asia Asset Management [Full text - Registration required]
Index Universe (27/02/2013)
Concerns Raised Over Corporate Bond Indices
"(...) Investors are raising concerns about corporate bond indices, saying that the risks are too high and that there is an unsatisfactory range of indices currently available. The news follows a recent report by EDHEC-Risk Institute, called “A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures,” after a survey of investors. Results from the survey show that only 41 percent of respondents were satisfied or very satisfied with corporate bond indices. "A level which confirms that current corporate bond indices do not meet investors’ needs," the report says. Other results included risks resulting from the instability of corporate bond indices, which included interest rate risk exposure and credit risk exposure. Between 64 percent and 80 percent of respondents agreed or strongly agreed that the instability of interest rate risk exposure is currently a problem. Similarly, 60 percent said that credit risk was a problem, of that 30 percent said they would have the ability to use derivative products to manage instability. Forty-five percent of respondents agreed or strongly agreed that bond issuers and investors have conflicting interests when it comes to the duration of corporate bonds. Using derivative instruments may appear to be a solution to interest rate risk instability, as in principle one can create an overlay strategy that neutralises the fluctuation of risk exposures in the underlying index. However, only 57 percent of respondents indicate that they can use derivatives for such purposes, leaving almost half of them with no tools to manage the instability problem. (...)"
Copyright Index Universe [Full text]
The Asset (27/02/2013)
Investors disgruntled with corporate bond indices, reports institute
"(…) Investors are dissatisfied with the corporate bond indices currently on offer as they also noted that the instability of interest rate risk exposure is problematic, according to survey results from EDHEC-Risk Institute. Only 41% of respondents are satisfied or very satisfied with corporate bond indices, a level which confirms that current corporate bond indices do not meet investor needs while 64% and 80% of respondents agree or strongly agree that on the growing concern on interest rate risk exposure. About 45% of respondents agree or strongly agree that bond issuers and investors have conflicting interests when it comes to the duration of corporate bonds. Using derivative instruments may appear to be a solution to interest rate risk instability, as in principle one can create an overlay strategy that neutralises the fluctuation of risk exposures in the underlying index, but only 57% of respondents indicate that they can use derivatives for such purposes, leaving almost half of them with no tools to manage the instability problem. (…)"
Copyright Asset Publishing and Research Limited [Full text]
Benefits and Pensions Monitor (27/02/2013)
Investors Unhappy With Corporate Bond Indices
"(...) Only 41 per cent of investors are satisfied or very satisfied with corporate bond indices, a level which confirms that current corporate bond indices do not meet investor needs, says an EDHEC-Risk Institute survey. ‘Reactions to a Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures’ found the instability of corporate bond indice risk factor exposures was affirmed by the majority of respondents. As well, between 64 per cent and 80 per cent of respondents agree or strongly agree that the instability of interest rate risk exposure is problematic. Using derivative instruments may appear to be a solution to interest rate risk instability, as in principle one can create an overlay strategy that neutralizes the fluctuation of risk exposures in the underlying index, but only 57 per cent of respondents indicate that they can use derivatives for such purposes, leaving almost half of them with no tools to manage the instability problem. (...)"
Copyright Benefits and Pensions Monitor [Full text]
Hedge Fund Journal (27/02/2013)
Investors dissatisfied with corporate bond indices
"(...) In a survey entitled Reactions to "A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures" researchers at EDHEC-Risk Institute have analysed industry reactions to a previous EDHEC-Risk study on corporate bond indices and confirmed that investors are dissatisfied with the indices currently on offer. Among the main findings of the survey: Only 41% of respondents are satisfied or very satisfied with corporate bond indices, a level which confirms that current corporate bond indices do not meet investor needs. The instability of corporate bond indices’ risk factor exposures was affirmed by the majority of respondents. Between 64% and 80% of respondents agree or strongly agree that the instability of interest rate risk exposure is problematic. 45% of respondents agree or strongly agree that bond issuers and investors have conflicting interests when it comes to the duration of corporate bonds. Using derivative instruments may appear to be a solution to interest rate risk instability, as in principle one can create an overlay strategy that neutralises the fluctuation of risk exposures in the underlying index, but only 57% of respondents indicate that they can use derivatives for such purposes, leaving almost half of them with no tools to manage the instability problem. (...)"
Copyright Hedge Fund Journal [Full text]
European Pensions (26/02/2013)
Investors unhappy with corporate bond indices
"(…) Investors are dissatisfied with corporate bond indices currently on offer, mainly due to their instability of risk exposure, EDHEC-Risk Institute has said based on analysis of industry reactions to its previous study on these indices. The survey, entitled Reactions to ‘A Review of Corporate Bond Indices: Construction Principles, Return Heterogeneity, and Fluctuations in Risk Exposures’, found that only 41 per cent of respondents were satisfied or very satisfied with corporate bond indices. Furthermore, between 64 and 80 per cent agreed or strongly agreed that the instability of the indices’ interest rate risk exposure is problematic, while 45 per cent agreed or strongly agreed that bond issuers and investors have conflicting interests when it comes to the duration of corporate bonds. While derivative instruments can form a solution to this instability, only 57 per cent of respondents can use derivatives for such purposes, leaving the other 43 per cent with no tools to manage the instability problem. Two-thirds of respondents also marked the instability of credit risk exposure as problematic, with only a third having the ability to use derivatives to manage instability. (…)"
Copyright European Pensions [Full text]
Portfolio Adviser (26/02/2013)
Corporate bond indices unsatisfactory for investors
"(…) Fewer than half of investors believe current corporate bond indices meet their needs and the majority view risk exposure instability as a cause for concern, a survey by the EDHEC-Risk Institute has found. Just 41% of respondents stated they were satisfied with indices, while up to 80% agree the instability of interest rate exposure is problematic. Around two thirds of respondents also felt that the instability of exposure to credit risk is unacceptable. Exposure to both credit risk and interest rate risk can be managed using derivative instruments, but just 33% and 43% of investors have the ability to use derivatives to dilute the respective issues. Index providers creating indices that are intended to be the foundation of an investment vehicle are likely to encounter difficulties, as almost half of respondents recognise that there is a direct trade-off between the index’s risk factor stability and its investability. (...)"
Copyright Last Word Media Limited [Full text]
IPE (26/02/2013)
Asset managers voice concerns over corporate bond indices
"(…) Asset managers have grown increasingly concerned about the instability of corporate bond indices at a time when investors are shifting from sovereign debt to corporate bonds, according to a EDHEC-Risk Institute study. Of the nearly 70 asset and wealth managers surveyed, only 41% said they were "satisfied" or "very satisfied" with corporate bond indices. EDHEC said: "As corporate bond indices should allow investors to achieve specific objectives, particularly in managing defined risk factors, it will be increasingly important for index providers to construct indices using methods that account for the stability of these risk factors. "We observe, unfortunately, that the new forms of corporate bond indices do not take this dimension into account." Against this backdrop, investors could use derivatives instruments as a solution to interest rate risk instability, creating an overlay strategy that neutralises the fluctuation of risk exposures in the underlying index, EDHEC said. However, only 57% of respondents to its survey said they could use derivatives for such purposes, leaving almost half of them with no tools to manage bond index instability issues. EDHEC pointed out that corporate bonds had long been considered a standard asset class and represented a significant amount of investment. (…)"
Copyright IPE [Full text - Registration required]
Investment Europe (26/02/2013)
Investors dissatisfied with corporate bond indices – EDHEC-Risk report
"(...) A survey by researchers at the EDHEC-Risk Institute has indicated that a significant majority of those polled feel that available corporate bond indices do not meet investor needs. (...) Nearly half those polled recognise there is a direct trade-off between an index's risk factor stability and its investability, which will probably present obstacles to providers who wish to create indices as the foundation of an investment vehicle. The various issues identified for corporate bond indices may be one of the reasons for the current relative unpopularity of passive investing in the corporate bond market, the survey report said. Corporate bond indices should allow investors to achieve specific objectives, particularly in managing defined risk factors, so it will be increasingly important for providers to construct indices using methods that account for the stability of these risk factors. "We observe unfortunately that the new forms of corporate bond indices do not take this dimension into account," the Institute's report said. (...)"
Copyright Incisive Media [Full text]
Les Echos (22/02/2013)
La formation continue, nouvelle activité lucrative des grandes écoles
"(...) A l'EDHEC aussi, programmes sur mesure et formation continue sont une réalité. Mais l'idée que tout cela serait nouveau agace quelque peu. L'activité formation continue représente 14 % du chiffre d'affaires de l'école. « Elle est en progression régulière depuis dix ans », indique Benoît Arnaud, qui pilote cette activité pour le groupe et revendique un temps d'avance par rapport aux autres écoles. « La formation continue n'est pas pour nous un relais de croissance, ni quelque chose qui vient en plus quand on a du mal à boucler un budget, c'est le coeur de notre activité », insiste-t-il. L'EDHEC a développé la formation continue en créant un centre de recherche et de formation en finance reconnu, l'EDHEC Risk Institute. (...)"
Copyright Les Echos [Full text - French - Registration required]
Citywire (20/02/2013)
Finally, hedge funds deliver: Equity strategies hit eight-month high
"(…) Hedge funds enjoyed a strong start to 2013 with strategies exposed to equity risk posting their best returns in eight months. As global markets gained momentum, a spread of hedge funds strategies delivered positive returns, with long/short equity funds posting a typical 3.40% for last month, while event driven strategies delivered 2.26%. Recent reports by the EDHEC-Risk Institute found some strategies such as short selling cost hedge funds dear during 2012. With a number of stock markets opening the year on a high, it is perhaps unsurprising short selling continued to hold them back in January. According to the EDHEC, these strategies posted losses of 4.9% during January, while the other 12 strategies it monitored ended the month in positive territory. (…)"
Copyright Citywire [Full text]
Portfolio Adviser (19/02/2013)
‘Disappointed’ hedge fund investors see uptick in January
"(...) Hedge fund returns continued on an upward trajectory in January, as equity-exposed strategies and funds of hedge funds posted the highest returns for a number of months. Data provided by the EDHEC-Risk Institute shows that long/short equity returned 3.4%, and equity market neutral and event-driven posted 1.6% and 2.26% respectively, the highest returns in the past eight months. The funds of hedge funds sector, meanwhile, made a 2.15% gain in the first month of the year, its highest since May 2011. CTA global, which had registered losses for the ten months until December, generated positive returns for the second consecutive month at 1.86%. (...)"
Copyright Last Word Media Limited [Full text]
FT Adviser (15/02/2013)
Construction risk can diversify a portfolio
Article by Frédéric Blanc-Brude, research director at EDHEC Risk Institute-Asia
"(...) Recent research by EDHEC-Risk Institute in the context of the NATIXIS Research Chair on infrastructure debt investment argues that construction risk guarantees are simply not necessary if scientific portfolio construction methodologies are applied to infrastructure investing. In effect, they are likely to be damaging not only from a public welfare perspective but also from an asset management one. Moral hazard arises from public sector guarantees – large projects that receive blanket (95 per cent to 100 per cent) guarantees of the debt financing create multi-billion pound liabilities for the taxpayer – take Metronet for example. Giving such ‘extremely naïve’ guarantees, in the words of the NAO, is a failure to recognise that construction risk is mostly a function of who is exposed to it. Construction risk is either the result of unforeseen ‘exogenous’ conditions, such as the weather, or that of ‘endogenous’ incentives created by contracts allocating risks to different parties. Contracts that create incentives to control cost overruns can reduce and sometimes eliminate construction risk. A construction firm that is given incentives to control costs, has plenty of experience of how much things cost to build, and is large enough to diversify project-specific construction risk (it is involved in numerous projects in multiple locations), is a good candidate to take construction risk. (...)"
Copyright FT Investment Adviser [Full text]
Ignites Europe (15/02/2013)
IMA speaks out against Tobin tax
"(...) The UK's Investment Management Association (IMA) has added its voice to the growing chorus of opposition against Europe’s proposed financial transaction tax, which was formally unveiled by the European Commission yesterday. (...) Meanwhile, earlier this month, leading French research body EDHEC-Risk Institute wrote an open letter to European Commission president José Manuel Barroso, in which it warned that the so-called Tobin tax risks making the optimal management of long-term investments more expensive.(...)"
Copyright Ignites Europe (a Financial Times service) [Full text - Registration required]
Funds Europe (February 2013)
The EU has designs on you
"(…) The European Commission is calling on all its member states to enact pension reforms at country level. François Cocquemas, of the EDHEC-Risk Institute, takes an indepth look at the white paper. (...) The European Commission published a white paper in February last year entitled An Agenda for Adequate, Safe and Sustainable Pensions. It points out some of the salient issues facing European countries in the near future, and proposes some European-level responses to encourage countries to tackle them. In accordance with the subsidiarity principle, many of the reforms need to be enacted at country level. (...) With recent research we aim to provide an in-depth response to the proposals and with our three key messages in mind, a move towards hybrid pensions could provide a more adequate conceptual framework for European countries to converge towards. (...)"
Copyright Funds Europe [www.funds-europe.com]
FTfm (11/02/2013)
Appetite for smart indices increases
Article by Noël Amenc, director of EDHEC-Risk Institute
"(...) The first generation of smart indices, and notably the indices constructed from the stocks’ economic characteristics, such as fundamentally weighted indices, are embedded solutions that do not distinguish the stockpicking methodology from the weighting methodology. As such, they oblige the investor to be exposed to particular systematic risks that represent the very source of their performance. The second generation of smart indices clearly distinguishes between the stock selection and weighting phases. In doing so, it enables investors to choose the risks to which they wish or do not wish to be exposed. This choice of risk is expressed first by a very specific and controlled definition of the investment universe. An investor wishing to use a better diversified benchmark than a cap-weighted index but little inclined to take on liquidity risk can decide to apply this scheme solely to a very liquid selection of stocks. In the same way, an investor who does not want the diversification of their benchmark to lead them to favour stocks with a value bias can absolutely decide that the diversification method that they choose will only be applied to growth. In recent research published in the Journal of Portfolio Management, we have been able to show that the distinction between the selection and weighting phases, which can be made for most “smart beta” construction methods, could add value both in terms of performance and in controlling the investment risks. Thus the second generation of smart indices provides an answer to previous criticisms that outperformance only came from overexposure to the value and liquidity risk compared with cap-weighted. (...)"
Copyright Financial Times Fund Management [Full text]
Investment Magazine (February 2013)
Towards Efficient Benchmarks of Infrastructure Equity Investments
Article by Frédéric Blanc-Brude, research director at EDHEC Risk Institute–Asia
"(…) While the economics of underlying infrastructure investment suggest a low-risk profile, the experience and research evidence is mixed. In research supported by Meridiam and Campbell Lutyens as part of the Infrastructure Equity Investment Management and Benchmarking research chair at EDHEC-Risk Institute, Frédéric Blanc-Brude explains why and what research and benchmarking efforts are necessary to create investment solutions that realign expectation and performance. (…)"
Copyright Conexus Financial Pty Ltd. [investmentmagazine.com.au]
Ignites Europe (04/02/2013)
EDHEC adds voice to criticism of ‘Tobin tax’
"(...) EDHEC-Risk Institute has become the latest voice from the fund industry to speak out against Europe’s proposed financial transaction tax, reports Investment Europe. The French institute has written an open letter to European Commission president José Manuel Barroso, in which it warns that the so-called Tobin tax risks making the optimal management of long-term investments more expensive. The institute says that the different effects of the financial transaction tax will ultimately lead to a rise in the risk premium required by investors. According to the institute, this increase will affect long-term investors too, writes Investment Europe.(...)"
Copyright Ignites Europe (a Financial Times service) [www.igniteseurope.com]
IPE (04/02/2013)
Brussels should learn from failure of French Tobin tax – EDHEC
"(…) The European Commission's imminent financial transaction tax (FTT) is likely to have no effect on volatility and could actually increase volatility in a worst-case scenario, according to the EDHEC-Risk Institute. In an open letter to European Commission president José Manuel Barroso, professor Noël Amenc, director at EDHEC-Risk Institute, said introducing an FTT – also known as a Tobin tax – faced "serious" implementation challenges. According to him, reducing the convenience of deals by increasing taxes made the optimal management of long-term investments – "which should be dynamic and not static" – more costly. (...) EDHEC finally claimed that implementing the FTT based not only on the location of the transaction or the headquarters of the financial intermediary but also on the primary listing or the nationality of the company was "irrelevant". "It would simply lead to European stocks being disadvantaged in comparison with other geographical regions," Amenc said. (…)"
Copyright IPE [Full text - Registration required]
Investment Magazine (04/02/2013)
An optimal framework for pension plans
Article by Samuel Sender, applied research manager at EDHEC-Risk Institute
"(…) The general framework for occupational pension plans can be described as intra- and intergenerational hybrid pension plans, with risk-sharing mechanisms between members and with sponsors. We define the degree of hybridity of a pension plan as the extent of risk sharing with the sponsor. At one end of the spectrum lie traditional defined-benefit (DB) funds, where all the risk is with the sponsor – as long as it can bear it – and the pension benefit is independent of plan returns. In a DB scheme, the sponsor gives a guarantee to the fund, in exchange for the possibility that its initial cash contribution is reduced so that the pension fund has an underfunded guarantee value. As the degree of hybridity of funds is linked to the degree of risk sharing with the sponsor, collective defined contributions (CDC), which are hybrid pension plans with collective risk sharing, and conditional indexation but without a sponsor, and DC funds, where the risk is entirely borne by individuals. These two systems lie at the other end of the spectrum. However, because the market value of the pension rights in individual DC funds is always equal to the market value of the investment fund where all pension assets are invested and risk is individualised, they stand apart because they are not collective solutions. (…)"
Copyright Conexus Financial Pty Ltd. [Full text]
Global Custodian (02/02/2013)
EDHEC-Risk Institute Says Financial Transaction Tax Would Disadvantage European Stocks
"(…) Noël Amenc, director of the EDHEC-Risk Institute and professor of Finance at the EDHEC Business School, has written an open letter to European Commission President José Manuel Barroso opposing the so-called Tobin tax that may be implemented on financial transactions across the eurozone. (...) The professor says the burden of the tax on financial transactions would make the management of long-term investments more costly; increase liquidity premiums on stocks; make markets less efficient and restrict price discovery; and lead to an increase in risk premium by investors and a rise in the cost of capital. Amenc says this would have a negative impact on economic growth in Europe. Amenc called the introduction of the FTT in France “failed,” noting an average fall of 15% in the volume of stocks that are taxed versus those that are not. Investors are replacing French stocks in their equity portfolios with non-taxed European alternatives, Amenc says. The European Commission has said such a “substitution effect” would not occur if the transaction tax were expanded to a broader geography, but Amenc counters that European stocks as a whole would be at a disadvantage. (…)"
Copyright Global Custodian [Full text - Registration required]
Index Universe (01/02/2013)
EDHEC-Risk Opposes Tobin Tax In Open Letter
"(...) Opposition to the European financial transaction tax (FTT) is intensifying, with European think-tank EDHEC-Risk writing a letter to the European Commission to protest against the measure. The move comes after the European Parliament authorised 11 EU member states to move ahead with the tax. The open letter, addressed to the European Commission’s president Barroso, says that the theoretical arguments supporting the FTT as a measure to reduce volatility are, at best, mixed. “There is evidence to suggest that it has either no effect on volatility or it actually increases volatility; and, introducing an FTT faces serious implementation challenges,” Professor Noël Amenc, director of EDHEC-Risk Institute and professor of finance at EDHEC Business School, said in the letter. (...) Arguments from EDHEC-Risk against a Europe-wide tax include drawing lessons from France’s recent experience with transaction taxes. According to the letter, transactions in French stocks to which the tax is applicable have declined by an average 15 percent, compared to untaxed stocks. ‘Substitution effects’ have occurred between French and foreign stocks from the same sector, says EDHEC-Risk. “Some investors have decided to modify their equity portfolio by underweighting French stocks in favour of non-taxed European firms. This substitution effect will not fail to have consequences on the price of French firms and their capacity to raise capital in order to invest and create employment,” EDHEC said. (...)"
Copyright Index Universe [Full text]
Financial News (01/02/2013)
Opposition to FTT grows in Europe
"(...) France has already gone ahead with the introduction of a 20 basis point tax on the purchase of shares in companies worth in excess of €1bn. Italy authorised the introduction of its version of FTT on shares and derivatives. Spain has been discussing a draft FTT bill. Final implementations will vary, but the European Union has said it will permit the final FTT levy of 10 basis point on bonds and shares and one basis point on the notional value of derivative transactions. The 11 members authorised to introduce it comprise Germany, France, Italy, Spain, Belgium, Austria, Greece, Portugal, Slovakia, Slovenia and Estonia. In an open letter to European Commission Michel Barnier, Noel Amenc, professor of finance at EDHEC Business School, the French academic institution, said: “The theoretical arguments in support of FTT as a measure to reduce volatility are, at best, mixed.” He added that the tax would lead to an increase in the cost of capital “with, a consequential negative impact on economic growth in Europe.” Amenc said: "The Commission should draw lessons from the recent failed introduction of the FTT in France. “The taxed French stocks have recorded an average fall of 15% in volume. Some investors have decided to modify their equity portfolio by underweighting French stocks in favour of non-taxed European firms. PensionsEurope, the European pension fund lobby group, has also come out in opposition to the FTT measure, saying its members would end up being taxed to recover the cost of a financial crisis for which it has not been responsible. (...)"
Copyright Financial News [Full text - Registration required]
Hedge Fund Journal (01/02/2013)
EDHEC-Risk Warnings on Tobin Tax
"(...) In the light of the ongoing discussions on broad implementation of an FTT within the eurozone, EDHEC-Risk Institute points out that reducing the convenience of transactions by increasing taxes: Makes optimal management of long-term investments, which should be dynamic and not static, more costly. This has been shown from more than thirty years of research results, notably those of Robert Merton, Nobel Prize in Economics laureate in 1997, and in the work on the optimal management of risk budgets that EDHEC-Risk Institute has been conducting in recent years as part of its research programme on asset-liability management. Increases the liquidity premium on stocks. Makes markets less efficient and restricts price discovery phenomena. Ultimately, all these elements would lead to an increase in the risk premium required by investors, including long-term investors, and to a rise in the cost of capital, with a consequential negative impact on economic growth in Europe. Before seeking to impose a tax on European stocks, EDHEC-Risk Institute recommends that the Commission draw lessons from the recent failed introduction of the FTT in France. The taxed French stocks have recorded an average fall of 15% in volume compared to stocks that were not concerned. “Substitution effects” have occurred between French and foreign stocks from the same sector. (...)"
Copyright Hedge Fund Journal [Full text]
Investment Europe (01/02/2013)
EDHEC-Risk Institute warns EC's Barroso again on Tobin Tax
"(...) France's highly-regarded EDHEC-Risk Institute has again warned the European Commission, in an open letter to President Jose Manuel Barroso, against introducing the proposed Tobin or Financial Transactions Tax (FTT) across the eurozone. Professor Noel Amenc has reiterated the Institute's research findings which show the theoretical arguments that FTT might reduce volatility are, "at best, mixed; the empirical evidence on the other hand, indicates that a FTT has either no effect on volatility or it actually increases volatility, and introducing an FTT faces serious implementation challenges." Amenc, who is also professor of Finance at EDHEC Business School, says the FTT risks making optimal management of long-term investments, which should be dynamic and not static, more costly. He said this has been shown from more than 30 years of research results, notably those of Robert Merton, Nobel Prize in Economics Laureate in 1997, and in the work on the optimal management of risk budgets that EDHEC-Risk Institute has been conducting in recent years as part of its research programme on asset-liability management. (...)"
Copyright Incisive Media [Full text]
Asia Asset Management (February 2013)
Building benchmarks of unlisted infrastructure equity investment
"(…) In this article, drawn from research carried out with the support of Meridiam Infrastructure and Campbell Lutyens, Frederic Blanc-Brude, research director at EDHEC Risk Institute – Asia, argues that unlisted infrastructure equity benchmarks have the potential to meet the major expectations institutional investors have of infrastructure investment and could provide infrastructure market beta. Suitably diversified infrastructure index portfolios would provide attractive risk-adjusted returns for efficient investment in infrastructure and multi-asset-class diversification. In modern finance theory, separation theorems state that the management of risk and performance is best done via separate portfolios: for a pension fund or insurance company, performance should be obtained through optimal exposure to risk factors in order to minimise the burden of contributions or premia, while hedging liabilities is the role of a separate, dedicated portfolio (Amenc et al. 2010). In this context, the choice of benchmark is central to the portfolio construction exercise. In the general case, once reliable estimates of risk and expected returns have been obtained, one may design efficient proxies for asset class benchmarks. But an assessment of expected returns and risk measures for infrastructure equity investment cannot be derived from existing research results, and instead requires the design of appropriate benchmarks. Although the potential benefits of index-based infrastructure products seem very attractive, our current knowledge based on past experience of private equity funds or listed infrastructure companies is inappropriate to develop such products. (…)"
Copyright Asia Asset Management [Full text - Registration required]

January 2013

Asia Asset Management (29/01/2013)
EDHEC puts out proposals to limit non-financial risks
"(…) In a summary document that concludes three years of research on better management of non-financial risks within the European fund management industry – conducted with the support of CACEIS – EDHEC-Risk Institute is putting forward a series of proposals to limit these risks which emerged during the 2007-2008 crisis and undermined the quality of the UCITS label. For EDHEC-Risk Institute, the sophistication of UCITS is one of the principal causes of a rise in non-financial risks. These risks are not the direct result of positions taken by funds on financial markets and for which they receive a reward proportional to their exposure, but rather produced by the operation of the value chain of the collective investment management industry itself. This analysis also leads to the conclusion that current regulation (AIFMD, UCITS V, MiFID II, IMD II, PRIPS and EMIR), even if it does contain some very positive elements in terms of investor protection against non-financial risks, will not really solve the problem. (…)"
Copyright Asia Asset Management [Full text]
Financial Standard (29/01/2013)
EDHEC-Risk reveals risk control plan
"(...) After a three-year study into the European collective investment scheme industry, the EDHEC-Risk Institute has recommended a system of "shared responsibility" to limit the non-financial risks which emerged following the global financial crisis. The risks refer to those that arise from the operation of the value chain within the industry rather than the investment positions taken by funds on financial markets. The analysis concludes that current regulation of the industry, whilst containing positive elements, does not solve the problem of non-financial risk. EDHEC-Risk has called for a new system of shared responsibility which incentivises fund managers to better manage non-financial risks by associating the level of required regulatory capital with the level of residual non-financial risk taken by the major players in the value chain. It also recommends requiring key investor information documentation to contain a description of risk exposure and how to manage these risks. Lastly, the EDHEC-Risk Institute recommends that a new sub-sector of collective investment schemes be created which is restricted to holding only assets on which it can gain a return without difficulty. (...)"
Copyright Rainmaker Group [Full text]
Euromoney (29/01/2013)
Greenfield diet difficult for investors to digest
"(…) Experts argue that much of the concern around construction risk is the result of the private nature of the loan market. "Because infrastructure debt was privately owned by the banks there was no information available for new investors," says Benjamin Sirgue, head of global infrastructure and projects at Natixis. In October last year the bank launched a three-year research programme into construction risk together with the EDHEC Risk Institute. The first results of the study were published in January. "We decided to open our books to EDHEC Risk Institute so that they can provide independent research on the characteristics of infrastructure debt compared with other asset classes, incorporating a real assessment of construction risk. More and more often people now understand that construction risk in project finance is very different from construction risk in public procurement," he says. "If you build a good and efficient infrastructure debt portfolio you need to have an element of construction risk in there." Ageas will be buying construction loans as part of its partnership with Natixis. "We went deeply through our lending policy and criteria with Ageas and designed a detailed criteria with them that they have appetite for. They have no problem with construction risk," says Sirgue. Although it will not be for everyone, if more light can be shed on the risks that construction truly entails then an institutional appetite for it might develop. "When exogenous construction risk is high and hard to quantify in the case of very large projects (think the Messina Strait) or if its contractual management is too difficult (think London Underground) then public sector guarantees will help," says Frederic Blanc-Brude, research director at EDHEC Risk Institute. But he says that "Hundreds of schools, hospitals and transport and energy projects are both what the economy needs and what investors should require in order to have access to the infrastructure investment narrative. If this kind of pipeline can be developed, construction risk will be a welcome diversifier in debt portfolios and fina ncing infrastructure construction risk with institutional money should become standard practice." (…)"
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European Pensions (28/01/2013)
Proposals published to limit non-financial risks among European funds
"(…) EDHEC-Risk Institute has today recommended a number of key proposals to limit non-financial risks in the European fund management industry which emerged during 2007-8 undermining the quality of the UCITS label. In its new publication Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry, the institute stated that current regulation such as AIFMD, UCITS V, MiFID II, IMDII, PRIPS and EMIR will not solve the problem. Therefore it said that there must be a reinforcement on non-financial risks – particularly with “a requirement for the Key Investor Information Document (KIID) to contain a description of gross risk exposure and how to manage these risks, as well as a synthetic indicator of the fund’s net risks”. In addition, a proposal to increase the responsibility of all actors within the fund management industry has been put forward. EDHEC-Risk Institute outlined that “it will lead to the creation of incentives to better manage non-financial risks by associating the level of required regulatory capital with the level of residual non-financial risk taken by the major players in the value chain". (…)"
Copyright European Pensions [Full text]
Benefits Canada (28/01/2013)
EDHEC-Risk Institute makes recommendations
"(...) The EDHEC-Risk Institute has put forward a series of recommendations aimed at improving management of non-financial risks within the European fund management industry, following three years of research on the topic. The institute says the level of sophistication within the Undertakings for Collective Investment in Transferable Securities (UCITS)—a set of European Union directives—is one of the principal causes of a rise in non-financial risks produced by the operation of the value chain of the collective investment management industry itself. In order to deal with this and add a new dynamic to UCITS, EDHEC-Risk Institute recommends the implementation of regulation and promotion of better practices with regard to non-financial risk. These proposals can be categorized into three major themes. (...)"
Copyright Rogers Publishing Limited [Full text]
Asset International (28/01/2013)
PIMCO to Pensions: Get Real on Liabilities
"(...) PIMCO's report follows follows a study from the EDHEC-Risk Institute, which said that while investors were aware of pressures on public and private pension systems in Europe, a closer look into how each nation measured their liabilities uncovered some surprising results. "Due to the variety of national systems, obtaining a clear view of pension liabilities is not straightforward," the study said. To demonstrate, the institute used a uniform discount rate to measure each member state in the European Union's public pension obligations as a percentage of 2010 GDP. "Ultimately, the values for public pension liabilities that EDHEC-Risk Institute has calculated can lead to solvability analyses that are substantially different from those habitually taken into account by rating agencies or investors, " the study noted. (...)"
Copyright Asset International [Full text]
Investment Europe (28/01/2013)
EDHEC-Risk Institute proposes limits to non-financial risk to secure Ucits label
"(...) EDHEC-Risk Institute, together with Caceis Investor Services, has put forward a series of proposals to limit risks that it says undermined the Ucits label during the 2007-8 financial crisis. Following three years of research, EDHEC-Risk Institute has concluded that Ucits works against itself in terms of non-financial risks. "These risks are not the direct result of positions taken by funds on financial markets and for which they receive a reward proportional to their exposure, but rather produced by the operation of the value chain of the collective investment management industry itself," it said. It adds that the research findings suggest other regulation - AIFMD, Ucits V, MiFID II, IMD II, Prips, Emir - do not solve the problem of non-financial risk, even where they set out to improve investor protection. "On the contrary, such security-related discourse pushing for restitution of assets guaranteed by the depositary, which in reality would only relate to a portion of these assets, would give less sophisticated investors, particularly retail investors, a false sense of security, thus leading them to select their funds without taking into account any of the associated non-financial risks." "On the other hand, the emphasis put on the depositary's obligation to return assets (AIFMD and Ucits V) does not directly encourage other stakeholders in the value chain to contribute to the improvement of information and to manage non-financial risks better." (...)"
Copyright Incisive Media [Full text]
Funds Europe (28/01/2013)
EDHEC Risk Institute seeks to protect Ucits label
"(…) A “Restricted Ucits” label should be created to safeguard investors and the reputation of the Ucits brand, the French EDHEC-Risk Institute says. The sophistication of Ucits funds, made possible by the Ucits III regulations and “exploited to the absolute limit” by the “Newcits” concept, is a principal cause of increased non-financial risks, EDHEC says. EDHEC defines non-financial risk as risks that are not a direct result of positions taken by funds on financial markets but produced elsewhere in the operational chain, such as assets lost by a depositary bank. EDHEC says Restricted Ucits would establish a Ucits category with a scope for investment that is limited to what a depositary can hold and return without difficulty. This means that a depositary should be able to give a total guarantee, which is an expectation under Ucits V. Ucits V, like the Alternative Investment Fund Managers Directive for non-Ucits funds, is moving towards placing greater liability on depositary banks, effectively making depositaries insurers for assets. But EDHEC says that these regulations along with certain others “will not really solve the problem” of non-financial risks. They may even give less sophisticated investors, particularly retail investors, a false sense of security, EDHEC says. Better regulation and practices with regard to non-financial risk are needed, EDHEC says. (...)"
Copyright Funds Europe [Full text - Registration required]
FTfm (28/01/2013)
EDHEC tries to redefine risky funds
"(...) One of Europe’s leading fund industry research bodies is calling for a radical rethink of plans to make investing safer for retail investors. European regulators are moving towards classifying Ucits funds as either “complex” or “non-complex” depending on the complexity of their pay-off structure. Only non-complex funds could then be sold to non-sophisticated investors who did not take advice. However, the Nice-based EDHEC Risk Institute argues that the division should be based on whether “non-financial risks”, ie the risk of losses not caused by a decline in the value of portfolio holdings such as equities and bonds, can be eradicated from a fund. Under this definition, any fund that has counterparty risk via an over-the-counter derivatives transaction or securities lending activities, or holds equities listed in countries with weak clearing systems or dubious property rights, would have to be labelled as a “non-restricted” Ucits, alerting small investors to potential hidden risks. These non-restricted funds would include synthetic exchange traded funds, which rely on swaps to generate their exposure to their underlying market; equity funds that engage in securities lending, including physically backed ETFs; and many emerging market equity funds, with an estimated 25 per cent of developing markets likely to fail EDHEC’s test. “It is very important for the investor to be sure that, when they invest, the label is clear about the safety of the investment,” says Noël Amenc, director of the EDHEC Risk Institute, which drew up its proposals in conjunction with Caceis, a French asset servicer with €2.5tn of assets under custody. (...)"
Copyright Financial Times Fund Management [Full text - Registration required]
IPE (28/01/2013)
Investors neglecting EU member states' pension liabilities – EDHEC
"(…) Investors must do more to measure the impact of pension liabilities on public finances when analysing the solvency of European countries, the EDHEC-Risk Institute has argued. The institute said it was "fundamental" to evaluate the extent to which increasing funding needs and decreasing coverage at public pensions could weigh on public deficits, particularly at a time when structural deficits became a target in the euro-zone. "Due to the variety of national systems, obtaining a clear view of pension liabilities is not straightforward," it added. "The recent 2012 Ageing Report [released by the European Commission last year] goes a long way in providing comparable figures and projections of public pension expenditures." EDHEC, which based its results on the Commission's ageing report, has estimated a net present value of the corresponding liabilities for various discount rates. While for the highest discount rate of 5% the report shows accrued-to-date liabilities around or above 100% of 2010 GDP in 18 EU member states, for a discount rate of 4%, 12 states are above 200% of the same GDP, and in the lowest hypothesis of 3%, 11 countries are above 400%. (…)"
Copyright IPE [Full text - Registration required]
Le Monde (28/01/2013)
Où le coût des retraites pourrait-il dépasser 1 000 % du PIB d'ici à 2060 ?
"(...) Selon une étude de l'EDHEC-Risk Institute, c'est le Grand-Duché qui pourrait connaître les plus grands problèmes de financement public des retraites d'ici à 2060. Plusieurs scénarios sont présentés avec diverses hypothèses, la principale donnant un coût équivalent à 1 280,1 % du produit intérieur brut (PIB) luxembourgeois en valeur 2010. Un risque élevé plane aussi sur la Belgique (795,3 %), Chypre (779,6 %), l'Irlande (670,1 %), le Royaume-Uni (461 %), la Suède (450,8 %) ou la Slovaquie (431 %). A l'inverse, les engagements publics sur les retraites sont excédentaires en Roumanie et en Lettonie, et moins élevés en Finlande (46,9 % du PIB), en Estonie (54,2 %) ou en Bulgarie (93,6 %). En Espagne (126 %), en Italie (139,8 %), en Allemagne (141,1 %), au Portugal (144,3 %), ou en France (177,9 %), la situation apparaît moins déficitaire qu'au Danemark (396,5 %) ou en Autriche (311,8 %). "Des pays aux finances publiques vertueuses au sens de Maastricht - la Suède, le Luxembourg, le Danemark -, le sont moins si leurs engagements publics sur les retraites sont pris en compte ; l'Espagne, l'Italie ou le Portugal présentent une situation relativement meilleure", note l'étude.(...)"
Copyright Le Monde [Full text - French - Registration required]
L'Agefi (28/01/2013)
L'EDHEC-Risk Institute publie ses propositions pour limiter les risques non-financiers dans l'industrie européenne de la gestion collective
"(...) Dans un communiqué de presse, l'EDHEC-Risk institute publie les conclusions d'un document de synthèse comprenant une série de recommandations pour limiter les risques Non-Financiers dans l'Industrie Européenne de la Gestion Collective. Pour EDHEC-Risk Institute, la sophistication des OPCVM est une des principales causes de l'augmentation des risques non-financiers. C'est à dire des risques qui ne dérivent pas directement des positions prises sur les marchés financiers et pour lesquelles les fonds reçoivent une rémunération à proportion de leur exposition mais qui sont le produit du fonctionnement même de la chaîne de valeur de l'industrie de la gestion collective. La première mesure conduirait au renforcement de l'information sur les risques non-financiers avec notamment l'obligation de décrire dans le KIID les risques bruts et leur contrôle et d'y faire figurer un indicateur synthétique des risques nets du fonds. (...) La seconde vise à l'accroissement de la responsabilité de l'ensemble des acteurs de l'industrie de la gestion des fonds. Ce nouveau régime de responsabilité partagée rompt avec l'idée que les dépositaires peuvent protéger les investisseurs contre tous les risques non-financiers, qui sont souvent pris à l'initiative des gérants. (...) Enfin, et c'est probablement la proposition phare de cette étude, EDHEC-Risk Institute recommande, qu'en contrepartie de la sophistication des OPCVM permise par l'évolution réglementaire (UCITS III, EAD) et exploitée jusqu'à son paroxysme par les NewCITS, sophistication qui expose potentiellement les investisseurs à des risques non-financiers plus importants, soit créé un label "Restricted UCITS" établissant une catégorie d'UCITS dont le champ d'investissement serait limité à ce que peut réellement conserver et donc restituer sans difficulté le dépositaire et qui à ce titre pourrait bénéficier d'une garantie totale en matière de risques non-financiers. (...)"
Copyright L'Agefi [Full text - French]
BenefitsPro (25/01/2013)
European market investors need to consider pension risks
"(…) Investors keeping an eye out for opportunities in the still-troubled European market have been warned to take a long-term view of the potential dangers of those nations' pension obligations - as they present a financial time-bomb not unlike costs in the U.S. A recent study by the EDHEC-Risk Institute has suggested that investors take better account of the overall pension liabilities on the books when examining the solvability of European nations and considering plans for moving money into those markets. As the study suggests, more than just the pension systems and their retirees themselves, the systemic issues related to the public finances of the countries involved and the principal-related risks need to be considered when more strategic investments are contemplated. And with structural deficits becoming a target in the Eurozone and beyond, the institute says it is fundamental to evaluate the extent to which the increasing funding needs and the decreasing funding sources of public pensions could add to those deficits - and more instability. Part of the issue, the study notes, is that getting a clear image of the pension liabilities in various nations is a difficult prospect, with nations seemingly on their feet at present facing strategic danger when their long-term pension obligations are taken into consideration. (…)"
Copyright Summit Business Media [Full text]
Insurance Day (25/01/2013)
Special report: Questioning the need for guarantees
"(…) Infrastructure construction risks do not need public sector guarantees but scientific portfolio construction, says Frédéric Blanc-Brude from the EDHEC-Risk Institute Asia. (...) In a report published on January 16 the UK’s National Audit Office (NAO) expressed concerns if the British government, in its desperation to attract pension funds to the infrastructure sector, gave large construction risk guarantees for new projects, substantial liabilities could arise for the British taxpayer. This is an ongoing debate in the UK but it highlights an issue of global relevance: numerous governments are now pushing for the growth of institutional financing of national infrastructure spending plans, while investors are increasingly looking at long-term assets like infrastructure. Recent research by EDHEC-Risk Institute in the context of the Natixis research chair on infrastructure debt investment argues construction risk guarantees are simply not necessary if scientific portfolio construction methodologies are applied to infrastructure investing. In effect, they are likely to be damaging not only from a public welfare perspective but also from an asset-management one. (…)"
Copyright Informa plc [Full text - Registration required]
Money Management (25/01/2013)
Another European problem: public pensions
"(...) Public pension liabilities have emerged as an issue to further cloud the outlook for major European economies, according to a new analysis released this week by the EDHEC-Risk Institute. The analysis of pension commitments in the major European Union economies suggests that those countries which have appeared "virtuous" with respect to their public finances, may not be so virtuous when their pension exposures are taken into account. The EDHEC-Risk Institute analysis said that when public pension liabilities were taken into account, the outcome was "substantially different to those habitually taken into account by ratings agencies and investors". "As such, countries with virtuous public finances in the Maastricht sense, such as, for example, Sweden, Luxembourg or Denmark, are much less virtuous if their public pension commitments are taken into account, while the situation of countries such as Spain, Italy or even Portugal is relatively better," it said. The EDHEC-Risk Institute analysis said that, because of this, investors had to be more vigilant on pensions risk when evaluating the solvency of sovereign issuers. (...)"
Copyright Money Management [Full text]
Financial Standard (25/01/2013)
Public pension liabilities add to eurozone debt woes
"(...) The size and complexity of European Union public pension liabilities masks the funding needs of member countries, according to new research by the EDHEC-Risk Institute. The institute says that Maastricht treaty debt-to-GDP targets are too simplistic given the variety in size and reach of each member's pension systems. As structural deficits come under increased scrutiny, the research house has evaluated how increasing pension liabilities and decreasing funding basis could add to public deficits. While southern European economies have come under intense pressure from the international community for having debt-to-GDP ratios well in excess of 100%, the report found that countries that appear in better fiscal shape could have their economies stretched by their expensive pension systems. "Countries with virtuous public finances in the Maastricht sense, such as for example, Sweden, Luxembourg or Denmark, are much less virtuous if their public pension commitments are taken into account, while the situation of countries such as Spain, Italy, or even Portugal, is relatively better," said the report. Rises in the old-age dependency ratio and unemployment as well as stagnant growth and political upheaval - all prevalent in the eurozone - would add to the risk. The EDHEC-Risk Institute analysis concludes that investors and rating agencies must be more vigilant when evaluating the fiscal health of sovereigns. (...)"
Copyright Rainmaker Group [Full text]
Benefits and Pensions Monitor (25/01/2013)
Investors Need Pension Risk Vigilance
"(...) As structural deficits become a target in the Eurozone and beyond, it is fundamental to evaluate the extent to which the increasing funding needs and the decreasing funding basis of public pensions could add to public deficits, says a study by EDHEC-Risk Institute. However, due to the variety of national systems, obtaining a clear view of pension liabilities is not straightforward. Ultimately, the values for public pension liabilities that the institute has calculated can lead to solvability analyses that are substantially different from those habitually taken into account by ratings agencies or investors. As such, countries with virtuous public finances in the Maastricht sense, such as for example, Sweden, Luxembourg, or Denmark, are much less virtuous if their public pension commitments are taken into account, while the situation of countries such as Spain, Italy, or even Portugal, is relatively better. In this perspective, it recommends investors must be more vigilant on pensions risk when evaluating the solvency of sovereign issuers; European institutions should continue to work towards more transparency and information in the area of public finances, notably with regard to the data available and the modelling of public and private pensions liabilities; and ultimately, one should envisage the inclusion of explicit criteria on pension liabilities, in addition to the goals of the stability and growth pact and the budgetary pact. This inclusion would allow all stakeholders to better evaluate pensions risk and would favour the implementation of indispensable reforms. (...)"
Copyright Benefits and Pensions Monitor [Full text]
European Pensions (24/01/2013)
Solvability analysis should include pension liabilities – EDHEC-Risk Institute
"(…) Investors should take pension liabilities into account more when analysing the solvability of European countries, EDHEC-Risk Institute has said. Because pension systems vary across the continent, obtaining a clear view of the liabilities is not straightforward, but the European Commission’s 2012 Ageing Report provides comparable figures and projections of public pension expenditures up to the year 2060. The present value of pension liabilities is very sensitive to the discount rate chosen, the institute said, but is not negligible in any event. With a high discount rate of 5 per cent, accrued-to-date liabilities are around or above 100 per cent of 2010 GDP in 18 out of 27 EU countries, above 200 per cent in 8 countries and up to 483 per cent for Belgium. With the central hypothesis of a 4 per cent rate, 12 countries are above 200 per cent and 7 countries above 400 per cent. For the lowest rate of 3 per cent, 11 countries are above 400 per cent and six are above 800 per cent of GDP, while it is impossible to calculate a discount rate for three countries whose pension expenditure growth rates are above 3 per cent. (…)"
Copyright European Pensions [Full text]
Investment Europe (24/01/2013)
Assessment of pension funding needs essential, EDHEC-Risk Institute warns
"(...) While public and private pension systems in the EU are under tremendous pressure, it is fundamental to evaluate the extent to which the increasing funding needs, and decreasing funding basis of public pensions, a study by the EDHEC-Risk Institute has warned. On the basis of projections by the 2012 Ageing Report published by the European Commission to the year 2060, EDHEC-Risk Institute has estimated the net present value of the corresponding liabilities for various discount rates. The present value of pension liabilities is very sensitive to the discount rate chosen, but is not negligible in any event. "For the highest discount rate of 5%, we obtain accrued-to-date liabilities around or above 100% of 2010 GDP in 18 countries out of 27; above 200% in 8 countries; and up to 483% for Belgium. With the central hypothesis of a 4% rate, 12 countries are above 200% and 7 countries above 400%. Finally, for the lowest hypothesis of 3%, 11 countries are above 400%, 6 countries are above 800% of GDP, and it is impossible to calculate a discount rate for three countries whose pension expenditure growth rates are above 3%," EDHEC said. Ultimately, the values for public pension liabilities that EDHEC-Risk Institute has calculated can lead to solvability analyses that are substantially different from those habitually taken into account by ratings agencies or investors. (...)"
Copyright Incisive Media [Full text]
Asset International (24/01/2013)
Unseen Pension Obligations Can Undo “Healthy” Economies, Investors Warned
"(...) Global Investors have been warned to look more deeply into a nation's pension liabilities when evaluating the solvency of sovereign issuers, as the seemingly healthiest economies could be undone by these obligations. A study from the EDHEC-Risk Institute said while investors were aware of pressures on public and private pension systems in Europe, a closer look into how each nation measured their liabilities uncovered some surprising results. "Due to the variety of national systems, obtaining a clear view of pension liabilities is not straightforward," the study said. To demonstrate, the institute used a uniform discount rate to measure each member state in the European Union's public pension obligations as a percentage of 2010 GDP. Using a 5% discount rate - which is higher than most European countries are using - it found accrued-to-date discount rates of over 100% for 18 of the 27 European Union member states. The remainder had liabilities of over 200% to GDP. When using the lower 3% discount rate, 11% of the 27 nations had liabilities over 400% as a percentage of GDP, six that were over 800% and the remaining countries were incalculable. (...)"
Copyright Asset International [Full text]
IPE (24/01/2013)
Construction-risk guarantees for infrastructure ‘damaging’
"(…) Construction-risk guarantees for infrastructure projects would be damaging from both a public welfare and an asset management perspective, according to research by EDHEC-Risk Institute. The institute said large infrastructure projects that received "blanket guarantees" on the debt financing – say between 95% and 100% – simply created multi-billion-pound liabilities for the taxpayer. EDHEC based its comments on a report published earlier this month by the UK National Audit Office (NAO). At the time, the NAO expressed concerns that if the UK government, in its desperation to attract pension funds to the infrastructure sector, gave large construction-risk guarantees for new projects, substantial liabilities could arise for the British taxpayer. "This is an ongoing debate in the UK, but it highlights an issue of global relevance," EDHEC said. "Numerous governments are now pushing for the growth of institutional financing of national infrastructure spending plans, while investors are increasingly looking at long-term assets like infrastructure." EDHEC argued that, giving such "extremely naïve" guarantees – in the words of the NAO – is a failure to recognise that construction risk is mostly a function of who is exposed to it. Infrastructure construction risk should not rely on public sector guarantees, EDHEC said, but should instead be based on a scientific portfolio construction. (…)"
Copyright IPE [Full text - Registration required]
L'Agefi (24/01/2013)
Les garanties publiques amputent les revenus des projets d'infrastructures
"(...) Consentir à de généreuses garanties publiques des risques de construction pour attirer les fonds de pension sur les nouveaux projets d'infrastructures est une mauvaise solution, notamment pour le contribuable. Tel est le résultat d'une étude menée par l'EDHEC-Risk Institute dans le cadre de la chaire de recherche Natixis. En effet, ces garanties s'avèrent superfétatoires pourvu que l'on applique des méthodes scientifiques de construction des portefeuilles aux investissements en infrastructures. De fait, insiste l'EDHEC, ces garanties sont nocives non seulement pour le contribuable mais également du point de vue de la gestion d'actifs. Fournir ce genre de garanties avec un taux de couverture très élevé du financement par la dette crée des engagements très importants pour le contribuable et cela revient à nier que le risque de construction est principalement fonction de l'agent qui s'y trouve exposé. L'EDHEC considère qu'investir dans un portefeuille d'obligations d'infrastructures qui ne comporterait pas un certain risque de construction revient à opter pour des rendements plus faibles tout en acceptant éventuellement une prise de risque plus élevée. (...)"
Copyright L'Agefi [www.agefi.fr - French]
Benefits and Pensions Monitor (23/01/2013)
Construction Risk Guarantees Not Necessary
"(...) Research by EDHEC-Risk Institute in the context of the NATIXIS Research Chair on infrastructure debt investment argues that construction risk guarantees are simply not necessary if scientific portfolio construction methodologies are applied to infrastructure investing. A report from the UK National Audit Office expressed concerns that if the British government, in its desperation to attract pension funds to the infrastructure sector, gave large construction risk guarantees for new projects, substantial liabilities could arise for the British taxpayer. The EDHEC-Risk Institute research suggests this is an issue of global relevance as numerous governments are now pushing for the growth of institutional financing of national infrastructure spending plans, while investors are increasingly looking at long-term assets like infrastructure. It says construction risk is reduced by risk transfer in project financing as opposed to being increased by public sector risk guarantees. As a result, investing in a portfolio of infrastructure debt that does not include some construction risk amounts to choosing to receive lower returns while possibly taking more risk. Investors in infrastructure debt should actively seek to invest in construction risk. Moreover, if construction risk can be used to build efficient infrastructure debt portfolios, there is little need to push it out of sight and into new public sector liabilities. (...)"
Copyright Benefits and Pensions Monitor [Full text]
Funds Europe (23/01/2013)
Government guarantees are bad for infrastructure investors, says research
"(…) Public sector guarantees for infrastructure projects reduce returns for investors as well as cost the taxpayer, says the EDHEC-Risk Institute. The institute was responding to concerns the UK government will guarantee debt financing for infrastructure projects to encourage pension funds to invest. Such guarantees introduce a moral hazard because the government bears the cost of failures to hit targets, warns the institute. Investors suffer because investments in projects with no construction risk tend to yield lower returns. “Investing in a portfolio of infrastructure debt that does not include some construction risk amounts to choosing to receive lower returns while possibly taking more risk,” says the institute. The institute says investors should accept that construction projects may be delayed or halted by factors such as bad weather or mismanagement. It adds that by allocating money across many projects, investors can control their exposure to construction risk and be rewarded with better yields. (...)"
Copyright Funds Europe [Full text - Registration required]
European Pensions (23/01/2013)
Not guarantees, but risk diversification needed for infrastructure investing
"(…) Public sector construction risk guarantees are not necessary if scientific portfolio construction methodologies are applied to infrastructure investing, EDHEC-Risk Institute has said, following the ongoing debate in the UK and the growing interest of governments to grow institutional financing of national infrastructure projects, while investors are increasingly looking at long-term assets like infrastructure. Recent research by the institute, in the context of the NATIXIS Research Chair on infrastructure debt investment, found that such guarantees are likely to be damaging both from a public welfare and asset management perspective. It warned that moral hazard arises from such guarantees, as it can create multi-billion pound liabilities for the tax payer. However, construction risk is mostly a function of who is exposed to it. It is either the result of unforeseen ‘exogenous’ conditions, such as the weather, or that of ‘endogenous’ incentives created by contracts allocating risks to different parties. Construction risk can be reduced and sometimes eliminated by contracts that create incentives to control cost overruns. (…)"
Copyright European Pensions [Full text]
IPE (22/01/2013)
Allianz downplays construction risk in £1bn infrastructure fund
"(…) Meanwhile, the EDHEC-Risk Institute has suggested government guarantees that reduce construction risk for pension funds investing in infrastructure projects also damage returns. In a new report, the French business school claims that government guarantees designed to protect investors from construction risk could in fact damage infrastructure investment returns. The report claimed guarantees against endogenous risks such as cost overruns removed incentives to control them, citing median overruns in standard projects versus those with public sector guarantees as 0% and 20%, respectively. Describing blanket guarantees as the result of "a failure to recognise that construction risk is mostly a function of who is exposed to it", the report claimed construction risk could in fact offer "a separate but related" investment opportunity because of the phase-related higher credit spread. "(The) predictable credit-risk transition path suggests the opportunity to diversify infrastructure debt portfolios across the project life-cycle," it said. (…)"
Copyright IPE [Full text - Registration required]
Professional Pensions (22/01/2013)
Institutional investors should ‘actively seek’ construction risk
"(...) EDHEC-Risk Institute research argued investors could increase returns, reduce portfolio risk and diversify infrastructure debt portfolios by including construction risk. It said infrastructure project finance becomes predictably less risky as the project is built, ramps up and becomes fully operational - leaving an opportunity to invest in assets with different risk/return profiles and low correlations throughout a project's lifecycle. The comment comes after the National Audit Office warned last week that taxpayers could be exposed to substantial losses from government guarantees on infrastructure projects, designed to attract investors like pension funds. EDHEC-Risk Institute said: "In other words, investing in a portfolio of infrastructure debt that does not include some construction risk amounts to choosing to receive lower returns while possibly taking more risk. "It follows that investors in infrastructure debt should actively seek to invest in construction risk. Moreover, if construction risk can be used to build efficient infrastructure debt portfolios there is little need to push it out of sight and into new public sector liabilities." (...)"
Copyright Incisive Media Investments Limited [Full text]
Bloomberg Businessweek (22/01/2013)
Infrastructure Construction Risk does not Need Public Sector Guarantees but Scientific Portfolio Construction
"(...) In a report published on January 16, 2013, the UK National Audit Office (NAO) expressed concerns that if the British government, in its desperation to attract pension funds to the infrastructure sector, gave large construction risk guarantees for new projects, substantial liabilities could arise for the British taxpayer. This is an ongoing debate in the UK, but it highlights an issue of global relevance: numerous governments are now pushing for the growth of institutional financing of national infrastructure spending plans, while investors are increasingly looking at long-term assets like infrastructure. Recent research by EDHEC-Risk Institute in the context of the NATIXIS Research Chair on infrastructure debt investment argues that construction risk guarantees are simply not necessary if scientific portfolio construction methodologies are applied to infrastructure investing. In effect, they are likely to be damaging not only from a public welfare perspective but also from an asset management one. (...)"
Copyright Bloomberg [Full text]
Infrastructure Investor (22/01/2013)
Investors should ‘actively seek’ construction risk
"(…) Research from EDHEC Risk Institute, part of France’s EDHEC Business School, suggests that construction risk is a desirable exposure for infrastructure debt investors and should not be ‘pushed out of sight’ as a public sector liability. Pointing to its role as a diversifier within infrastructure debt portfolios, a new study from EDHEC Risk Institute – part of France’s EDHEC Business School – says that construction risk has the ability to increase returns and reduce portfolio risk. The study continues: “It follows that investors in infrastructure debt should actively seek to invest in construction risk. Moreover, if construction risk can be used to build efficient infrastructure debt portfolios there is little need to push it out of sight and into new public sector liabilities.” The study is topical. Its findings come just a week after the UK’s National Audit Office (NAO) expressed concerns that if the UK government gave large construction risk guarantees to infrastructure projects – in an effort to attract pension funds – then substantial liabilities could arise for the UK taxpayer. The EDHEC study adds a further element to the debate. It not only talks about the “damaging” effects of guarantees from a public welfare perspective – as alluded to by the NAO – but says they would also be damaging from an asset management perspective. It says guarantees are not necessary “if scientific portfolio construction methodologies are applied to infrastructure investing”. (...)"
Copyright PEI [Full text - Registration required]
Funds Europe (21/01/2013)
Hedge funds fail to match US stock market
"(…) Not one of the 13 hedge fund strategies watched by the EDHEC-Risk Institute kept track with the United States stock market in 2012. The result must present a challenge to hedge fund providers, which are seeking capital for investment vehicles that typically charge much higher fees than other funds. The top-performing hedge fund strategy in EDHEC's list, distressed securities, returned 13.2% in 2012, while the worst-performing strategy, short selling, returned a loss of 19.3%. In contrast, the S&P 500 index, which investors can access cheaply with a low-cost tracker or exchange-traded fund (ETF), returned 13.4% in 2012. The good performance of the S&P 500 may yet continue, as the index is already up more than 4% this year. (...)"
Copyright Funds Europe [Full text - Registration required]
Financial News (21/01/2013)
Can low-volatility ETFs survive a period of low volatility?
"(...) Low-volatility products, which seek to provide the above-cash returns of the stock market with a less unnerving ride, have proved a hit in the US. (...) Such concentrations can leave investors more exposed than they would like, according to Felix Goltz, head of applied research at EDHEC-Risk Institute in France. He said: “Low-volatility stocks come with other types of risks. Quite often they are more exposed to extreme risk.” (...) However, EDHEC-Risk’s Goltz argues that while some academic papers support the idea of the low-volatility anomaly, others find that altering either the time period studied or the way in which the component stocks are weighted can see the effect quickly disappear. (...)"
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City A.M. (21/01/2013)
Hedge funds disappoint as shares roar on
"(...) Costly hedge funds failed to keep pace with run of the mill stock funds last year, as equity markets proved more profitable than the best performing hedge strategies on average, data shows. Statistics from the EDHEC Risk Alternatives Index show the most profitable hedge fund strategies for investors trailed US equity market returns by almost three percentage points on average in 2012. Distressed securities hedge funds – which buy discounted bits of bankrupt firms and sell them for a profit – performed best over the 12 months, delivering a 13.2 per cent return. Emerging market strategies were the second best, giving a 9.9 per cent return in 2012. But both were outshone by the S&P 500 equity index of the top US companies, which logged a 16 per cent return last year. Two of the most prominent strategies, short selling and CTA global, also performed the worst in 2012, with returns of -19.3 per cent and -2.3 per cent respectively, the data shows. The lack of performance is set to unsettle investors ploughing money into expensive hedge funds expecting returns above that of conventional equities and bonds. (...)"
Copyright Financial News [Full text]
France Info (17/01/2013)
Le porte-parole du groupe PS à l'Assemblée dit-il vrai sur le "plan social" de Renault ?
"(...) "La France a raté sa politique industrielle", explique le chercheur Noël Amenc. "Nos industries ne sont pas sur les bons créneaux et cela fait très longtemps que ça dure", poursuit-il. "Nous avons raté la révolution de l'électronique grand public et surtout celle des nouvelles technologies de l'information et de la communication. Les politiques de filières industrielles ont souvent été une manière de concentrer des subventions sur de grands groupe, au détriment des PME. Or, ce qu'il manque en France, c'est ce qu'il y a en Allemagne : 500 entreprises de taille moyenne, leaders dans des secteurs où la qualité, l'innovation, comptent plus que le prix", conclut Noël Amenc, professeur de finance à l'EDHEC. (...)"
Copyright France Info [Full text - French]
Asset International (16/01/2013)
Equity Infrastructure Investment – The Next Big Thing?
"(...) Leading European academics have begun a research initiative to examine how institutional investors could better access and benchmark equity investment in infrastructure. The EDHEC-Risk Institute has launched a research chair to concentrate on an increasingly popular asset class, but using a relatively unused manner of investment. "It will focus on fostering data collection and aggregation from investors and on improving the benchmarking of return distributions for direct and indirect investment in infrastructure equity by developing an academically-validated and industry-recognised index," the institute said this week. Investment firm Meridiam Infrastructure and advisory Campbell Lutyens are co-sponsors of the research chair. To coincide with the launch, the institute has published a foundation paper on the issue that sets out the task in hand. The paper, "Towards Efficient Benchmarks of Infrastructure Equity Investments", highlights a recent research quandary with respect to infrastructure equity investment, which has also been a question for final investors. (...)"
Copyright Asset International [Full text]
Hedge Funds Review (16/01/2013)
News
"(…) Meridiam Infrastructure, Campbell Lutyens and EDHEC-Risk Institute have launched a research chair on equity investment in infrastructure. The institute will conduct research supported on infrastructure equity investment management and benchmarking. The chair will involve a research team made up of three senior researchers (professors and engineers) from EDHEC-Risk's campus in Singapore for the next three years. The research aims to provide a better understanding of the nature and investment profile of equity investment in infrastructure assets. It will focus on fostering data collection and aggregation from investors and on improving the benchmarking of return distributions for direct and indirect investment in infrastructure equity by developing an academically validated and industry-recognised index. (...)"
Copyright Hedge Funds Review [Full text]
NEWSManagers (16/01/2013)
EDHEC endows chair with Meridiam and Campbell Lutyens
"(…) A research chair for equity investments and benchmarking in the area of infrastructure has been created in Singapore by the EDHEC-Risk Institute with Meridiam Infrastructure (EUR2.8bn in assets) and Campbell Lutyens. It will employ up to three senior researchers at the EDHEC campus in Singapore in the next three years. (…)"
Copyright Agefi [www.newsmanagers.com - Registration required]
Infrastructure Investor (15/01/2013)
Meridiam, Campbell Lutyens, join business school infra initiative
"(…) Fund manager Meridiam Infrastructure and its placement agent Campbell Lutyens have sponsored a ‘research chair’ at EDHEC-Risk Institute on infrastructure, according to a press statement. The chair will support research on ‘Infrastructure Equity Investment Management and Bookmarking,’ the statement noted, and recruit a three-person team from the EDHEC-Risk campus in Singapore. The attendant research will aim to “provide a better understanding of the nature and investment profile for equity investment in infrastructure,” and “focus on fostering data collection and aggregation” to improve benchmarking. The benchmarking, according to the statement, will encompass both direct and indirect investment in infrastructure, and help to develop an “academically-validated and industry-recognised index”. Meridiam and Campbell Lutyens will support the chair through 2016. A ‘foundation paper’ on benchmarking infrastructure investment has been published, the statement said. (...)"
Copyright PEI [Full text - Registration required]
Investment Week (14/01/2013)
Interest in hedge funds could rise
"(…) Given the air of trepidation hanging over investors' heads, it seems probable the established macro funds will continue to be sought by those seeking to diversify their portfolios. Equity long / short could prove another option, but as the performance of some retail absolute return vehicles demonstrates, shorting is a hard act to master. That goes for hedge fund managers too. As an EDHEC-Risk Institute report published last October found, hedge funds had made an average annual return from shorting of 0% over the past 11 years. (…)"
Copyright Investment Week [www.investmentweek.co.uk]
Top 1000 Funds (11/01/2013)
EDHEC: a bridge to practical portfolio construction
"(…) The new chairman of EDHEC-Risk Institute’s international advisory board, chief investment strategist at Swedish pension fund AP2, Tomas Franzen, says institutional investors should embrace academia and be open to applying research in the implementation of practical portfolio construction. He says that while investing is part art and part science, it is important to employ science as much as possible and have a scientific approach as part of the investment process. “EDHEC is a nice bridge between a scientific approach and practitioners’ needs and methods for implementation in practical portfolio construction,” he says. EDHEC was born around the same time as AP2 and Franzen says it has made a relevant contribution to his work at the fund. In particular one of the areas of focus that institutional investors have employed is the academic work on more efficient indices and benchmarking of equities portfolios. (...)"
Copyright Top1000funds.com [Full text]
Funds Europe (08/01/2013)
Inside View: Peer Group Comparisons
"(…) Noël Amenc of the EDHEC-Risk Institute examines risk in smart beta indices and argues that not enough information is made available for investors to assess products. (...) There has been more talk about the role of beta in asset management recently. From our viewpoint, this is part of an evolution in asset management that perhaps goes further than the growing momentum towards passive investment for cost reasons or doubts over active managers’ fees. The success of smart beta with institutional investors largely outstrips the initial framework that was established for it, namely that of replacing the natural passive investment reference represented by cap-weighted indices. The reason behind the new indices for the vast majority of investors, and doubtless their promoters, is probably the superiority of their performance compared to traditional cap-weighted indices. Everyone agrees that while cap-weighted indices are the best representation of the market, they do not necessarily constitute an efficient benchmark that can be used as a reference for an informed investor’s strategic allocation. Alternative beta, advanced beta and smart beta are responses from the market to a question that has formed the basis of modern portfolio theory since the work of the Nobel Prize winner Harry Markowitz: how to construct an optimally diversified portfolio. Each solution contains risks – systematic risks and specific risks. (...)"
Copyright Funds Europe [Full text - Registration required]
Insurer CIO (07/01/2013)
Beyond Smart Beta Indexation
"(...) Amenc explains with great detail the success of smart beta with institutional investors, as it largely outstrips the initial framework that was established for it. Notably, replacing the natural passive investment reference represented by cap-weighted indices. Amenc comments that it may be easy to observe that cap-weighted indices have no equivalent when it comes to representing market movements or that they remain the simple reference understood by all investors and stakeholders in the investment industry. However, in the end even the biggest critics of cap-weighted indices constantly refer to cap-weighted indices to evaluate the performance of their new indices. Amenc believes the reason behind the new indices is probably the superiority of their performance compared to traditional cap-weighted indices. Everyone agrees that while cap-weighted indices are the best representation of the market, they do not necessarily constitute an efficient benchmark that can be used as a reference for an informed investor’s strategic allocation. A starting point (for active investment) or an end point (for passive investment) that offers, through its diversification, a good reward for the risks taken by the investor, Amenc clarifies. Each solution contains risks, which can be filed in two categories: systematic risks and specific risks. (...)"
Copyright InsurerCIO, Inc. [Full text]