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EDHEC-Risk Information

EDHEC-Risk in the Press

Articles published in 2012

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December 2012

  • Pensions & Investments (24/12/2012)
    EU economies tap pension funds as financing source
    "(...) However, there's possibly a misunderstanding among institutions of the risk associated with the construction phase of infrastructure projects, said Frederic Blanc-Brude, research director at EDHEC Risk Institute based in Singapore. Mr. Blanc-Brude, who's a specialist in infrastructure finance, said the risk is “not as bad as investors think.” “Public projects have a terrible record” during the construction phase, said Mr. Blanc-Brude, who is leading the Natixis/EDHEC Risk Institute research program on infrastructure debt investment. “But if you look at private projects, the risk of cost overruns has mostly been adequately managed.” Furthermore, “adding a bit of construction risk can help build more efficient infrastructure debt portfolios,” Mr. Blanc-Brude said. (...)"
    Copyright Pensions & Investments [Full text - Registration required]


  • France Inter (24/12/2012)  
    Indices concordants
    "(...) Il le dit d’entrée : "je suis professeur, et dans la vie j’aime agir conformément à ce que j’enseigne. Et là, ce n’était plus possible". Noël Amenc est professeur, en effet. Professeur de finances à l’Ecole des Hautes Etudes Commerciales, l’EDHEC. Depuis 2 ans, il faisait aussi partie du Conseil Scientifique des Indices, au sein de NYSE-Euronext, la société qui gère, notamment, la Bourse de Paris. Mais, il y a quelques semaines, il en a claqué la porte, et voici pourquoi. Le Conseil Scientifique de la Bourse de Paris, c’est lui, par exemple, qui a décidé qu’aujourd’hui (lundi 24 décembre, veille de Noël) Alcatel-Lucent devait quitter le CAC 40, remplacé par Gemalto. Au cours de l’année qui s’achève, c’est encore ce Conseil qui a décidé de "sortir" PSA Peugeot Citroën de l’indice phare de la Bourse de Paris, pour le remplacer par le chimiste Solvay. C’est précisément cette décision qui a poussé Noël Amenc à la démission. Il ne parle pas de malhonnêteté, mais suggère, en revanche, de potentiels "conflits d’intérêts". Et il dénonce, très concrètement, l’absence de règles précises permettant de déterminer quelle société peut faire partie du CAC 40, et quelle autre ne le peut pas. Il existe bien 2 critères "objectifs" (le montant du capital dit "flottant", c'est-à-dire à disposition sur le marché, et le volume des échanges) mais un autre peut aussi compter: l’emprise économique de la société considérée (son histoire, son implantation...). (...)"
    Copyright Radio France [Full text - French]


  • IPE Special Supplement
    EDHEC-Risk Institute Research Insights Winter 2013
    • Structured equity investment strategies for long-term Asian investors
    • Asian volatility indices and volatility products
    • Key results of the EDHEC-Risk Asian Index Survey
    • Who is afraid of construction risk?
    • Avoiding sovereign credit risk exposure in equity portfolios
    • EDHEC-Risk Institute’s response to the European Commission White Paper, An Agenda for Adequate, Safe and Sustainable Pensions
    • Improving risk management in DC and hybrid pension plans

    Copyright IPE [Full text]


  • Funds Europe (December 2012/January 2013)
    EDHEC Research: Pension 2.0
    "(…) Reviewing the occupational pension framework in various countries, Samuel Sender, of the EDHEC-Risk Institute, says there is an urgent need to rethink DC provision. (...)"
    Copyright Funds Europe [Full text - Registration required]


  • Index Universe (19/12/2012)
    Index Business Rife With Conflicts Of Interest, Says EDHEC
    "(...) Despite this year’s LIBOR scandal, regulators risk taking too relaxed a view of standards of governance in the financial index business, says EDHEC-Risk, the financial research centre of EDHEC business school. EDHEC says it's not surprising that regulators have so far focused largely on interest rate and oil price benchmarks in their investigations into the manipulation of key indices. “Outrage at {the} price‐rigging of indicators that are used as benchmarks for contracts {worth} hundreds of trillions of dollars is perfectly understandable,” say EDHEC-Risk’s directors, Noël Amenc and Frédéric Ducoulombier, in a response to the European Commission’s recent consultation document on the regulation of indices. EDHEC-Risk’s reply to the consultation has just been published on the Commission’s website, together with letters from 74 financial institutions, public bodies and other interested parties. But an observation made by the Commission in its consultation document—that other financial indices, such as equity benchmarks, are “straightforward” —is too benign a view, say Amenc and Ducoulombier, who go on in their 17-page submission to point out the many potential conflicts of interest involved in the index business. (...)"
    Copyright Index Universe [Full text]


  • Pensions & Investments (18/12/2012)
    Distressed hedge funds continue to lead in 2012
    "(...) November hedge fund data from EDHEC-Risk, released Tuesday, show that distressed securities hedge funds led all strategies through the first 11 months of 2012. The 10.7% year-to-date return for distressed funds was followed by convertible arbitrage (8.3%), relative value funds (8.1%) and fixed-income arbitrage funds (8%). According to EDHEC, the annualized Sharpe ratio for distressed securities hedge funds is 1.01 since January 2001. These risk-adjusted returns are more than 1.6 times higher than the next-closest strategy: event-driven funds, whose annualized Sharpe ratio was 0.61 through November. (...)"
    Copyright Pensions & Investments [Full text - Registration required]


  • Reuters (18/12/2012)
    European shares rise on U.S. budget deal hopes
    "(...) Nokia is still down 15 percent this year while Alcatel has fallen 13 percent. The two companies have been among the most shorted stocks in Europe in the past few months. The hedge fund strategy - which involves betting on falling stock prices by borrowing shares, selling them, then buying them back more cheaply - has been suffering this year, down 16 percent, according to EDHEC-Risk Institute data. By contrast, the best hedge fund strategy has been to invest in so-called distressed securities - stocks and debt of troubled companies going through restructuring or facing financing issues - up 11 percent year-to-date, according to EDHEC data. (...)"
    Copyright Reuters [Full text]


  • Citywire (18/12/2012)
    Hedge funds caught out as short selling costs them dear
    "(…) Hedge funds have been caught out trying to predict crashing stocks, losing 16% through short selling strategies year to date. According to a fresh analysis, short selling has proved a losing strategy, clocking up the biggest losses of 13 monitored by the EDHEC-Risk Institute. Short selling strategies shed 1.57% in November alone, according to the analysis, and aside from global commodity trading strategies, which lost 0.08%, no other strategy lost hedge funds money during November. Despite a number of investors looking to hedge fund trends as a canny way to root out ideas, it is not the first time traders have landed on the wrong side of short trades. A study published by EDHEC in August found short selling strategies had made nothing. (…)"
    Copyright Citywire [Full text]


  • Reuters (11/12/2012)
    Europe stock-pickers to profit as macro focus wanes
    "(...) European stock investors who bet on a company's core strengths should outperform those guided by macroeconomic and political factors in 2013 as the big picture themes that dominated during the financial crisis recede. (...) Equity funds using the long/short hedge fund strategy, in which managers focus on bottom-up factors lost 5.96 percent in 2011 when markets were highly correlated, underperforming global macro funds, which were down 1.73 percent, data from the EDHEC Risk Institute showed. That trend seems to have already turned. Global macro hedge funds have returned just 2.1 percent this year, against a 5.5 percent return from the long/short strategy. (...)"
    Copyright Reuters [Full text]


  • Pensions & Investments (10/12/2012)
    Attraction to smart beta grows, as does complexity
    "(...) In a separate paper, Noel Amenc, London-based professor of finance at EDHEC Business School, writes that the first generation of smart-beta benchmarks is generally constructed from the stocks' economic characteristics and “do not distinguish the stock-picking methodology from the weighting methodology.” However, the second generation of smart beta “clearly” distinguishes between the two phases, enabling “the investor to choose the risks to which he does or does not wish to be exposed,” Mr. Amenc wrote. Data from EDHEC-Risk Institute reveal about 40% of investors surveyed in Europe and North America already adopted smart-beta indexing strategies. Along with the added complexity, there also is a need for more informed decisions on the different risk factors to which investors are exposed, as well as a clearer understanding of the implementation process, Mr. Amenc wrote in “Beyond Smart Beta Indexation,” which was published last month. (...)"
    Copyright Pensions & Investments [Full text - Registration required]


  • FTfm (10/12/2012)
    Backroom dealing exposed
    "(...) Large asset management groups appear to be routinely co-ordinating internal trades in order to protect funds that are suffering heavy redemptions from being forced to sell stock at fire-sale prices. The findings raise serious questions as to whether fund managers engaging in such “backroom dealing” are violating their fiduciary duty to their own investors by buying stock in order to aid a colleague. (...) “This practice exists but it can be punished if it is not carried out in conditions that protect investors,” said Noël Amenc, director of the EDHEC Risk Institute. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Le Monde (10/12/2012)  
    Le CAC 40 et ses critères de sélection en accusation
    "(...) Professeur de finance à l'Ecole des hautes études commerciales (EDHEC), M. Amenc était l'une des sept personnalités qualifiées - régulateurs, universitaires, analystes, etc. - qui se réunissent quatre fois par an pour choisir les entreprises entrant et sortant des indices français, à commencer par le célèbre CAC 40. (...) Le 6 septembre, lors de l'avant-dernière réunion du CSI, les "sages" ont fait entrer le chimiste belge Solvay dans le CAC 40. "J'étais contre, indique M. Amenc. Il y a un vrai souci sur la nationalité des titres. Les membres du Conseil exercent un pouvoir discrétionnaire. On devrait se contenter de simples critères mathématiques pour déterminer la composition du CAC 40." (...) Mais pour Solvay, "l'essentiel du volume échangé est à Bruxelles, le suivi de la valeur par les analystes se fait à Bruxelles, le groupe fait partie de l'indice-phare de la Bourse belge {BEL-20}. Il n'y a aucune raison de considérer que ce titre est français", assure M. Amenc.(...)"
    Copyright Le Monde [Full text - French - Registration required]


  • Asia Asset Management (December 2012/January 2013)
    Change is coming for pension plans
    "(…) The pension crisis at the turn of the century illustrates the need to improve the stability of funded systems and ensure greater reliance on these systems, as in the future a greater share of retirement income will come from funded pensions. In this article, based on research carried out with the support of AXA Investment Managers, Samuel Sender, applied research manager at EDHEC-Risk Institute, proposes some prescriptions to resolve the pension predicament. (…)"
    Copyright Asia Asset Management [Full text]


  • France Info (07/12/2012)  
    Jean-Marc Ayrault dit-il vrai sur le coût de la nationalisation de Florange ?
    "(...) Noël Amenc, professeur de finance à l'EDHEC, explique que "si on coupe tous les ponts avec le groupe Mittal, il faut faire vivre cette entreprise, il faut à la fois gérer ses approvisionnements, payer ses approvisionnements, et aussi chercher des clients, financer des créances clients. L'argent ne va pas rentrer immédiatement en cash. Il faut aussi trouver de nouveaux marchés. Donc il faut un fond de sécurité, un fond de roulement qui est estimé {...} entre 100 et 300 millions d'euros". Noel Amenc conclut que si l'on retient l'hypothèse basse, le coût aurait été de 800 millions d'euros, en hypothèse haute, 1,2 milliard. Pour lui, "Un milliard, le chiffre du Premier ministre, est un chiffre {...} réaliste". (...)"
    Copyright Radio France [Full text - French]


  • Investment Europe (03/12/2012)
    EDHEC reviews impact of Solvency II on bond management
    "(...) The one-size-fits-all approach to Solvency II regulation under EIOPA could spell trouble where those affected rely on bonds of different types and durations, suggests research from EDHEC, the French business school. The challenge the European Insurance and Occupational Pensions Authority now has is finding a formula that is sufficiently flexible to ensure the regulation is met, but without forcing those regulated towards any one type of bond or duration. (...)"
    Copyright Incisive Media [Full text]


  • Investment Europe (03/12/2012)
    AMP Capital expands infrastructure debt offering
    "(...) Dr Arjuna Sittampalam, research associate with EDHEC-Risk Institute agrees that the long-term nature of this asset class is a natural fit for such institutional investors as pension funds. However, he notes that in Europe infrastructure typically accounts for less than 3% of their allocations, much lower than the 10% in Canada and Australia. In his view, the obstacles in the way of increasing allocation to the asset class are the fragmentation of the pension scene in Europe, regulatory constraints, the scarcity of project finance and lack of supply. But with political support, Sittampalam believes the sector still has significant growth potential. Not all the benefits will be absorbed by the asset management industry, but he expects that "there is every chance that {its} exposure to infrastructure might amount to at least a few trillion dollars over the next decade or so." Compared to the total size of the global wealth industry, which stands at around $100-150trn, this is a relatively significant part of the pot. (...)"
    Copyright Incisive Media [Full text]


  • Hedge Funds Review (03/12/2012)
    People moves
    "(...) EDHEC-Risk Institute has appointed Tomas Franzén, chief investment strategist with Andra AP-fonden (AP2), the second Swedish national pension fund, as chairman of its international advisory board. Franzén succeeds Theo Jeurissen, former director of investments at PMT, the Dutch industry-wide pension fund, and former chairman of the investors' committee of the Dutch Association of Pension Funds, who has recently retired. (...)"
    Copyright Hedge Funds Review [Full text - Registration required]


  • IPE (01/12/2012)
    Hedge Funds: Alpha-hunting with funds of funds
    "(…) Peter Meier, Oliver Liechti and Patrick Dütsch run hundreds of FoHFs through a factor model and find those focused on trading strategies delivering the best returns and the highest alphas. (...) The hedgegate platform classifies the funds into five categories: ‘diversified’ (Div), ‘equity hedged’ (F-EH), ‘focused non-directional’ (F-ND), ‘focused trading’ (F-TR) and ‘uncorrelated’ (Uncorr). The classification is purely quantitative and return-based. Another factor model, using the sub-style indices of three databases (Dow Jones Credit Suisse, EDHEC and HFR) delivers the most important style exposures of each FoHF. If, for example, the factor exposure for global macro and managed futures surpasses a pre-set threshold, the fund is classified as ‘focused trading’ (F-TR). (…)"
    Copyright IPE [Full text - Registration required]


November 2012

  • Asia Asset Management (November 2012)
    Investor lessons from volatility ETNs
    "(…) Gaining volatility exposure has become easier for investors with the introduction of volatility exchange-traded notes (ETNs) and volatility exchange-traded funds (ETFs), and some of these products have become very popular. In this article, Stoyan Stoyanov, head of research with EDHEC Risk Institute–Asia in Singapore, uses the recent crisis with TVIX – a volatility ETN – to underline important differences between ETNs and ETFs. He also emphasises an important feature of these products – that they track constant maturity VIX futures indices rather than the VIX index itself – which has an impact on the quality of the volatility exposure because of the roll-over costs and the lack of cash-and-carry arbitrage relationship. (…)"
    Copyright Asia Asset Management [Full text]


  • Risk.net (30/11/2012)
    EDHEC-Risk Institute appoints new board member
    "(...) EDHEC-Risk Institute has named Tomas Franzén as chairman of its international advisory board. He replaces Theo Jeurissen, former director of investments at PMT, a Dutch pension fund, and former chairman of the investors' committee of the Dutch Association of Pension Funds. Franzén is chief investment strategist with the Swedish national pension fund, Andra AP-fonden. He joined the fund in 2001, having previously worked as chief strategist at Swedbank Markets between 1998 and 2001. (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Financial News (30/11/2012)
    EDHEC-Risk Institute adds international chairman
    "(...) EDHEC-Risk Institute, the asset and risk management research organisation, has appointed Tomas Franzén as chairman of its international advisory board. Franzén is chief investment strategist with Andra AP-fonden, the second Swedish national pension fund. He succeeds Theo Jeurissen, the former director of investments at Dutch pension fund PMT, who has recently retired. (...)"
    Copyright Financial News [Full text - Registration required]


  • Investment Europe (29/11/2012)
    New Board member for EDHEC-Risk Institute
    "(...) EDHEC-Risk Institute has appointed Tomas Franzén, chief investment strategist with Andra AP-fonden (AP2), the second Swedish national pension fund, as chairman of its international advisory board. (...) The role of EDHEC-Risk Institute's international advisory board is to consult on 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 42 members of the board also advise on the objectives and contents of projects deriving from the expertise of the research centre. (...)"
    Copyright Incisive Media [Full text]


  • Hedge Fund Journal (November 2012)
    EDHEC-Risk Institute appoint Franzén chairman
    "(...) EDHEC-Risk Institute has appointed Tomas Franzén, Chief Investment Strategist with Andra AP-fonden (AP2), the second Swedish national pension fund, as chairman of its international advisory board. Franzén will succeed chairman Theo Jeurissen, who has recently retired. AP2 is one of four buffer-funds within the Swedish national pay-as-you-go pension system. As Chief Investment Strategist, Franzén is responsible for issues related to Investment Policy and Strategic Asset Allocation and is a member of the Executive Committee at AP2. (...)"
    Copyright Hedge Fund Journal [Full text - Registration required]


  • L'Agefi Hebdo (29/11/2012)  
    Mesurer la vraie performance de la gestion active
    Article par Noël Amenc, professeur de finance, directeur de l'EDHEC Risk Institute
    "(...) Tout classement de fonds s'appuie sur une mesure ajustée du risque. Il serait injuste de récompenser un gérant dont la supériorité apparente de la performance ne serait due qu'à une prise de risque supérieure à celle de ses collègues. Cette dimension de la rentabilité ajustée du risque a donné lieu à différents indicateurs et méthodes. Parmi les plus connus, le ratio de Sharpe qui rapporte l'excès de rendement d'un portefeuille par rapport à l 'actif sans risque à son risque total mesuré par son écart type. Indicateur robuste qui ne dépend pas d'un quelconque choix de benchmark, le ratio de Sharpe est considéré comme une mesure absolue de la performance du portefeuille et c'est probablement cette qualité qui en fait sa principale limite. En effet, cet indicateur en ne prenant pas en compte le benchmark représentatif de l'allocation stratégique du fonds pour en mesurer l'excès de rendement, récompense tout autant la performance du marché sur lequel est investi le fonds que celle du fonds lui-même. (...) Pour répondre à ces critiques et difficultés, les classements des Grands Prix de la Gestion d'Actifs de L'Agefi réalisés par EuroPerformance s'appuient sur une méthodologie originale proposée par l'EDHEC et issue des travaux de William Sharpe sur l'analyse de style. Cette méthode est fondée sur une approche de type « return-based style analysis » (RBSA) qui permet, sans avoir connaissance des titres détenus par le fonds, de caractériser son style et, par voie de conséquence, de construire un benchmark adapté et représentatif des risques pris par le gérant. (...)"
    Copyright L'Agefi Hebdo [Full text - French - Registration required]


  • Börsen-Zeitung (28/11/2012)  
    Strategien eines dynamischen Risikomanagements für Pensionsfonds
    "(…) BNP Paribas Investment Partners (BNPP IP) hat zusammen mit dem EDHEC Risk Institute Strategien für ein aktives Risikomanagement erarbeitet. Ziel ist es, die Absicherung der investierten Assets und gleichzeitig die Performance zu verbessern. Dabei zeigt sich bei der Umsetzung in der Praxis, dass der Aufteilung der Portfolien eine besondere Bedeutung zukommt. Das dynamische Risikomanagement passt gegenüber einer starren Allokation das Risiko an den Deckungsgrad an und teilt das Vermögen auf zwei Portfolien auf. Das sogenannte Absicherungsportfolio (Liability-Hedging-Portfolio) sichert die Zahlungsverpflichtungen ab. Das Performance-Seeking-Portfolio (PSP) hingegen dient der Ertragsgewinnung. Die Aufteilung zwischen beiden Portfolien wird in Abhängigkeit vom Deckungsgrad des Pensionsfonds dynamisch gesteuert, um den unterschiedlichen Ansprüchen der Leistungsberechtigten und Anteilseigner gerecht zu werden. (…)"
    Copyright Börsen-Zeitung [Full text]


  • IPE (28/11/2012)
    Wednesday people roundup
    "(…) EDHEC Risk Institute – Tomas Franzén, chief investment strategist with Swedish buffer fund AP2, has been appointed as chairman of the institute's international advisory board. Franzén succeeds Theo Jeurissen, former director of investments at PMT, the Dutch industry-wide metal worker pension fund, who has recently retired. (…)"
    Copyright IPE [Full text - Registration required]


  • Financial News (18/11/2012)
    Are hedge fund ETFs all they seem?
    "(...) There are broadly two ways in which ETFs can provide hedge fund exposure: by replicating the performance of an index of hedge funds by investing in other assets to mimic the results or by directly investing in the funds themselves. Both approaches have pros and cons. The benefit of the first is that by using liquid instruments, such as futures based on equities or currencies to replicate index performance, ETFs should be able to provide the accessibility, liquidity and low costs that have made them popular. The downside is that using factor models to determine what drives results of the funds in the index is as much art as science. Felix Goltz, head of applied research at EDHEC-Risk Institute in France, said: “It is quite difficult to figure out what the hedge funds factor exposures actually are.” (...) But it would be a mistake to write off hedge fund ETFs altogether. Goltz noted that EDHEC’s annual survey of ETF investors this year showed both use and satisfaction for hedge fund ETFs were much lower than for ETFs tracking traditional asset classes but, unsurprisingly, satisfaction tends to move with performance. Satisfaction rates for hedge fund ETFs have fluctuated from as low as 28% to as high as 65% over the past five years, largely in line with the performance of the industry. If hedge fund performance picks up, satisfaction with hedge fund ETFs may well too. (...)"
    Copyright Financial News [Full text - Registration required]


  • FTfm (17/11/2012)
    Investors grapple with sector’s multiple choices
    "(...) Indices’ credibility, as with individual hedge funds, is a big subject of discussion among investors – a group now as likely to include conservative risk-averse pension funds as it is wealthy individuals. Even with a larger-than-ever industry, overseeing assets of more than $2tn, no single comprehensive hedge fund index exists. There are six principal hedge fund indices – Barclays, Dow Jones/Credit Suisse, EDHEC, Eurekahedge, Hedge Fund Intelligence and HFR – that are used almost interchangeably as proxies for hedge fund performance. “Average” returns vary between them, though all tend to produce numbers within a similar range. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Investment Europe (16/11/2012)
    EDHEC-Risk Institute, Natixis set up a research chair
    "(...) EDHEC-Risk Institute and Natixis have partnered to create a research chair entitled "Investment and Governance Characteristics of Infrastructure Debt Instruments". The chair will "contribute to clarifying the nature and investment profile of infrastructure debt instruments in order to reduce the relative shortfall of publicly available investment data on the subject, compared to longer established investment segments", a joint statement said. It will specifically focus on the risk and return characteristics and portfolio diversification benefits that infrastructure debt instruments can bring to institutional investors. The research associated with the Infrastructure Debt Chair will be led by research director Frederic Blanc-Brude, who has more than 10 years research experience in the infrastructure sector and who has published numerous academic papers on this topic. This three-year partnership was signed by Laurent Mignon, Natixis chief executive officer, and Noël Amenc, director of EDHEC-Risk Insitute. (...)"
    Copyright Incisive Media [Full text]


  • L'Agefi (15/11/2012)  
    L’utilisation stratégique augmente
    "(...) Pionnier de la gestion passive, le groupe Vanguard tire incontestablement avantage des défis posés à la gestion active depuis la crise financière. Ainsi que de la sensibilité accrue des investisseurs, institutionnels en particulier, aux coûts de cette gestion. Dans le cadre d’un symposium d’investissement qui s’est tenu mercredi à Zurich, Tim Huver, spécialiste des Exchange Traded Funds (ETF) du géant américain s’est livré à une analyse détaillée des tendances mises en évidence en Europe, sur la base notamment des données recueillies à cet égard par la société de recherche EDHEC-Risk Institute. (...)"
    Copyright L'Agefi [Full text - French]


  • IPE (05/11/2012)
    Corporate defined benefit pension funds are not all equal
    "(…) Assessing the value of a pension plan in deficit with a weak sponsor company is no easy matter. EDHEC-Risk Institute's Lionel Martellini and Vincent Milhau explore your options. (...) Correctly assessing the value of a pension plan in deficit with a weak sponsor company is a real challenge given that no comprehensive model is currently available for analysing the risk that corporations and their pension funds mutually create. In fact, international accounting standards SFAS 87.44 and IAS19.78 recommend that pension obligations be valued on the basis of a discount rate equal to the market yield on AA corporate bonds, the same rate for all firms. While the use of a market rate is arguably preferable to using a constant rate –whether it includes a credit spread component or not – the use of the same market rate to discount all pension liabilities regardless of the sponsor credit rating, pension funding situations and asset allocation policy can hardly be justified. Indeed, it is impossible to imagine that the sponsor's health has no influence on the future value of pensions, or even on their existence. (…)"
    Copyright IPE [Full text - Registration required]


  • Investment Magazine (November 2012)
    Dynamic investment strategies for corporate pension funds in the presence of sponsor risk
    Article by Lionel Martellini, scientific director, and Vincent Milhau, deputy scientific director, of EDHEC-Risk Institute
    "(...) In this article, drawn from the BNP Paribas Investment Partners research chair at EDHEC-Risk Institute on asset-liability management and institutional investment management, Lionel Martellini and Vincent Milhau show that sophisticated dynamic asset allocation strategies could usefully be implemented by pension funds. (...) Previous academic research has emphasised the benefits of dynamic risk-controlled allocation strategies in asset-liability management (ALM). Detemple and Rindisbacher consider a pension fund, which can be either defined-benefit (DB) or defined-contribution (DC), and they derive optimal portfolio and cash extraction policies. When preferences are expressed over the terminal “partial surplus” and the pension fund has constant relative risk aversion (CRRA) utility, the optimal strategies extend some commonly-used forms of dynamic strategies used in an asset-only context, such as CPPI strategies to the ALM context. In a subsequent paper, we analyse the optimal allocation policy for a pension fund facing regulatory constraints on the funding ratio in a continuous-time model with uncertain interest and inflation rates. (...)"
    Copyright Investment Magazine [investmentmagazine.com.au]


  • IPE (01/11/2012)
    Risk Managed Equities: Betting on low-vol stocks
    "(…) EDHEC’s ‘Risk-Efficient index’ products, developed with FTSE, have a very similar starting point to Choueifaty’s maximum diversification. Its aim is to construct portfolios for a maximum Sharpe ratio – identical to traditional portfolio optimisation approaches with the one exception that the usual expected return estimates are replaced by more predictable expected risk estimates. “We know that the volatility, when correctly calculated for a period, has a certain forecasting value for the volatility of the following period,” explains head of applied research Felix Goltz. “Ultimately, the efficient maximum Sharpe ratio can be compared to the minimum-volatility approach, which is also a way of constructing an efficient portfolio without worrying about estimating the stocks’ returns. These two approaches are based on an estimation of the variance-covariance matrix, which is the main ingredient of any portfolio optimisation.” Where EDHEC’s approach differs from a minimum volatility approach is that it affirms the traditional finance theory link between risk and reward and acknowledges that the riskiest stocks are the most profitable over the long term. As a result it avoids a concentration on low-volatility stocks and, in Goltz’s view, enables the diversification budget constituted by the correlations between stocks to be used better. (…)"
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  • Hedge Funds Review (November 2012)
    Comparing commodity indexes throws up useful factors in taking into account fundamentals of the futures markets
    Article by Joëlle Miffre, professor of finance, EDHEC Business School and member of EDHEC-Risk Institute
    "(...) The rising interest of institutional investors for commodities since the early 2000s prompted remarkable financial engineering in the commodity index space which is now in its third generation. Broadly speaking, first-generation commodity indexes are long-only and do not pay much attention to the fundamentals of backwardation and contango. The second-generation indexes are also long-only but attempt to lessen the negative blow on performance of contango while exploiting backwardation. The third-generation indexes are long/short and capitalise on both the price appreciation associated with backwardation and the price depreciation relating to ­contango. Given the recent proliferation of indexes, it has become increasingly bewildering to investors to choose a ­specific index. (...)"
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October 2012

  • Investment Magazine (29/10/2012)
    Long-term investing strategies in private wealth management
    Article by Noël Amenc, Romain Deguest, Lionel Martellini and Vincent Milhau of EDHEC-Risk Institute
    "(...) Asset-liability management (ALM) denotes the adaptation of the portfolio-management process in order to handle the presence of various constraints relating to the commitments that represent the liabilities of an investor. Academic research has suggested that suitable extensions of portfolio-optimisation techniques used by institutional investors (for example, pension funds) could be usefully transposed to the context of private wealth management precisely because they have been engineered to allow for the incorporation in the portfolio-construction process of investors’ specific constraints, objectives and horizons, all of which can possibly be summarised in terms of a single state variable – the value of the “liability” portfolio. (...)"
    Copyright Investment Magazine [Full text]


  • Investor Daily (26/10/2012)
    EDHEC-Risk Institute, NATIXIS establish infrastructure debt research chair
    "(...) The chair will give greater transparency on the nature and investment profile of infrastructure debt instruments to help reduce the relative shortfall of publicly available investment data on the subject, compared to longer established investment segments. It will specifically focus on the risk and return characteristics and portfolio diversification benefits that infrastructure debt instruments can bring to institutional investors. Importantly the chair, led by Research Director Frederic Blanc-Brude, Ph.D., will contribute to facilitating the cooperation between banks and institutional investors in infrastructure debt. "By sponsoring this chair, Natixis aims to help allow institutional investors to play a more active role in the financing of infrastructure investments that are crucial as drivers of growth, productivity and competitiveness", Laurent Mignon, Natixis Chief Executive Officer said. (...)"
    Copyright Investor Daily [Full text]


  • IPE Special Supplement
    EDHEC-Risk Institute Research Insights Autumn 2012
    • A generalised approach to portfolio optimisation: improving performance by constraining portfolio norms
    • Advantages of long-short commodity funds for long-term investors
    • Portfolio allocation decisions in the presence of regimes in asset returns
    • The benefits of volatility derivatives in equity portfolio management
    • What asset-liability management strategy for sovereign wealth funds?
    • Reactions to the EDHEC study ‘Optimal design of corporate market debt programmes in the presence of interest rate and inflation risks’
    • European regulation of the commodity derivatives market – be wary of placebos
    • Reactions to the EDHEC-Risk European Index Survey 2011
    • Insights from the EDHEC-Risk North America Index Survey 2011
    • How to assess hedge fund performance in a robust manner
    • Risk-managed investing in non-cap-weighted equity indices

    Copyright IPE [Full text]


  • Infrastructure Journal (26/10/2012)
    An Infrastructure Carol
    "(...) The other great need highlighted on Tuesday was for more information and better data on the performance of infrastructure debt. To this end, Natixis and the EDHEC‑Risk Institute have set up a three-year research chair on the investment characteristics and governance of infrastructure debt instruments. Natixis chief executive Laurent Mignon and Noël Amenc, the director of EDHEC‑Risk Institute, signed the partnership ahead of the event. The purpose of the chair is to contribute to clarifying the nature and investment profile of infrastructure debt instruments in order to reduce the relative shortfall of publicly available investment data on the subject, compared to longer established investment segments. The chair will specifically focus on the risk and return characteristics and portfolio diversification benefits that infrastructure debt instruments can bring to institutional investors. The research associated with the Natixis‑sponsored Infrastructure Debt Chair will be led by a former Infrastructure Journal employee and current research director at EDHEC, Frederic Blanc‑Brude, Ph.D., who has more than 10 years of research experience in the infrastructure sector and has published numerous academic papers on this topic. (...)"
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  • FT Adviser (24/10/2012)
    Making all the right changes
    Article by Noël Amenc, professor of finance of EDHEC Business School and director of EDHEC-Risk Institute
    "(...) There are two notable areas in which the guidelines go further than the consultation document. The first is securities lending, where Esma indicates clearly that all, net of operational costs, should be returned to the fund. This may come as a surprise to some industry participants. The problem of transparency has been brought up before, but Esma went much further than expected. The new rule drastically changes the situation and the business model of ETF providers that have chosen physical replication since securities lending represented a considerable source of revenue for asset management firms. These revenues did not correspond to disproportionate profits, but allowed ETFs to show lower management fees. As a result of receiving all lending profits, ETF management fees are expected to increase. The arrangement will nonetheless have the merit of clarifying the real costs of replication and the profits associated with the risk taken in securities lending. (...) The second area is the new requirements in the area of financial indices. I am very satisfied that the European regulator has taken a major step towards transparency in an industry that, with some exceptions, was characterised - under the pretext of protecting intellectual property - by the low level of information given to investors on index methodologies and compositions. Esma, through these recommendations, is putting a logical end to these practices, and is allowing all stakeholders to access details on the methodology, which should allow the investor to replicate the index and its composition without any additional cost. (...)"
    Copyright FT Investment Adviser [Full text]


  • Hedge Fund Journal (October 2012)
    EDHEC-Risk and Natixis research chair
    "(...) EDHEC-Risk Institute and Natixis have created a research chair to assist with clarifying the nature and investment profile of infrastructure debt instruments. The chair, entitled “Investment and Governance Characteristics of Infrastructure Debt Instruments”, aims to reduce the relative shortfall of publicly available investment data on the subject, compared to longer established investment segments. It will specifically focus on the risk and return characteristics and portfolio diversification benefits that infrastructure debt instruments can bring to institutional investors. “This partnership with EDHEC-Risk Institute will contribute to facilitating the cooperation between banks and institutional investors in infrastructure debt,” said Laurent Mignon, Natixis Chief Executive Officer. “By sponsoring this chair, Natixis aims to help allow institutional investors to play a more active role in the financing of infrastructure investments that are crucial as drivers of growth, productivity and competitiveness.” The research associated with the Natixis-sponsored Infrastructure Debt Chair will be led by Research Director Frederic Blanc-Brude, Ph.D., who has more than 10 years of research experience in the infrastructure sector and has published numerous academic papers on this topic. (...)"
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  • IPE (23/10/2012)
    EDHEC, Natixis launch research chair on infrastructure debt
    "(…) EDHEC-Risk Institute and Natixis have launched a research chair on infrastructure debt instruments as institutional investors increasingly seek to provide project loans. The new chair, based on a three-year partnership between EDHEC and Natixis, aims to clarify the nature and investment profile of infrastructure debt instruments. EDHEC and Natixis said the chair would help address the relative shortfall of publicly available investment data on the subject, compared with more "established" asset classes. Led by research director Frederic Blanc-Brude, the chair will also explore infrastructure debt instruments' risk/return characteristics and portfolio diversification benefits. Laurent Mignon, chief executive at Natixis, said: "This partnership will contribute to facilitating the cooperation between banks and institutional investors in infrastructure debt. "By sponsoring this chair, Natixis aims to help institutional investors play a more active role in the financing of infrastructure investments that are crucial as drivers of growth, productivity and competitiveness." (…)"
    Copyright IPE [Full text - Registration required]


  • Financial News (23/10/2012)
    EDHEC set to probe infrastructure debt
    "(...) Research organisation EDHEC-Risk and French investment adviser Natixis are joining forces to probe the investment and governance characteristics of infrastructure debt, which is increasingly being used to finance public sector projects across the world. (...) The initiative involves the creation of a new EDHEC research chair and follows a series of government initiatives to boost spending on infrastructure to stimulate the global economy. (...) The EDHEC research will be led by independent consultant Frédéric Blanc-Brude, who has published a series of research reports on project finance and the Chinese economy. Between 2008 and 2010, he started an office in China for IPA, a UK energy, water and transport consultant owned by Dar Group, a global infrastructure and urban design group based in the Middle East. His consulting projects include the construction of a $6bn port project in Southern Iraq and a Deutsche Bank study of renewable energy financing. He has written extensively on public-private construction partnerships in Europe. Research includes a 2009 study of roads funded by public-private partnerships under the umbrella of the European Investment Bank which were found to be 24% more expensive to build than public sector roads, principally as a result of cost overruns. EDHEC is an independent research organisation. (...)"
    Copyright Financial News [Full text - Registration required]


  • Institutional Asset Manager (23/10/2012)
    EDHEC-Risk Institute and Natixis create research chair on infrastructure debt instruments
    "(...) EDHEC-Risk Institute and Natixis have created a research chair entitled “Investment and Governance Characteristics of Infrastructure Debt Instruments”. The purpose of the chair is to contribute to clarifying the nature and investment profile of infrastructure debt instruments in order to reduce the relative shortfall of publicly available investment data on the subject, compared to longer established investment segments. The chair will specifically focus on the risk and return characteristics and portfolio diversification benefits that infrastructure debt instruments can bring to institutional investors. The research associated with the Natixis-sponsored Infrastructure Debt Chair will be led by research director Frederic Blanc-Brude, who has more than ten years of research experience in the infrastructure sector and has published numerous academic papers on this topic. (...)"
    Copyright GFM Ltd. [Full text]


  • Le Revenu (22/10/2012)  
    Natixis et l'EDHEC-Risk Institute ouvrent une chaire de recherche sur la dette infrastructure
    "(...) Natixis et l'EDHEC-Risk Institute ouvrent une chaire de recherche intitulée "Caractéristiques d'investissement et de gouvernance des instruments de dette infrastructure". L'objectif de cette chaire est de contribuer à clarifier la nature et les caractéristiques d'investissement de la dette infrastructure pour pallier l'insuffisance de données disponibles sur le sujet par rapport à d'autres segments d'investissement plus établis. Cette chaire se concentrera en particulier sur les caractéristiques du profil de risque et du rendement des instruments de la dette infrastructure et leur apport en termes de diversification de portefeuille pour les investisseurs institutionnels. Le programme de recherche sera dirigé, au sein de l'EDHEC-Risk Institute, par le directeur de recherche Frédéric Blanc-Brude, qui a accumulé plus de 10 ans d'expérience dans le secteur et apublié de nombreuses études sur le sujet. (...)"
    Copyright Le Revenu [Full text - French


  • L'Agefi (23/10/2012)  
    Pourquoi les spécialistes Infrastructures font beaucoup d’envieux
    "(...) Parmi les signes extérieurs d’un marché en pleine forme, figurent l’organisation d’évènements et autres rencontres comme le premier colloque « European Infrastructure Day » organisé ce jour à Paris par Natixis, l’occasion pour la banque de présenter avec l’EDHEC Risk Institute leur nouvelle chaire de recherche sur la dette infrastructure, ou encore cet autre séminaire organisé dans un mois par L’Agefi sur les investissements en infrastructures. (...)"
    Copyright L'Agefi [Full text - French]


  • Les Echos (22/10/2012)  
    Le suivi de tendance désorienté par des marchés chahutés
    "(...) Opérant sur les marchés depuis les années 1970, les « hedge funds » « CTA » (« commodity trading advisors ») ou suiveurs de tendance, sont des fonds quantitatifs, investissant sur tous les marchés à terme mais distincts des fameux traders haute fréquence. Ils ont un horizon d'investissement plus long et ne spéculent pas à très court terme. Grâce à leurs investissements très diversifiés, ils s'efforcent de détecter et de profiter d'une partie des tendances qui s'y font jour. Seulement, dans un environnement chahuté par la crise de la zone euro, des signaux contradictoires ont afflué de manière incessante sur les marchés, perturbant ces mécaniques. Si elles offrent généralement une assez bonne protection dans des marchés en baisse, elles redoutent les marchés peu volatils et sans direction. Bilan, la stratégie de suivi de tendance enregistre une performance étale depuis le début de l'année, après une baisse de 3,54 % en 2011 et un gain de 9,8 % en 2010. Sur longue période (1997-2012), cette stratégie a rapporté en moyenne 7 % par an, selon les indices EDHEC Alternative Indexes. (...)"
    Copyright Les Echos [Full text - French - Registration required]


  • L'Agefi (22/10/2012)  
    Natixis et l'EDHEC-Risk Institute ouvrent une chaire de recherche sur la dette infrastructure
    "(...) Ce partenariat de trois ans a été signé aujourd'hui par Laurent Mignon, Directeur Général de Natixis, et Noël Amenc, Directeur de l'EDHEC-Risk Institute, à la veille du premier colloque "European Infrastructure Day" organisé par Natixis le 23 octobre à Paris. A l'occasion de cette conférence, à laquelle participeront de nombreux investisseurs institutionnels, Frédéric Blanc -Brude présentera la chaire et ses premiers travaux. "Ce partenariat avec l'EDHEC-Risk Institute facilitera la coopération entre banques et institutionnels dans le financement des infrastructures. En soutenant cette chaire, Natixis souhaite faciliter l'intervention des investisseurs institutionnels dans le secteur des infrastructures, moteurs de croissance, de productivité et de compétitivité", a déclaré Laurent Mignon, Directeur Général de Natixis. (...)"
    Copyright L'Agefi [Full text - French]


  • Le Figaro (19/10/2012)  
    Hedge funds : les stratégies qui gagent... et les autres
    "(...) La gestion alternative qui fait appel à des techniques d’investissement non conventionnelles conduit à des résultats très différents selon les choix de gestion. Dans ce secteur, les erreurs de gestion coûtent cher. (...) EDHEC-Risk Institute, qui analyse depuis des années les performances de la gestion alternative vient de sortir une étude passionnante qui compare les performances des « hedge funds » en fonction des techniques de gestion mises en œuvre. Dans le secteur des fonds qui recourent des techniques différentes de l’achat classique de produits financiers dans l’espoir de bénéficier de leur valorisation à moyen ou long terme, le pire côtoie en effet le meilleur. Les stratégies les plus agressives de ventes à découvert ne fonctionnent visiblement pas puisque depuis le début de l’année les fonds qui ont utilisé cette technique ont fait perdre de l’argent à leurs clients. Sur dix ans, le retour annuel des fonds « short » est négatif de 0,4 % en moyenne par an... (...)"
    Copyright Le Figaro [Full text - French]


  • CNBC (18/10/2012)
    Short sellers suffer in September - EDHEC
    "(...) Short-selling was the worst hedge fund strategy in September, down 3.86 percent while world stocks climbed 2.9 percent, according to EDHEC-Risk Institute data. The best hedge fund strategy last month was long positions on equities of emerging markets, up 2.76 percent, while "long-short" equity strategies gained 1.63 percent and investments in distressed securities gained 1.71 percent, EDHEC data shows. CTA Global, a hedge fund strategy which trade derivatives on commodities and on financial instruments such as stock indices, posted the second-worst performance among all strategies, losing 1.05 percent. (...)"
    Copyright CNBC [Full text]


  • Les Echos (15/10/2012)  
    Comment les sociétés de gestion utilisent les instruments dérivés
    "(...) Paradoxalement, les dérivés, souvent décrits comme risqués, sont surtout utilisés pour protéger les portefeuilles dans un environnement incertain. Essentiels pour optimiser le couple rendement / risque des fonds, ils nécessitent cependant un suivi attentif de la part des gérants d'actifs. (...) Montrés du doigt depuis la crise des crédits « subprime », les produits dérivés restent essentiels pour la grande majorité des gestions. Impossible, sans ces instruments, de créer des fonds à capital garanti, de supprimer le risque de change ou de protéger un portefeuille contre l'inflation ou encore un pic de volatilité... « En Europe, moins de 20 % des fonds d'investissement excluent totalement l'utilisation des dérivés au sens large du terme », estime Noël Amenc, directeur de l'EDHEC-Risk Institute. (...)"
    Copyright Les Echos [Full text - French - Registration required]


  • L'Agefi (12/10/2012)  
    EDHEC‐Risk Institute considers that the European White Paper on pensions could be improved
    "(...) EDHEC-Risk Institute has released a comprehensive new study in response to the European Commission White Paper entitled “An Agenda for Adequate, Safe and Sustainable Pensions,” published on February 16th, 2012, which proposed a series of measures related to information and monitoring, European harmonisation and portability, and pension design. In a letter addressed to Mr László Andor, European Commissioner for Employment, Social Affairs and Inclusion, on October 4, 2012, EDHEC-Risk Institute considers that the European Commission White Paper constitutes a first step but that the Commission should go further in terms of harmonisation and better take into account the specifics of the financial management of pension funds. (...)"
    Copyright L'Agefi [www.agefi.fr]


  • NEWSManagers (12/10/2012)  
    L'EDHEC suggère des améliorations sur la réforme des retraites
    "(…) L'EDHEC-Risk Institute estime que le livre blanc de la Commission européenne sur les retraites pourrait être amélioré. Dans une lettre adressée à László Andor, le commissaire européen pour l'Emploi, les Affaires sociales et l'Inclusion, l'EDHEC indique que la Commission devrait aller plus loin en matière d'harmonisation et de meilleure prise en compte des spécificités de la gestion financière des fonds de pension. L'institut estime notamment que les nouvelles legislations devraient encourager la generalisation des pratiques de gestion sous contrainte de passif, à la fois pour les fonds de pension et les produits de retraite individuels. (…)"
    Copyright Agefi [Full text - French - Registration required]


  • Funds Europe (October 2012)
    EDHEC Research: Designing Equity Solutions with Managed Volatility
    Article by Lionel Martellini, professor of finance at EDHEC Business School and scientific director at EDHEC-Risk Institute, and Renata Guobuzaite, research assistant
    "(…) The EDHEC-Risk Institute has analysed the design of attractive equity solutions with managed volatility, based on mixing a well-diversified equity portfolio with volatility derivatives, as opposed to minimising equity volatility through minimum variance approaches. Long volatility positions show a strongly negative correlation with respect to the underlying equity portfolio. Adding a long volatility exposure to an equity portfolio would result in a substantial improvement of the risk-adjusted performance of the portfolio. The benefits of the long volatility exposure are found to be strongest in market downturns, when they are most needed. (...)"
    Copyright Funds Europe [Full text - Registration required]


  • European Pensions (10/10/2012)
    Still room for improvement in EC White Paper on pensions - EDHEC
    "(…) The European Commission White Paper “An Agenda for Adequate, Safe and Sustainable Pensions”, published in February, only constitutes a first step into ensuring European harmonisation and improved pension design and should go further than this, according to EDHEC-Risk Institute. In a letter addressed to the European Commissioner for Employment, Social Affairs and Inclusion, László Andor, EDHEC-Risk Institute stated that the Commission should better take into account the specifics of the financial management of pension funds. EDHEC-Risk director Noël Amenc stated: “The current pension debate should be used by the commission to foster increased coordination in pensions reform. When discussing the sustainability of public finance, one medium-term objective could be to recognise unfunded implicit pension commitments." He added: “New regulation should encourage the generalisation of asset-liability management practices, both for pension funds and individual retirement products, using the best available knowledge and techniques and evaluating micro as well as macroeconomic impacts. A move towards hybrid pensions could, with this objective in mind, provides a more adequate conceptual framework for European countries to converge towards." Concerning the issue of a prudential framework Amenc said that “it needs to respect the particularities of pension providers, which are not those of insurers”. (…)"
    Copyright European Pensions [Full text]


  • Hedge Funds Review (October 2012)
    Regulation could be an opportunity for the fund of hedge funds industry to attract investors again
    Article by Mathieu Vaissié, Research Associate, EDHEC-Risk Institute
    "(...) Funds of hedge funds have a role to play in institutional investor portfolios but they need to adapt their value proposition. Regulation could help the FoHF industry make its voice audible. (...) The implementation of the granularity adjustment, first introduced in the Basel framework, makes it possible to take the diversification potential of funds of hedge funds (FoHFs) into account and in turn to reconcile the outcome of the standard formula in Solvency II with empirical evidence. With the severity of the recent financial crises, systemic risk issues have resurfaced for the first time in many years. It is no surprise to see a wave of new regulations and regulatory proposals on the ­financial markets. Regulation can make financial markets more effective but it can also lead to additional costs and in some cases be seen as a source of risk by practitioners. In the hedge fund world, where regulation has mostly been lenient and investment flexibility provides a clear edge in the search for alpha, regulatory developments will have a strong impact, especially since the performance of both hedge funds and funds of hedge funds is being challenged. (...)"
    Copyright Hedge Funds Review [Full text - Registration required]


  • IPE (10/10/2012)
    Tobin tax gets green light after more member states pledge support
    "(…) The number of countries backing the EU's proposed financial transactions tax (FTT) increased this week, with Italy, Spain, Estonia and Slovakia pledging their support. In September 2011, the European Commission issued a proposal for the introduction of a controversial directive that contains an FTT at 0.1% for transactions in bonds and equities, and 0.01% for derivatives transactions. (...) France's EDHEC Risk Institute meanwhile predicted that the Tobin tax, named after Nobel laureate James Tobin, was unlikely to reduce overall volatility. EDHEC Business School professor Raman Uppal said: "The Tobin tax reduces speculative activity in financial markets, but this tax also drives away investors who provide liquidity and stabilise prices." (…)"
    Copyright IPE [Full text - Registration required]


  • Institutional Asset Manager (09/10/2012)
    European Commission white paper on pensions could be improved, says EDHEC-Risk
    "(...) EDHEC-Risk Institute has released a study in response to the European Commission White Paper entitled “An Agenda for Adequate, Safe and Sustainable Pensions,” published in February 2012, which proposed a series of measures related to information and monitoring, European harmonisation and portability, and pension design. In a letter addressed to László Andor, European Commissioner for Employment, Social Affairs and Inclusion, on 4 October 2012, EDHEC-Risk Institute considers that the European Commission White Paper constitutes a first step but that the Commission should go further in terms of harmonisation and better take into account the specifics of the financial management of pension funds.
    Copyright GFM Ltd. [Full text]


  • Asia Asset Management (October 2012)
    Dealing with inflation risk
    "(…) Recent EDHEC-Risk Institute research supported by Rothschild & Cie looks at the possibility of increasing firm value through the issuance of an optimal level of inflation-linked bonds, which would allow for a reduction in the variability of cash flows, net of debt costs. Lionel Martellini, professor of finance at EDHEC Business School and scientific director of EDHEC-Risk Institute, and Vincent Milhau, deputy scientific director of EDHEC-Risk Institute, explain their approach. While inflation hedging has always been of critical importance to institutional investors whose liabilities are directly tied to an inflation index, inflation risk is a growing concern for all investors. The assets used by investors to hedge inflation risk typically include sovereign inflation-linked bonds, such as US Treasury Inflation Protected Securities (TIPS), inflation swaps, equities, and commodities. However, the low returns of inflation-linked sovereign bonds, coupled with rising uncertainty over the credit-worthiness of sovereign issuers, have made inflation-linked bonds issued by corporations appear more attractive. (…)"
    Copyright Asia Asset Management [Full text]


  • FTfm (08/10/2012)
    Tinkering with deficits will end badly
    "(...) Now the European Commission, in its infinite wisdom, is consulting on changes that could have a “catastrophic” effect on the bloc’s private sector final salary schemes. The Commission is poised to spring into action in 2013 in the wake of a consultation exercise by the catchily named European Insurance and Occupational Pensions Authority (Eiopa), which is proposing pensions be shoehorned into something remarkably similar to the Solvency II regime drawn up for insurance companies. (...) The process is designed to level the playing field between the pensions and insurance industries, ensuring that every entity has sufficient assets to meet their liabilities even in the event of a sharp market slump. If such a framework had been created before the first DB pension schemes were rolled out, this might have been a sensible approach, but now is surely too late. The world is now awash with underfunded DB schemes, most of which are closed to new members and a growing minority closed to further contributions from their existing members. Interestingly the EDHEC-Risk Institute, which last week added its voice to the chorus arguing that pension providers and insurers should be treated differently, also called for the Commission to push for unfunded implicit pension commitments to be recognised in public finances. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • L'Agefi Suisse (08/10/2012)  
    Les risques ne se logent pas seulement dans les actifs
    "(...) Les fonds de pensions peuvent-ils reproduire les performances de rendement des années 90 ? Il est probable que oui. Pour autant qu’ils prennent toute la mesure de ce que recèle réellement la notion de risque. Objectif: se mettre en position de réaliser une allocation optimale des actifs. Pourtant, rien ne semble plus éloigné du réel qu’une compréhension partagée de la notion de risque. (...) C’est du côté de la congruence actif-passif (ALM) que les lacunes sont les plus patentes. Les fonds de pension n’évaluent généralement pas correctement l’adéquation de leur allocation d’actifs aux risques de leur passif. Une faille qui peut conduire à des prises de décisions sous optimales. Ce fut d’ailleurs l’avertissement lancé en 2010 par Noël Amenc, professeur de finance et directeur d’EDHEC-Risk Institute, à l’issue d’une étude pan-européenne auprès de 129 spécialistes de la gestion ALM (représentant environ 3000 milliards d’euros d’encours), couvrant également les caisses de pension suisses. (...)"
    Copyright L'Agefi Suisse [Full text - French - Registration required]


  • Risk.net (05/10/2012)
    EDHEC-Risk Institute warns of alternative index drawdowns
    "(...) EDHEC is reminding investors that alternative indexes can have significant drawdowns. (...) The drawdowns of alternative indexes must not be ignored, though they may be better performers in the long term, according to the EDHEC-Risk Institute. "No guarantee exists that in the short term these alternative weighting schemes always outperform cap weighting," states EDHEC in its research paper, Diversifying the diversifiers and tracking error: outperforming cap-weighted indices with limited risk of underperformance, published in August. The institute finds that "the worst performing strategy in one sub-period can be the best performer in the subsequent sub-period, and vice versa," in its comparison of various indexes based on the US equity market, with different weighting schemes. (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Financial News (04/10/2012)
    EDHEC-Risk adds to advisery board
    "(...) EDHEC-Risk Institute, the asset and risk management think-tank, has added six members to its international advisery board. The new members are Ashvin Chhabra from the Institute for Advanced Study; Joseph Jelincic from CalPERS; Timo Löyttyniemi from the Finland State Pension Fund; Joseph Masri from the Qatar Investment Authority; Olivier Rousseau from the French pension reserve fund; and Jean-Paul Villain from the Abu Dhabi Investment Authority. (...)"
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  • Hedge Fund Journal (04/10/2012)
    EDHEC-Risk Institute expands board
    "(...) EDHEC-Risk Institute has appointed six new members to its international advisory board, which brings together high-level representatives from regulatory bodies, leading pension funds, professional organisations and business partners. 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 42 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. (...)"
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  • NEWSManagers (04/10/2012)  
    Six nouveaux membres pour le Comité d'orientation de l'EDHEC
    "(…) Désormais fort de 42 membres, le Comité d'orientation international de l'EDHEC-Risk Institute vient d'accueillir six personnalités. Il s'agit de : Ashvin B. Chhabra, Directeur des Investissements, Institute for Advanced Study ; Joseph John Jelincic, Membre du Comité d'Administration et Président du Comité Risque et Audit, California Public Employees' Retirement System (CalPERS) ; Timo Löyttyniemi, Directeur Général, The State Pension Fund (Finlande) ; Joseph Masri, Directeur de la Gestion des Risques, Qatar Investment Authority; Olivier Rousseau, Membre du directoire, Fonds de Réserve pour les Retraites ; Jean-Paul Villain, Directeur, Groupe de Stratégie, Cabinet de la Direction Générale, Abu Dhabi Investment Authority. Le Comité rassemble des représentants de haut niveau des autorités de régulation, des investisseurs institutionnels, des organisations professionnelles et des partenaires d'Edhec-Risk Institute. Le rôle du Comité d'orientation international consiste à valider la pertinence des propositions de programmes de recherche présentées par la direction d'EDHEC-Risk Institute et d'évaluer les résultats de ses travaux du point de vue de leur impact potentiel sur les pratiques des entreprises. (…)"
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  • Pensions & Investments (03/10/2012)
    CalPERS, French fund execs among those appointed to EDHEC-Risk Institute board
    "(...) EDHEC-Risk Institute on Wednesday announced six new members of its 42-member international advisory board. The six new members, according to a news release, are: J.J. Jelincic, member of the board of administration and chairman of the risk and audit committee of the $239.3 billion California Public Employees' Retirement System, Sacramento; Olivier Rousseau, executive director, € 35.1 billion ($45.3 billion) Fonds de Reserve pour les Retraites, Paris; Timo Loyttyniemi, managing director, € 13.8 billion ($17.8 billion) State Pension Fund (Finland), Helsinki; Joseph Masri, head of risk management, $100 billion Qatar Investment AuthorityDoha; Jean-Paul Villain, director, strategy unit, managing director's office, $627 billion Abu Dhabi Investment Authority; and Ashvin B. Chhabra, chief investment officer of the Institute for Advanced Study. (...)"
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  • Investment Europe (03/10/2012)
    EDHEC-Risk adds to its Advisory Board
    "(...) The EDHEC-Risk Institute has added six new members to its international advisory board. The role of the 42-strong board is to validate the relevance and goals of research proposals presented by the centre's management and to evaluate how research outcomes may impact on industry practices. The six new members are: Ashvin B. Chhabra, Chief Investment Officer, Institute for Advanced Study; Joseph John Jelincic, Member of the Board of Administration and Chair of the Risk & Audit Committee, California Public Employees' Retirement System (CalPERS); Timo Löyttyniemi, Managing Director, The State Pension Fund (Finland); Joseph Masri, Head of Risk Management, Qatar Investment Authority; Olivier Rousseau, Executive Director, Fonds de réserve pour les retraites (The French pension reserve fund); Jean-Paul Villain, Director, Strategy Unit, Managing Director's Office, Abu Dhabi Investment Authority. (...)"
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  • IPE (03/10/2012)
    Wednesday people roundup
    "(…) EDHEC-Risk Institute – Six new members have joined the international advisory board. They include Ashvin Chhabra, CIO at the Institute for Advanced Study; Joseph John Jelincic, board administration member and chair of the risk and audit committee at CalPERS; Timo Löyttyniemi, managing director at Finland's State Pension Fund; Joseph Masri, head of risk management at Qatar Investment Authority; Olivier Rousseau, executive director at France's FRR; and Jean-Paul Villain, director of Abu Dhabi Investment Authority's strategy unit. (…)"
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  • Financial Times (01/10/2012)
    Passive aggression
    "(…) Passive investing is enjoying an unprecedented period of popularity as growing numbers of institutional and retail investors discover that exchange traded funds and other index-based products are vital tools for building robust portfolios. (...) A substantial body of academic evidence provides support for the view that while an active manager might manage to outperform his benchmark in equity and bond markets in any single year, the vast majority fail to deliver outperformance over a sustained period. (...) The simplest of the alternative approaches is the equally weighted portfolio. In an award-winning paper published earlier this year, academics from the University of Frankfurt and the EDHEC Business School in France showed that random combinations of equally weighted stocks from the US market outperformed both the the S&P 500 and Dow Jones Industrial Average indices. (...) EDHEC-Risk Institute, a division of EDHEC business school, carried out a similar analysis of four alternative indices (equally weighted, minimum volatility, risk efficient and fundamentally weighted RAFI) tracking the US market. While all four outperformed the cap-weighted S&P 500 index over the past nine years, each alternative index behaved well only in certain market conditions. EDHEC concluded that no single model could “pretend to be uniquely superior” as alternative-weighted indices delivered different results depending on conditions. (...)"
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  • IPE (01/10/2012)
    Brussels should focus on national pension frameworks – EDHEC
    "(…) Brussels should push for more pension reforms at the national level before trying to implement a European framework, and help pension providers design "better" investment solutions for their contributors, according to EDHEC Risk Institute. Releasing its response to the White Paper on Pensions published by the European Commission in February this year, EDHEC warned that the implementation of a common framework could lead to profound changes in national systems. "The current public debates surrounding pensions on the one hand and budgetary coordination on the other would greatly benefit from being held conjunctly," EDHEC said. "In all logic, unfunded first-pillar public pensions are largely structural problems due to slow-moving demographics, with a large impact on government-sponsored DB {defined benefit} schemes and social security pension schemes. "Unfunded and underfunded second-pillar pensions have also the potential to weight on future deficit, as countries may need to eventually bail out some pension plans." EDHEC called on the Commission to take advantage of this opportunity and, in the short run, help with citizens' information and push for national reforms. In the longer term, it should take into account unfunded implicit pension commitments mentioned in the Stability Treaty, as that might be the "only" way to encourage coordinated reform across countries. Additionally, EDHEC voiced concerns over the introduction of solvency capital requirements for pension funds similar to those for insurance companies. (…)"
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  • Responsible Investor (01/10/2012)
    Pension chiefs join EDHEC-Risk Institute advisory board
    "(...) The EDHEC-Risk Institute, the institutional investor-backed think tank, has named several senior pension executives to its international advisory board. They include: Joseph John Jelincic, Member of the Board of Administration and Chair of the Risk & Audit Committee at the California Public Employees’ Retirement System (CalPERS); Timo Löyttyniemi, Managing Director, the State Pension Fund (Finland); Olivier Rousseau, Executive Director, France’s Fonds de Réserve pour les Retraites. The institute’s 42-member advisory board is chaired by Theo Jeurissen, the former Chairman of the Investors’ Committee of the Dutch Association of Pension Funds. (...)"
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  • IPE (01/10/2012)
    Sovereign Bonds: Curve balls from credit markets
    "(…) Corporate credit portfolio managers are getting used to talking about ‘yield’ as well as ‘spreads’. This lexical challenge comes as more and more institutional investors turn to credit to do the jobs that used to be reserved for the sovereign market: low-risk income generation; duration or liability-matching. (...) Lionel Martellini, professor of finance at the EDHEC Business School, recalls that his project of research into managing sovereign bond risk by diversifying into corporate credit was inspired by looking at what happens on nominal and inflation-linked curves. “There is a clear analogy between comparing credit and sovereigns and comparing nominal and real bonds,” he says. “If you look at the time series of the breakeven inflation rate you clearly see that there is much more volatility at the short-end than the long-end. And the magnitude of the effect is substantial: something like a beta of 0.30 at 10 years versus two years.” (…)"
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  • HedgeWeek (01/10/2012)
    EDHEC-Risk Institute and CFA Institute offer Advances in Equity Portfolio Construction seminar
    "(...) EDHEC-Risk Institute and CFA Institute are reinforcing their executive education partnership (initiated in 2008 with the Advances in Asset Allocation Seminar) by offering the Advances in Equity Portfolio Construction Seminar. The course aims to provide investment practitioners with the tools to better understand the limits and benefits of different portfolio construction approaches, and to discuss alternative equity index strategies. The two-day programme is intended for finance practitioners who contribute to the design and implementation of portfolio construction models and is also insightful for investment professionals who analyse or decide on the adoption of appropriate model portfolios or benchmarks for equity investments, or who are interested in customising their strategic equity benchmark. The event will take place on 20-21 November 2012 in Singapore and on 12-13 February 2013 in London. (...)"
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  • NEWSManagers (01/10/2012)  
    L'EDHEC renforce son partenariat avec le CFA Institute
    "(…) Après avoir lancé ensemble leur Advances in Asset Allocation Seminar en 2008, l'EDHEC-Risk Institute et le CFA Institute ont décidé d'approfondir leur coopération dans le domaine de la formation des dirigeants en créant le Equity Portfolio Construction Seminar. Les cours sont destinés à des praticiens de l'investissement qui vont être formés aux outils qui permettent de comprendre les limites et les avantages de différentes approches de construction de portefeuille ainsi que d'étudier des stratégies indicielles alternatives pour les actions. C'est un programme de deux jours qui se déroulera les 20 et 21 novembre à Singapour et les 12 et 13 février 2013 à Londres. (…)"
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September 2012

  • Investment Magazine (September 2012)
    Evaluating hedge fund performance
    Article by René Garcia, professor of finance at EDHEC Business School and Caio Almeida, Getulio Vargas Foundation Graduate School of Economics.
    "(...) Performance evaluation of hedge funds has traditionally proceeded with two main approaches. One considers only absolute returns, while the other rests on the identification of risk factors behind hedge fund returns. It was soon recognised that absolute performance measurement for hedge funds needs to go beyond the traditional Sharpe or Treynor ratios. Hedge fund-return distributions are distinctly abnormal and measures based on the mean and variance are not sufficient to capture the risk associated with hedge fund returns. Other measures have been proposed to account for the negative skewness and positive large kurtosis exhibited by hedge fund-return distributions, namely the Sortino ratio, the Stutzer index or the Omega ratio. While these adapted measures are better able to capture the higher moment risk present in hedge fund returns, they are not sufficient to rank funds. We need additional indicators to know if a given fund is doing well relative to other funds using similar strategies. (...)"
    Copyright Investment Magazine [investmentmagazine.com.au]


  • IPE (28/09/2012)
    As safe as houses
    "(…) Austerity measures can create the most unlikely investment opportunities for pension fund investors. Among those are investments in social housing or social infrastructure. (...) According to an EDHEC-Risk Institute paper entitled ‘Pension Fund Investment in Social Infrastructure’, no more than $10bn (€7.76bn) of equity capital was invested in social infrastructure between 1995 and 2010, mostly in the UK, out of a total of $100bn capital investment essentially financed with bank debt. (...) “With social infrastructure investments like prisons, governments pay predictable revenues, possibly with an inflation link, which makes them a stable type of investment unless the government changes its mind about the benefits of private investment, which happens frequently in the infrastructure sector,” says Frédéric Blanc-Brude, research director at the EDHEC-Risk Institute and author of the social infrastructure paper. (…)"
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  • Benefits and Pensions Monitor (27/09/2012)
    Incidents Due To ETNs
    "(...) The incidents of spring 2012 involving the TVIX ETN issued by Credit Suisse were created by factors specific to ETNs, with no relation to the particular exposure to a volatility index, says an EDHEC-Risk Institute study. ‘The Risks of Volatility ETNs: a Recent Incident and Underlying Issues’ says the main factors suggested by the academic literature are the inefficient share creation process and the speculative motive of uninformed, return-chasing investors. Under normal market conditions, short-selling can suppress the accumulation of positive premiums. However, if share creation is suspended during a significant surge in demand, the security may become unavailable for borrowing, which limits short-selling activities. The study notes that the volatility exposure through volatility exchange-traded products is typically to a constant-maturity VIX futures index that can differ substantially from the spot VIX index. (...)"
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  • Financial News (26/09/2012)
    Risk institute warns over ETNs
    "(...) EDHEC-Risk Institute has said that investors need to be more aware of the structures and risks of exchange-traded notes, as regulators continue to probe the sharp fall of a Credit Suisse ETN in March. EDHEC-Risk’s report, published on Tuesday, said that complex financial products should only be purchased by sophisticated investors or those who truly understand their structures and risks. EDHEC-Risk’s report comes as regulators investigate volatility exchange-traded notes following an incident in March when Credit Suisse’s TVIX ETN plunged despite volatility in the market remaining relatively consistent. (...) The EDHEC-Risk report warned that investors that are seeking volatility exposure through volatility exchange-traded notes are not getting exposure to an actual volatility index. Instead, they are getting exposure to volatility index futures, which can “differ substantially”. EDHEC’s study emphasises how volatility exposure through ETNs can differ markedly from the spot Vix index. “The TVIX incident opens important, more general questions about the potential hidden risks in seeking exposure to market volatility through volatility ETNs,” the EDHEC-Risk study said. (...)"
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  • Citywire (26/09/2012)
    Volatility ETNs don't create distortions, investors do
    "(…) (ETN) controversy were caused by factors specific to ETNs and not those linked to volatility index exposure, a study has found. In March, Credit Suisse came under pressure to restore order to its TVIX instrument after it veered almost 90% from its asset value after a surge in demand for securities tracking volatility. The note's indicative value jumped from $162.8 million to $700 million at the end of last year. Credit Suisse was subsequently forced to cut its issuance after the instrument plunged nearly 30% in a single day. The EDHEC-Risk Institute, a body devoted to international risk analysis and asset management research, said that its detailed study into volatility ETNs had highlighted the "speculative motive of uninformed, return chasing investors" as a key factor in the creation of distortions, as well as insufficient share creation processes. "Under normal market conditions, short-selling can suppress the accumulation of positive premiums," EDHEC-Risk argued, a step used by Credit Suisse to bring the instrument back into line. "However if share creation is suspended during a significant surge in demand the security may become unavailable for borrowing, which limits short selling activities," the institute added. (…)"
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  • Canadian Investment Review (25/09/2012)
    The Trouble With Volatility ETNs: New EDHEC-Risk Institute study sheds light on TVIX ETN crisis
    "(...) Investors have been hungry for products that provide exposure to volatility. Which is why so many have flocked to a series of new exchange-traded notes and exchange-traded funds and promise to fit the bill. But earlier this year, investors in the TVIX ETN issued by Credit Suisse got a nasty surprise when the value started to plunge precipitously and seemingly inexplicably. In response, the EDHEC-Risk Institute has issued a new study called “The Risks of Volatility ETNs: a Recent Incident and Underlying Issues,” that is meant to shed light on the nature of volatility ETNs and the issues involved in the TVIX crisis. (...) The EDHEC-Risk study notes that the volatility exposure through volatility exchange-traded products is typically to a constant-maturity VIX futures index that can differ substantially from the spot VIX index. Short maturities are characterised by higher sensitivity to VIX but also higher roll-over costs. (...)"
    Copyright Canadian Investment Review [Full text]


  • FTfm (24/09/2012)
    Passive investing has room to grow
    "(...) “Even in countries with a lot of passive investment in institutional mandates the maximum proportion will be between 20 and 30 per cent. The large majority of assets are still being actively managed,” says Felix Goltz, head of applied research at EDHEC-Risk Institute. “The impact of ETFs, in particular, is exaggerated because they have been growing rapidly. But even after their recent growth, in Europe ETFs only account for about 3 per cent of investment management products.” Mr Goltz also highlights that competition among index providers means there is considerable variety in, and differences between, the indices that passive strategies track, which will dilute any distortions to price discovery. “Passive strategies no longer just track broad market-cap weighted indices, they also follow themed indices, such as minimum variance or economically-weighted indices,” he says. “This works against the idea that as index tracking increases, everyone ends up holding the same portfolio.” (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Le Temps (24/09/2012)  
    L’allocation d’un portefeuille peut être équilibrée par une bonne gestion du budget de risque
    "(...) En janvier 2009, dans l’une de ses études au sujet de la gestion des actifs et passifs (« ALM ») des institutions de prévoyance en Europe , l’EDHEC qualifiait, dans son analyse, les fonds de pension « d’investisseurs de long terme sujets à des contraintes de court terme », tout en soulignant à juste titre que les techniques modernes d’ALM (gestion actifs/passifs) impliquent forcément une allocation dynamique dans le cadre de la gestion des capitaux desdites institutions. Aujourd’hui, les nouvelles techniques d’allocations des actifs basées sur le risque font l’unanimité auprès des professionnels et en Suisse, plus particulièrement, pour la gestion des capitaux de la prévoyance professionnelle. (...)"
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  • Index Universe (21/09/2012)
    Does Low-Val Make Sense?
    "(...) Following the market ups and downs of the last five years, low-volatility indices have become increasingly popular with investors. And despite a recent rally in equity markets, providers of low-volatility indices are benefiting from continuing investor interest. Volatility is the most widely used measure of equity risk. Proponents of low-volatility equity strategies argue that on a historical basis and in risk-adjusted terms, these strategies will beat the market. But do the arguments stand up? (...) Some strategists also point out that, as a measure, volatility gives only a partial picture of stocks’ risks and is therefore inadequate. One reason for the lower expected returns of high-volatility stocks may be that these stocks can offer positive “skewness” in their returns, says Felix Goltz, head of applied research at EDHEC-Risk. (...)"
    Copyright Index Universe [Full text]


  • ETFI Asia (20/09/2012)
    Reactions to ESMA’s ETF guidelines
    Article by Frédéric Ducoulombier, director at EDHEC Risk Institute–Asia
    "(...) Having reviewed the current regulatory regime applicable to certain types of UCITS and particular activities such as efficient portfolio management techniques, the European Securities and Markets Authority (ESMA) issued “Guidelines on ETFs and other UCITS issues” (ESMA/2012/474) on July 25. (...) With regard to index-tracking UCITS, EDHEC-Risk Institute welcomes the new disclosures required, in particular the description of the index and its components, the fund’s policy regarding the ex-ante tracking error, together with the size of the tracking error ex-post and an explanation of any divergence between the target and actual tracking error. EDHEC-Risk also welcomes the proposed disclosures on how the index will be tracked, the underlying index and counterparty risk exposure implications, and the description of factors affecting tracking ability. However, while underlining the differences between actively-managed funds and index-tracking vehicles and imposing more disclosures on tracking error, the new guidelines fall short of giving a definition of passive management that would include a maximum acceptable level of tracking error. (...)"
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  • Business Times (19/09/2012)
    Hedge fund strategies record better returns in August
    "(...) The EDHEC-Risk Institute says its Alternative Indexes can be thought of as a set of hedge fund indexes providing a cross section of existing indexes for each hedge fund strategy. The existing commercial hedge fund indexes are subject to self-reporting bias, survivorship bias, selection bias, instant history bias and style bias. Hence, investors cannot rely on competing hedge fund indexes to obtain a "true and fair" view of hedge fund performance. The institute noted that the gradual institutionalisation of the alternative investments and growing demand from institutional investors have led to a need for information on the returns of hedge fund strategies. "Hedge funds actually exploit the many dimensions of risk in financial markets in order to expand the risk-taking opportunities of investors to a large variety of risk factors and to non-linear exposures," it said. "Indexes are a convenient way of assessing the risk/return characteristics of such vehicles." (...)"
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  • Citywire (18/09/2012)
    Hedgies made zilch from short selling strategies in last 11 years
    "(…) Hedge funds are known for taking punchy bets but according to new data they have made absolutely nothing from short selling over the last 10 years or so. Despite the bulk of strategies keeping a pace with the rising market during August, an analysis of where hedge funds have gone wrong has offered a fascinating insight into their weak spots. Over the last 11 years, the EDHEC-Risk Institute found that short selling had produced a 0% average annual return. It took the microscope to data since January 2001, but also analysed year-to-date figures, which painted a bleaker picture of their tactics. As volatility hit, many investors will have found it difficult to judge the direction of stocks, and hedge funds were no different. As a collective they lost 10.9% short selling year-to-date, and in August shed 3.24%, roughly a third of their yearly losses. Distressed securities strategies were by far the most successful over the 11 years examined by EDHEC. These yielded an annual average return of 10.1%, and the strategies and largely maintained this lead 12-months to date. Emerging market strategies were next in line and delivered a typical yearly return of 9.7% since the start of 2001. (…)"
    Copyright Citywire [Full text]


  • Ignites Asia (13/09/2012)
    Delivering alpha amid volatile financial markets
    "(...) At an earlier conference in May, Felix Goltz, Nice, France-based head of applied research at EDHEC-Risk Institute, said capitalisation-weighted equities indices in Asia are inefficient, as reported. Goltz made the comment at the EDHEC-Risk Days Asia 2012 conference in Singapore, where he assessed the quality of existing indices in Asia in terms of their risk-return efficiency, concentration effects, stability to style, and sector exposures and representativeness. The inefficiency of cap-weighted indices echoes the results of the EDHEC-Risk Asian index survey 2011, which show that although equities indices are commonly used in Asia, satisfaction rates are only “moderate to low”, as reported. According to the survey, nearly 60% say they see significant problems with standard cap-weighted equities indices. (...)"
    Copyright Ignites Asia (a Financial Times service) [www.ignitesasia.com - Registration required]


  • Investors Chronicle (11/09/2012)
    ETFs face ban on lending for profit
    "(...) At the end of July, the European Securities and Markets Authority (ESMA), an independent European Union authority that helps to safeguard the stability of the EU's financial system, published guidelines aimed at strengthening investor protection in respect of funds that fall under the Ucits (Undertakings for Collective Investment in Transferable Securities) regime. The guidelines in particular focused on exchange traded securities (ETFs) and one provision came as a particular surprise. ESMA recommended that ETFs which engage in stock lending must return all revenue they make from this, net of costs, back to fund shareholders, rather than allowing fund providers to keep some of the profit. (...) However, if ETFs have to return all the revenue they make from stock lending to investors some fear that ETF providers may raise fees or the ETF will not track the return of their index so closely. "These revenues did not correspond to disproportionate profits but allowed ETFs to show lower management fees," comment analysts at EDHEC-Risk Institute. "As a result of receiving all of the lending profits, the ETF can now expect its management fees to increase."(...)"
    Copyright Financial Times [Full text]


  • Ignites Europe (10/09/2012)
    New doubts about alternate indexing
    "(...) The merits of passive versus active investing have long been the source of heated debate, but the dispute now appears to be spilling over into the indexing community over alternative index strategies. The latest development fueling the debate is a paper sponsored by the EDHEC-Risk Institute that shows a wide variance in six-month returns of four major alternative-indexing methodologies over a period of nine years. Those strategies included equal-weight, low-volatility, risk-efficient and Research Affiliates fundamentally weighted indices. While all of the indices outperformed the traditional cap-weighted counterparts over the long term, they also underperformed at some point. (...) The EDHEC-Risk Institute researchers argue that one can use a combination of the alternative indices, managing the tracking error to create a portfolio that still outperforms the cap-weighted competition. But it criticises alternative-index devotees that focus more on pure outperformance and less on the relative risk of alternative indices, arguing that managing the difference in risk factor exposure among the alternative indices is the only way to “ensure that the outperformance is based on skill and not luck.”(...)"
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  • FTfm (07/09/2012)
    Survival of the most creative is the watchword
    "(...) However, others have put a dampener on this optimism. A separate study by EDHEC Risk Institute from March this year shows that actively managed ETFs were not an important development to the respondents – only 11 per cent said that ETFs should shift from passive to active. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Le Monde (07/09/2012)  
    Peugeot perd sa place historique dans le CAC 40, remplacé par le belge Solvay
    "(...) "Peugeot ne faisait plus partie des 40 principales valeurs de la place de Paris, quels que soient les critères utilisés", tranche Noël Amenc, professeur de finance à l'EDHEC et membre du Conseil scientifique. (...) A l'inverse, le choix de Solvay, coté à Paris depuis janvier, n'est, semble-t-il, pas allé de soi. "L'entrée de Solvay dans l'indice n'avait rien d'évident, mais est cohérente avec les règles qui le régissent : l'emprise économique d'une valeur fait partie des critères de choix, et Solvay est devenu plus français depuis le rachat de Rhodia ", explique M. Amenc. Le groupe ne réalise que 10 % de ses 12,7 milliards de chiffre d'affaires en France, mais un quart de ses 30 000 salariés travaillent dans l'Hexagone. Et Solvay n'est pas le premier groupe étranger à intégrer le CAC 40 : ArcelorMittal, dont le siège est à Luxembourg, EADS, STMicroelectronics et la foncière Unibail-Rodamco en font partie. "Mais cela pose une vraie question : doit-on fonder les indices sur le lieu principal de cotation ou sur le lien économique avec un pays ?", s'interroge M. Amenc.(...)"
    Copyright Le Monde [Full text - French - Registration required]


  • Risk.net (04/09/2012)
    Index roundup
    "(...) The EDHEC-Risk Institute has warned about the risk of new forms of equity indexes underperforming cap-weighted indexes. The firm argues in a research paper that the main alternative indexes on the market, while superior performers over the long term, have considerable relative drawdowns with regard to their cap-weighted counterparts. (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Ignites Europe (04/09/2012)
    Ossiam styling itself a ‘smart beta’ specialist
    "(...) Research shows that investor appetite for such strategies is on the increase. According to a survey of the ETF market by EDHEC-Risk Institute in March, 39 per cent of respondents said that they would like to see more ETFs based on alternative indices -- an increase of 10 per cent from the previous year. (...)"
    Copyright Ignites Europe (a Financial Times service) [Full text - Registration required]


  • Funds Europe (September 2012)
    Depositories not always responsible for losses
    Article by Samuel Sender, applied research manager at EDHEC-Risk Institute
    "(…) Neither regulations nor the fund management industry have been able to adequately anticipate the rise of non-financial risks and ensure these are controlled, managed and adequately communicated, respondents to EDHEC’s Shedding Light on Non-Financial Risks survey said. The industry is well aware of the limitations of regulations and, on the whole, there is a certain consensus on the idea that there are some non-financial risks inherent to investing which, even when not rewarded, must be taken. Indeed, 87% of respondents agree that the role of regulation is to limit non-financial risks and ensure that they are controlled and managed, not to suppress them. A very strong associated statement is that 56% agree that insuring risks will lead to a loss of accountability among investors. In addition, when it comes to a much-discussed practical detail regarding the way to protect investors, increasing the depository liability regarding restitution, 62% agree that a depository cannot guarantee the restitution of assets that are not under its custody and control. (...)"
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  • FTfm (03/09/2012)
    EDHEC warns on alternative indices
    "(...) Alternative weighted equity indices run the risk of ­seriously underperforming traditional market capitalisation weighted indices in the short term, says EDHEC-Risk Institute, a division of EDHEC business school. EDHEC-Risk compared four alternative indices (equally weighted, minimum volatility, risk efficient and fundamentally weighted RAFI) tracking the US market. All four outperformed the cap-weighted S&P 500 index over the longer term, by between 1.2 per cent and 3.8 per cent annualised over the past nine years. But EDHEC-Risk found big differences in performance in six monthly time periods, with each alternative index behaving well only in certain market conditions. Noël Amenc, director, said no one model could “pretend to be uniquely superior” as alternative weighted indices delivered different performances depending on conditions. EDHEC-Risk said the underperformance of alternative indices could be substantial (more than 13 per cent in one case) and could also be lengthy, lasting more than two years. It was misleading for providers to promote them as superior performers in the absence of rigorous processes to ensure risks were properly managed said EDHEC-Risk. It recommended investors should diversify exposures in combination portfolios and also monitor tracking errors to avoid periods of underperformance. (...)"
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  • Hedge Funds Review (September 2012)
    Robust assessment of hedge fund performance
    Article by René Garcia, Professor of Finance at EDHEC Business School, and Caio Almeida, Assistant Professor, Graduate School of Economics, Getulio Vargas Foundation
    "(...) A number of institutional investors now allocate a sizeable portion of their portfolios to hedge funds. This interest in hedge funds can be explained by the poor performance exhibited by traditional asset management. For some years now, numerous studies have shown that the vast majority of active asset managers do not outperform ­passive ­investment. Some authors find that the outperformance generated by active management just covers the costs generated by the strategy (...), while others conclude that the after-fee performance of active management is lower than that of passive management (...). All of these studies, conducted to propose improvement in terms of performance measurement, underline the difficulty of evaluating a portfolio’s true alpha. Within such a context of disappointing performance, hedge funds were seen as a way of improving portfolio performance. Evaluating hedge fund returns requires specific attention because hedge funds invest in a heterogeneous range of asset classes and cover a wide range of dynamic strategies that have different risk and return ­profiles. (...)"
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August 2012

  • Investment Magazine (August 2012)
    The benefits of inflation-linked corporate bonds
    Article by Lionel Martellini, scientific director, and Vincent Milhau, deputy-scientific director of EDHEC-Risk Institute
    "(...) In research supported by Rothschild & Cie, Lionel Martellini and Vincent Milhau discuss optimal debt-management structures. (...) A recent increase in inflation uncertainty has whetted investor appetite for appropriate hedges. Inflation hedging is now of critical importance to pension funds as well as to private investors. Inflation-linked securities, first introduced by sovereign states, have been introduced in response to rising demand for inflation hedging. Although inflation-linked debt is still most closely associated with states and their agents, utilities and financial service companies in particular are also expressing interest in it. In fact, intuition suggests that if a firm’s revenues grow with inflation, issuing some inflation-linked debt can be a natural hedge. It is surprising, then, that some large corporations do not issue inflation-linked bonds. (...)"
    Copyright Investment Magazine [investmentmagazine.com.au]


  • Benefits Canada (31/08/2012)
    Study: Risk of new equity indexes underperforming cap-weighted indexes
    "(...) New research from the EDHEC-Risk Institute warns of the risk of new forms of alternative-weighted equity indexes seriously underperforming traditional cap-weighted indexes. (...) Based on its findings, the EDHEC-Risk Institute makes the following three recommendations: diversify beta investment, because betas are not exposed in the same way to differing market conditions—notably, high-volatility/low-volatility and bull/bear environments; monitor explicit information on tracking error and extreme tracking error with respect to the cap-weighted indexes that the alternative indexes are supposed to be outperforming; and manage this constraint explicitly because it will ultimately improve the information ratio and risk-adjusted performance of these new indexes. The results show that with explicit tracking error constraints, the maximum tracking error of a diversified portfolio of alternative indexes declines by 44% while its median relative return is reduced by only 17%. The efficient diversified portfolio, combining the minimum volatility and maximum Sharpe ratio strategies, also improves the maximum relative drawdown compared to the stand-alone strategies without relative risk control by 35% and 28.5%, respectively. (...)"
    Copyright Rogers Publishing Limited [Full text]


  • L'Agefi (31/08/2012)  
    “New indices” may underperform originals
    "(...) A study published by the EDHEC-Risk Institute in the Journal of Portfolio Management suggests that the major alternative equity indices are probably superior in terms of long-term performance, but they run the risk of significant relative losses compared with cap size-weighted traditional indices. (...) The findings of the study show that with explicit constraints in terms of tracking error the maximal tracking error for a diversified alternative index is reduced by 44%, while the median relative returns are reduced by only 17%. An efficiently diversified portfolio, which combines minimal volatility and stratgies to maximise Sharpe ratios, can improve the maximal relative drawdown compared with single strategies with no relative risk control by 35% and 28.5%, respectively. (...)"
    Copyright L'Agefi [Full text - French - Registration required]


  • Institutional Asset Manager (31/08/2012)
    New forms of equity indices underperforming cap-weighted indices, says EDHEC-Risk
    "(...) Professor Noël Amenc, director of EDHEC-Risk Institute, says: “It is surprising that very few alternative equity indices which set a target of beating their cap-weighted equivalent benchmark include explicit tracking error constraints in their construction methodology, or provide information on the extreme tracking error risks that they contain. It is time to develop a genuine culture of relative risk management around alternative indices before the tracking error of these promising offerings leads to their demise.” (...)"
    Copyright GFM Ltd. [Full text]


  • Benefits and Pensions Monitor (31/08/2012)
    Alternative Indices May Underperform
    "(...) New forms of alternative-weighted equity indices run the risk of seriously underperforming traditional cap-weighted indices, says the EDHEC-Risk Institute. Its research paper ‘Diversifying the Diversifiers and Tracking the Tracking Error: Outperforming Cap-Weighted Indices with Limited Risk of Underperformance,’ shows that the main alternative indices on the market, while superior performers over the long term, have considerable relative drawdowns with regard to their cap-weighted counterparts. These drawdowns can be long (more than two years) and significant (more than 13 per cent). The research identifies two major sources of risk. One is risks that stem from a more pronounced ‘structural’ exposure to risk factors, which, through their associated premia, lead to outperformance over cap-weighted indices over the long term, but which, in certain conditions, can negatively affect the performance of these new indices. The other is that every weighting scheme, whether it is qualitative or quantitative, corresponds to a choice of model and, therefore, contains model risk. On the basis of this, it recommends diversifying beta investment, monitoring explicit information on tracking error and extreme tracking error, and managing this constraint explicitly. (...)"
    Copyright Benefits and Pensions Monitor [Full text]


  • NEWSManagers (31/08/2012)  
    Les "nouveaux indices" risquent de sous-performer les traditionnels
    "(…) Selon un article publié par l'EDHEC-Risk Institute dans le Journal of Portfolio Management, les principaux indices alternatifs d'actions sont probablement supérieurs en matière de performance sur le long terme, mais ils affichent des risques de pertes relatives importants par rapport aux indices traditionnels capi-pondérés. Ces "drawdowns" peuvent durer longtemps (plus de deux ans) et être de grande ampleur (plus de 13 %). Ces risques sont principalement imputables à deux raisons : une exposition structurelle plus prononcée à des facteurs de risque qui peuvent dans certaines conditions influer négativement sur la performance des indices ; tout système de de pondération, qu'il soit qualitatif ou quantitatif, découle du choix d'un modèle et de ce fait comporte un risque de modèle. (…)"
    Copyright Agefi [Full text - French - Registration required]


  • Asset International (30/08/2012)
    Beware the Risk of Alternative-Weighted Indices
    "(...) The trend of switching from capturing market performance through cap-weighted indices to alternative-weighted ones could be putting investors' capital at significant risk, a study published this month has found. The structure of some of these newly created indices could lead to losses of more than 13% and underperformance for periods of over two years, the EDHEC-Risk Institute said this month. A paper from the organisation identified two major sources of risk to which investors would be exposed: 1. Risks that stem from a more pronounced "structural" exposure to risk factors, which, through their associated premia, lead to outperformance over cap-weighted indices over the long term, but which, in certain conditions, can negatively affect the performance of these new indices. 2. Every weighting scheme, whether it is qualitative or quantitative, corresponds to a choice of model and therefore contains model risk. Asset managers and consultants have been inviting investors to consider other forms of capturing market performance - or alternative beta - through a range of alternatively-weighted indices. EDHEC-Risk suggested that investors diversify their beta investment strategies so they have a range of exposures that would be impacted differently depending on market conditions. (...)"
    Copyright Asset International [Full text]


  • Le Temps (27/08/2012)  
    Le risque se cache maintenant dans la complexité et le marketing
    "(...) L’investisseur se voit ouvrir les portes de marchés parfois difficiles d’accès. 98,8% des matières premières sont couverts par les ETF, mais seulement 36% des obligations souveraines et 22% des indices hedge funds, selon l’EDHEC. (...) La sélection de l’ETF est d’ailleurs moins simple qu’il n’y paraît. Comme l’écrit Burton Malkiel dans son ouvrage, « l’investissement exige beaucoup de travail ». 20% des investisseurs se déclarent dépassés dans l’établissement des critères de suivi des indices, selon l’EDHEC. (...)"
    Copyright Le Temps [Full text - French - Registration required]


  • Hedge Fund Journal (24/08/2012)
    Nonparametric Discounting: A robust assessment of hedge fund performance
    Article by Caio Almeida and René Garcia, EDHEC-Risk Insitute
    "(...) Robustness is key when assessing the performance of hedge funds. Since investment strategies are very diverse, sources of risk and corresponding exposures are hard to identify. Moreover, pension funds and rich individuals do not exhibit the same risk tolerance and will not assess performance in the same way. Traditional measures cannot offer such robustness to complex risk-factor exposures and investors’ risk aversion. Ratios involving mean returns and volatility (Sharpe, Treynor or Information ratios) or even more sophisticated ratios accounting for downside risk (Sortino, Gain-Loss or Omega ratios), do not control for the wide variety of strategies followed by hedge funds and therefore are not sufficiently informative to rank funds. Peer benchmarking also has its limits: homogeneous peer grouping is difficult given the absence of information regarding the hedge funds’ holdings and strategies, and investors cannot assess whether or not the average manager within the peer group generates any value. Measuring performance through alpha after adjusting the returns for the risk exposures to several factors delivers a finer basis for comparing funds. (...)"
    Copyright Hedge Fund Journal [Full text - Registration required]


  • Global Custodian (21/08/2012)
    North American Hedge Funds Hit All-Time High of $1.2 Trillion, Eurekahedge Reports
    "(…) The Eurekahedge Hedge Fund Index itself was up 1.10% in July and 2.57% year-to-date, although the industry saw outflows of $4.2 billion in the month. July was a rebound month for hedge funds, which had been on the decline for four straight months. Institutional investors, particularly pension funds, have been amping up the new inflows into hedge funds recently, according to an EDHEC-Risk report highlighted by J.P. Morgan yesterday. (…)"
    Copyright Global Custodian [Full text - Registration required]


  • Global Custodian (20/08/2012)
    Primary Hedge Fund Strategies Post Positive Performance in July
    "(…) All of the primary hedge fund strategies posted positive performance in July, the second consecutive positive month for many hedge funds, with the HFRI Fund Weighted Index returning 1.05%. These figures were highlighted in two separate trend reports from J.P. Morgan’s prime brokerage division and EDHEC-Risk. (...) EDHEC-Risk’s alternative indices also showed all market segments were up. Stocks gained 1.39% (S&P 500) with a nearly stationary implied volatility (VIX: 18.9%). Fixed-income instruments exhibited significant performance across all risk classes: worldwide and US high-grade (1.01% and 0.93% respectively), convertibles (0.95%), and the credit-spread index (0.66%). Commodities staged a comeback (6.07%) after having suffered huge losses over the last three months, while the Dollar (0.13%) was almost unchanged. (…)"
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  • European Pensions (17/08/2012)
    Hedge funds extend positive return performance for second consecutive month
    "(…) All hedge fund strategies had positive returns in Europe for July, extending the positive trend from the previous month according to EDHEC-Risk Institute. Stocks in the S&P500 gained 1.39% with a nearly stationary implied volatility at 18.9%. In July, CTA Global Hedge Fund strategies witnessed returns of 3.05%, global macro hedge fund strategies experienced returns of 1.51% and short selling strategies witnessed returns of 1.42%. Hedge fund strategies exposed to the equity risk factor benefited from the market environment, but captured less than half of its return due to rather low dynamic exposure. Equity Market Neutral has cumulative returns 0.35%, even driven returned 0.59% and long/short equity had cumulative returns of 0.43%. Funds of Funds recorded its best performance since February (0.72%). (…)"
    Copyright European Pensions [Full text]


  • CFO Insight (15/08/2012)
    Solvency II Draws Line for Corporates
    "(...) It could soon become significantly more difficult for the chief financial officers of financially weak companies to refinance via bond markets. A study by French think tank EDHEC reached this conclusion after examining the impact of Solvency II on the management of bond insurance. The results of the study show that the reform of the regulatory scheme in Europe, which would begin in 2014, would lead to a revaluation of this asset class by the insurance industry. An explanation for this lies in the new Solvency Capital Requirement (SCR) that actively discriminates against bonds with bad credit ratings or long maturities. Weak credit, long-term papers and non-rated bonds could lose much of their appeal in the future. According to calculations by EDHEC, insurers would have to hold two-and-a-half times as much equity for a BBB-rated bond as for a AAA-rated bond. This Solvency II stipulation could lead to insurers, who are important corporate bond investors, to rescind their strong commitment to this asset class. The same is true of long-term bonds, because the SCR increases with the maturity of bonds, regardless of their rating. Furthermore, lower demand for long-term securities could cause an increase in long-term interest rates. According to the analysts at EDHEC, not only would the importance of bond markets as sources of funding begin to diminish, but the overall financing environment would become much more challenging as well. (...)"
    Copyright Financial Gates [Full text]


  • Index Universe (08/08/2012)
    ESMA Turns Back The Index Clock
    "(...) The new rules have been welcomed by advocates of full index transparency. EDHEC-Risk, for example, said that: “By requiring that index calculation methodologies as well as index constituents and weightings be easily and freely available to investors and prospective investors, ESMA is mandating a complete reshaping of the index provision industry, for the benefit of UCITS and end-investors.” (...)"
    Copyright Index Universe [Full text]


  • CNBC (08/08/2012)
    To test efficiency, economists mail fake letters
    "(...) The results suggest that governments in developing countries suffer from the same inefficiencies as the private sector, including inferior "inputs" (human and physical capital and technology) and mismanagement, the economists wrote in a National Bureau of Economic Research working paper. While that finding was not surprising, "it is still important to recognize that not all bad government is caused by politics," wrote the group, which also included Alberto Chong of the University of Ottawa, Andrei Shleifer of Harvard University and Florencio Lopez-de-Silanes of EDHEC Business School in France. (...)"
    Copyright CNBC [Full text]


  • Securities Lending Times (07/08/2012)
    ESMA shakes up securities lending for UCITS funds
    "(...) The European Securities and Markets Authority (ESMA) has released guidelines on exchange-traded funds (ETFs) and other UCITS issues that affect securities lending and collateral diversification. (...) The EDHEC-Risk Institute, which conducts academic research for businesses, welcomed ESMA’s guidelines, but it said that it was “surprised by the boldness” of ESMA’s proposal on securities lending revenue. It said: “While it is only fair that investors receive the full benefits of the risks taken on their behalf, EDHEC had advocated a more modest approach that relied on disclosure and competition to improve terms for investors. The ESMA decision is a landmark decision that will force a dramatic reshaping of the European securities lending industry in a very short time span.” ESMA’s guidelines state: “All the revenues arising from efficient portfolio management techniques, net of direct and indirect operational costs, should be returned to the UCITS.” (...)"
    Copyright Black Knight Media Ltd. [Full text]


  • Financial News (06/08/2012)
    Esma bowls ETF market a googly
    "(...) The fund management industry was knocked for six on July 25 when the European Securities and Markets Authority, one of the region’s main financial regulators, launched the final version of its guidelines on exchange-traded funds and Ucits. (...) But many are worried that the new rules will leave ETF providers and fund managers out of pocket and place existing business models at risk. The EDHEC-Risk Institute said in a statement: “This new rule potentially changes the situation and the business model of ETF providers who have chosen physical replication because securities lending represented considerable sources of revenue for the asset management firms.” (...) In many cases index providers have previously provided only snippets of the methodologies and compositions used to build indices, arguing that the information was the intellectual property of the provider. EDHEC-Risk Institute said that ESMA’s recommendations would allow anyone to access details of the methodologies and replicate an index at little additional cost. (...)"
    Copyright Financial News [Full text - Registration required]


  • Pensions Insight (August 2012)
    Regulatory puzzle: Dismantling the jigsaw of DC regulation
    "(...) Risk sharing has been at the top of the pensions world’s agenda all year, and it looks set to stay there with the upcoming publication this autumn of a Department for Work and Pensions white paper on the topic. Tapping into this zeitgeist, the EDHEC Risk Institute published a study earlier this year into risk sharing. The research, sponsored by AXA Investment Managers (IM), calls for greater convergence in pension scheme regulation to facilitate risk sharing between employers and their staff. These measures could include more guarantees for defined contribution members and giving schemes more scope to diversify risk and adopt professional risk management practices. At the beginning of last month, AXA IM brought together a roomful of industry experts to thrash out the issues outlined in the report. They included pensions minister Steve Webb, who argued in a keynote presentation that the existing regulatory system needed urgent reform. He said: “Regulation, with the best possible will in the world, ended up destroying the thing it was meant to regulate: we have ended up losing quality defined benefit.” (...)"
    Copyright Pensions Insight [Full text]


  • Risk.net (02/08/2012)
    New Esma ETF guidelines change the rules on securities lending in favour of synthetics
    "(...) Market commentators point to the conclusions from a survey on synthetic ETFs by Paris-based consultancy EDHEC-Risk Institute from December 2011, which stated that Blackrock was the victim of its own “double-talk” in its relationship with the US Securities and Exchange Commission (SEC) and Esma. EDHEC made reference in the survey report to a letter to the US regulator in which Blackrock suggested that ETFs should be labelled according to their type of exposure and an Esma consultation in which it said they should be classified as either physical or synthetic. “The EDHEC study was strongly worded and very much made the argument between physical and synthetic in terms of the risks they were running. EDHEC pointed out that iShares was taking diametrically different positions with the SEC and Esma,” says a London-based ETF specialist. “If I was a regulator, that would really annoy me.” (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Professional Pensions (02/08/2012)
    A Developing Market
    "(...) The ETF market is a growing market and this looks set to continue. The EDHEC European ETF Survey 2011, published in March this year, shows that 63% of European institutional investors responding to the survey are planning to increase their investments in ETFs and only 1% would like to decrease it. The survey also indicates that there is an increase in using ETFs for short term dynamic strategies and sub-segment exposure even though the main uses of ETFs for the most part remains for broad market exposure and long-term buy and hold investments. (...)"
    Copyright Incisive Media Investments Limited [www.professionalpensions.com]


  • Portfolio Adviser (01/08/2012)
    PA Analysis: Esma ETF guidelines make zero monetary difference
    "(...) The main subject to have been picked up by commentators from the Esma guidelines on ETFs and other Ucits issues published last week has been the return of revenue, net of costs, generated via securities lending back to fund shareholders. There is little consensus about whether this will actually give shareholders any extra cash, however, or whether its benefit will be the less tangible impact of greater transparency. (...) Finally, EDHEC-Risk Institute's analysis comes down on the side of investors, not because the revenues generated by securities lending correspond to disproportionate profits, but because they allowed ETFs to show lower management fees. (...)"
    Copyright Last Word Media Limited [Full text]


  • Asia Asset Management (August 2012)
    Credit where credit’s due: A robust assessment of hedge fund performance
    "(…) Robustness is key when assessing the performance of hedge funds. Drawing on recent research supported by Newedge, René Garcia, professor of finance at EDHEC Business School, and Caio Almeida of the graduate school of economics of the Getulio Vargas Foundation, discuss a new method for evaluating hedge fund performance which captures the non-linear exposures of hedge fund strategies to several risk factors. (…)"
    Copyright Asia Asset Management [Full text]


July 2012

  • Investment Magazine (July 2012)
    How Asian investors see stock and bond indexes
    Article by Felix Goltz, head of applied research at EDHEC-Risk Institute
    "(...) A recent survey conducted by EDHEC-Risk Institute with the support of Amundi ETF sought to obtain the opinions of 127 investment-management professionals on stock and bond indexes, as well as insights into the current use of such indexes. Rather than constituting a random sample, the coverage of firms allows us to conclude that our sample of respondents is representative of Asian investment professionals who are likely to have advanced knowledge of indexation. Respondents are principally from the three asset-management hubs in the Asia-Pacific region (Australia, Singapore and Hong Kong), but a wide range of other countries are represented, such as India, China and New Zealand. The questionnaire deals with both the evaluation of the quality of an index as well as the role of indexes and the organisation of the investment-management process. Indeed, we cover a range of topics within each section. Rather than examining these on a topic-by-topic basis, the following is an overview of several key conclusions drawn from the findings. (...)"
    Copyright Investment Magazine [investmentmagazine.com.au]


  • IPE (31/07/2012)
    ETF guidelines will see investors reclaim securities lending profits
    "(…) The guidelines released by the European Securities and Markets Authority (ESMA) last week will help exchange-traded fund (ETF) providers who have chosen physical replication to adapt their business model and will lead to greater transparency among funds, according to the EDHEC-Risk Institute. In a statement, the institute said it welcomed the guidelines, which also touched on issues relating to UCITS, released on 25 July by ESMA, which indicated that all profits from securities lending should be returned to the fund. According to EDHEC, the rule set by ESMA will change the business model of ETF providers who have chosen physical replication because securities lending represented considerable sources of revenue for the asset management firms. "These revenues did not correspond to disproportionate profits but allowed ETFs to show lower management fees," the institute said. "As a result of receiving all of the lending profits, the ETF can now expect its management fees to increase." EDHEC nonetheless recognised that the arrangement will have the "merit of clarifying" the real costs of replication and the profits associated with the risk taken in the area of securities lending. The institute went on to say that the new rules on securities lending by UCITS would have a "strong impact" on the volumes handled on the securities lending market. (…)"
    Copyright IPE [Full text - Registration required]


  • Engaged Investor (July 2012)
    Webb urges pension pot promises for DC scheme members
    "(...) Steve Webb has called on defined contribution schemes to offer members a guarantee that their pots will not drop in value as part of wider moves to boost risk sharing between employers and staff. Speaking at the launch of new research on risk sharing by the EDHEC Risk Institute, sponsored by AXA Investment Managers, the pensions minister said pension providers should be able to offer a "nominal guarantee" that members' pots will not drop in value over a number of years. (...)"
    Copyright Engaged Investor [www.engagedinvestor.co.uk]


  • Financial News (31/07/2012)
    ETF guidelines to add costs for providers
    "(...) The new rules – which are guidelines that lack the legal standing of law handed down from the European Commission – call for the disclosure of the full calculation methodology of financial indices as well as disclosures about associated risks and expected tracking error. EDHEC-Risk Institute, a business school, also called the Esma rules a logical step for the ETF industry. It said it was “very satisfied that the European regulator has taken a major step towards transparency in an industry which up until now, with some exceptions, was characterised, under the pretext of protecting intellectual property, but the low level of information given to investors on index methodologies and compositions”. (...)"
    Copyright Financial News [Full text - Registration required]


  • L'Agefi (31/07/2012)  
    Les promoteurs d'ETF vont pâtir des nouvelles règles de l'Esma
    "(...) Les promoteurs d'ETF en Europe vont souffrir des nouvelles règles de l'Autorité européenne de régulation des marchés financiers (Esma), affirme une nouvelle étude de Moody's Investors Services, relayée également par une enquête publié par l'Edhec-Risk aux conclusions proches. (...) L'EDHEC-Risk Institute a donc enfoncé le clou en se disant éaglement "en accord avec les conclusions de l'Esma sur les risques de l'ETF". L'établissement a notamment relevé que les "guidelines" de l'Esma allait plus loin que le document de consultation dans deux domaines particuliers : Le premier porte sur le prêt-emprunt de titres, l'ESMA indiquant clairement que tous les profits de prêt de valeurs mobilières devaient revenir aux fonds. Cette position est une surprise pour toute l'industrie dans la mesure où personne n'imaginait que l'ESMA puisse aller aussi loin en termes de transparence. "Cette nouvelle règle change clairement la situation et le "business model" des fournisseurs d''ETF. Ceux qui ont opté pour la réplication physique l'ont fait en raison de l'importante source de revenus que procurait le prêt de valeurs mobilières, explique l'Institut. En l'occurrence, selon l'EDHEC, ces revenus ne constituent pas des profits disproportionnés mais permettent d'afficher des frais de gestion moins élevés... (...)"
    Copyright L'Agefi [Full text - French - Registration required]


  • Global Custodian (30/07/2012)
    Income From Securities Lending Should Not Be Used to Reduce Disclosed Fund Charges, Says IMA
    "(…) Offering an academic commentary on the guidelines, industry research body EDHEC-Risk Institute, said the guidelines are consistent with the conclusions of its research on ETF risks and ESMA’s consultation paper. Responding to ESMA’s guidelines on returning the profits from lending to the fund they said the new rule changes the business model of ETF providers who have chosen physical replication because securities lending represented considerable sources of revenue for the asset management firms. “As a result of receiving all of the lending profits, the ETF can now expect its management fees to increase; the arrangement will nonetheless have the merit of clarifying the real costs of replication and the profits associated with the risk taken in the area of securities lending,” said the Institute. EDHEC-Risk acknowledged that the new rules on securities lending by UCITS would have a strong impact on the volumes handled on the securities lending market. “This market is an important factor in ensuring a good level of liquidity and improving the efficiency of equity markets,” said the Institute. “It would therefore be important for an impact study to be produced in order to reinforce ESMA’s decision. “ (…)"
    Copyright Global Custodian [Full text - Registration required]


  • Investment Europe (30/07/2012)
    EDHEC-Risk Institute welcomes ESMA ETF guidelines
    "(...) ETF guidelines published by the European Securities and Markets Authority (ESMA) have been welcomed by EDHEC-Risk Institute, which says they are consistent with its responses to the Authority's consultation earlier this year. However, in two areas ESMA has gone much further than industry participants expected, EDHEC said. The first is in the area of securities lending, where the guidelines indicate that all profits from lending should be returned to the fund. "It is clear that this subject comes as a surprise to industry participants," EDHEC said. "Nobody thought that ESMA would go as far as it did on the subject. This new rule clearly changes the situation and the business model of ETF providers who have chosen physical replication because securities lending represented considerable sources of revenue for the asset management firms." "These revenues did not correspond to disproportionate profits but allowed ETFs to show lower management fees. As a result of receiving all of the lending profits, the ETF can now expect its management fees to increase; the arrangement will nonetheless have the merit of clarifying the real costs of replication and the profits associated with the risk taken in the area of securities lending." (...)"
    Copyright Incisive Media [Full text]


  • FTfm (30/07/2012)
    Securities lending challenges ahead
    "(...) The principle that Esma wants to uphold, in new rules that are set to come into force in February, is straightforward. Investors ultimately bear the risks associated with securities lending so they should receive the benefits. The practicalities are altogether more problematic. Fund managers argue that stock lending delivers real benefits, such as lower charges, that investors would not otherwise receive if managers had not gone to the trouble of setting of setting up lending programmes or employing a third-party (lending agent) to do so. Why, they ask, should they not be entitled earn profits from a valuable service that they provide to investors. (...) The potential impact of Esma’s new rules on investors is also unclear. The EDHEC-Risk Institute says management fees for physical ETFs will rise as providers will want to re-coup the revenues lost from securities lending. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Funds Europe (July/August 2012)
    Shedding light on who’s responsible
    Article by Samuel Sender, applied research manager at EDHEC-Risk Institute
    "(…) Following on from last month’s article, which was based on a survey of European fund industry professionals, we turn to the question of the respective responsibilities of asset managers and depositories within the fund management industry. According to respondents to our Shedding Light on Non- Financial Risks – a European Survey published in January 2012 (which was carried out within the risk and regulation in the European fund management industry research chair at EDHEC-Risk Institute supported by Caceis), the responsibilities of the fund management industry should be put under the limelight and reinforced. Directives must ensure that responsibilities are adequately distributed – and made clear to the client,who must in turn be knowledgeable about risks. (...)"
    Copyright Funds Europe [www.funds-europe.com - Registration required]


  • Benefits Canada (30/07/2012)
    Giving back sec lending revenues to ETF investors
    "(...) No one expected them to go that far. Sure, most ETF industry watchers expected the European Securities and Markets Association (ESMA) to crack down on transparency around securities lending. But none thought ESMA would go as far as ruling that all securities lending revenue has to be pumped right back into the fund for the benefit of investors. Which is exactly what happened last week as ESMA announced its new ETF guidelines. Although the guidelines cover Europe only, they could prove a game changer for the ETF industry, where providers argue revenues from securities lending keep costs low for investors. Just how much ETF providers make from securities lending activities is hard to quantify though – according to the Financial Times, participants are notably wary about sharing information about their securities lending activities. But according to a response issued by the EDHEC-Risk Institute this morning, “This new rule clearly changes the situation and the business model of ETF providers who have chosen physical replication because securities lending represented considerable sources of revenue for the asset management firms.” (...)"
    Copyright Rogers Publishing Limited [Full text]


  • FTfm (29/07/2012)
    ETFs fees may rise after Esma move
    "(...) Management fees for some exchange traded funds will rise due to new rules governing securities lending, according to the Edhec-Risk Institute, a division of EDHEC business school. The European Securities Markets Authority said last week that all profits from securities lending generated by Ucits funds should be returned to investors, rather than being split with the fund manager. Noël Amenc, director of the EDHEC-Risk Institute, said the new rules would change the business model of physical ETF providers, forcing them to raise management fees. However, providers with in-house lending programmes should still be able to keep a share of any profits from securities lending, said Mr Amenc. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Risk.net (27/07/2012)
    Standard formula ‘an inadequate risk measure’ for high-risk bonds
    "(...) European policy-makers has been urged to adjust Solvency II's treatment of bonds, after a study found that the current calibration of the standard formula does not adequately reflect the risks associated with very high-risk bond types. The research, by EDHEC Business School, also found that the standard formula underestimates losses on high-risk bonds during periods of crisis and does not reflect the differences in geographical risk of bonds. The European Insurance and Occupational Pensions Authority (Eiopa) should, EDHEC argues, adjust the bond solvency capital requirement (SRC) to incorporate the effects of macro-economic cycles and differences in geographical risk. It should also change the way high-risk bonds are assessed. EDHEC warns that the current calibrations of the bond SCR could lead to insurers shortening the duration of their bond portfolios and could threaten corporate funding by the insurance industry, EDHEC warns. "The current calibration of Solvency II is likely to prompt insurers to distance themselves from investing in long-term bonds, particularly those with ratings of BBB or lower. Naturally, this raises many questions on the future financing of the economy by the insurance industry," says Philippe Foulquier, director of the EDHEC Financial Analysis and Accounting Research Centre, based in Lille. "Solvency II could, therefore, dry up a major source of corporate funding and thus counter the growth and financing objectives of the economy," Foulquier adds. (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • FT Adviser (27/07/2012)
    7IM switches out of £110m of ETFs
    "(...) Multi-manager switches more than £100m into futures and out of exchange traded funds in a bid to reduce fees. (...) Mr Sleep said he recently took part in a survey by the EDHEC Risk Institute, which asked 174 investment managers and private wealth managers about the role of ETFs in asset allocation and their expected use of the securities. The survey found that 63 per cent were planning on increasing their use of ETFs and only 1 per cent of investors planning a decrease. “I completed the survey on behalf of 7IM and can say that I responded that we planned to decrease our ETF usage,” Mr Sleep said. (...)"
    Copyright FT Investment Adviser [Full text]


  • Benefits and Pensions Monitor (27/07/2012)
    Investors Could Shift From BBB
    "(...) Given the additional marginal cost that could be considered excessive in proportion to the return generated by such assets, investors could shift away from bonds rated BBB or lower under the new Solvency II requirements, says an EDHEC Risk Institute study. The study looks into the bond solvency capital requirement (SCR) as a risk measure, as well as its effect on bond management within a return-volatility-Value-at-Risk-SCR universe. Even though the report conceded that SCR – as defined by the Solvency II standard formula – is an appropriate measure of risk for fixed-rate bonds, SCR does not fully reflect the risk associated with long-maturity investment-grade bonds, high yield, or unrated bonds. It also noted that real credit spread is not strongly correlated with SCR due to the flat-rate treatment of spread risk under Solvency II, which assigns a single risk factor to each rating and does not account for internal variances in ratings. This means the additional marginal cost of long-term bonds could be seen as excessive compared with the return provided by such assets, which would push investors to "neglect" bonds rated BBB or lower and lead to "significant" implications for the financing needs of the economy. (...)"
    Copyright Benefits and Pensions Monitor [Full text]


  • L'Agefi (27/07/2012)  
    L'EDHEC étudie l'impact de Solvabilité II sur la gestion obligataire
    "(...) Le traitement des risques de marché constituent un des changements majeurs de Solvabilité II. Ces risques représentent un coût de capital additionnel qui doit désormais être intégré dans l'analyse des choix d'investissement des assureurs. Dans une étude intitulée « Les impacts de Solvabilité II sur la gestion obligataire », l'EDHEC analyse l'impact de la nouvelle régulation prudentielle sur la gestion obligataire des assureurs et s'interroge sur la pertinence du SCR obligataire comme mesure de risque. En outre, les auteurs se sont interrogés sur les conséquences de cette mesure de risque sur la gestion obligataire dans un univers rendement-volatilité-Value-at-Risk-SCR. Enfin, l'étude s'est aussi intéressé à la nouvelle hiérarchie obligataire et les opportunités d'arbitrage engendrées par Solvabilité II. (...)"
    Copyright L'Agefi [Full text - French - Registration required]


  • IPE (26/07/2012)
    Solvency II could drive investors from BBB bonds, EDHEC warns
    "(…) Investors could shift away from bonds rated BBB or lower under the new Solvency II requirements given the additional marginal cost that could be considered excessive in proportion to the return generated by such assets, a new study has found. According to an EDHEC Risk Institute study – which looks into the bond solvency capital requirement (SCR) as a risk measure, as well as its effect on bond management within a return-volatility-Value-at-Risk-SCR universe – the new Solvency II requirements could have a deep impact on investors' bond management practices. Even though the report conceded that SCR – as defined by the Solvency II standard formula – is an appropriate measure of risk for fixed-rate bonds, SCR does not fully reflect the risk associated with long-maturity investment-grade bonds, high yield or unrated bonds. EDHEC also noted that real credit spread is not strongly correlated with SCR due to the flat-rate treatment of spread risk under Solvency II, which assigns a single risk factor to each rating and does not account for internal variances in ratings. As a result, the additional marginal cost of long-term bonds could be seen as excessive compared with the return provided by such assets, which would push investors to "neglect" bonds rated BBB or lower. This, in turn, would lead to "significant" implications for the financing needs of the economy, EDHEC said. (…)"
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  • Financial News (26/07/2012)
    Solvency II could "dry up" corporate funding
    "(...) A paper published today by French business school EDHEC, “The Impact of Solvency II on Bond Management”, said the European Union's Solvency II directive on insurance companies will cut their appetite for non-investment grade credit once it comes into force in 2014. The report’s authors wrote: “Long-term bonds, particularly those with ratings of BBB or lower, could be neglected.” The reason, EDHEC said, was that the Solvency II directive will oblige insurers to account for the risk of their investments as a cost. The size of this cost, as calculated using the standard Solvency II formula, could be greater than the yields investors would earn on the bonds. EDHEC said: “This would likely result in financing problems for companies issuing such bonds. Naturally, this raises many questions on the future financing of the economy by the insurance industry. Solvency II could dry up a major source of corporate funding and thus counter the growth and financing objectives of the economy.” (...)"
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  • Funds Europe (26/07/2012)
    Corporate bonds to be hit by insurance rules
    "(…) Solvency II rules could “dry up” long-term funding for the corporate sector by discouraging insurers from the longer-dated corporate bond market, particularly the high-yield segment, say academics. The European Union’s Solvency II directive is intended to ensure that insurance companies stay solvent by imposing capital requirements on the assets they hold. Some insurers have already reduced their equity allocations as a result. Allocations to long-term corporate bonds, particularly those that are not investment grade, are also likely to reduce, said the Edhec Financial Analysis and Accounting Research Centre. The returns these bonds offer would not compensate insurers for the additional marginal cost of owning them. “Naturally, this raises many questions on the future financing of the economy by the insurance industry,” reads the report. “Solvency II could therefore dry up a major source of corporate funding and thus counter the growth and financing objectives of the economy.” EDHEC's research is based on analysing the way regulators calculate the solvency capital requirement for different asset classes. It found this measure underestimates the risk of losses for high-yield bonds during crisis years but overestimate the risks in crisis years. It also found the measure fails to reflect differing risk characteristics for different global regions. EDHEC suggested adjusting the calculations to take into account macroeconomic cycles and regional differences. It also concluded that the Solvency II formula tends to favour short-duration and particularly high-yield bonds. (...)"
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  • Pensions & Investments (24/07/2012)
    Hedge fund inflows strong in first half of the year
    "(...) Hedge fund inflows remained strong during the first half of 2012 — a net $20 billion — despite hedge fund returns that trailed those of major equity indexes. (...) Hedge funds of funds also produced positive returns in the six months ended June 30, with the HFRI Fund of Funds Composite index at 1.09% and the EDHEC Funds of Funds index at 0.8%. (...)"
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  • Benefits and Pensions Monitor (20/07/2012)
    Alpha Just Fair Reward
    "(...) What is incorrectly measured as hedge fund alpha in previous studies is actually some form of fair reward obtained by hedge fund managers from holding a set of relatively complex linear and non-linear exposures with respect to various risk factors, says research from the EDHEC-Risk Institute. The research findings strongly suggest that often the reduction in performance comes from a small number of extreme events which are not captured well with the usual linear approach. The findings also support the view that higher-moment equity risks capture a large part of the non-linear risk exposure of several hedge fund strategies. However, exposure to higher-moment risks for bond, interest rate, or currency is essential for other strategies, in particular emerging markets. ‘Robust Assessment of Hedge Fund Performance through Nonparametric Discount’ can be found at Fair Reward. (...)"
    Copyright Benefits and Pensions Monitor [Full text]


  • HedgeWeek (16/07/2012)
    EDHEC-Risk Institute proposes new method for assessing hedge fund performance
    "(...) In a report produced as part of the Newedge research chair on Advanced Modelling for Alternative Investments, EDHEC-Risk Institute has evaluated the performance of hedge funds through a non-linear risk adjustment of returns. This methodology is applied to various hedge fund indices as well as to individual hedge funds, considering a set of risk factors including equities, bonds, credit, currencies and commodities. The research findings suggest that what was incorrectly measured as hedge fund alpha in previous studies is actually some form of fair reward obtained by hedge fund managers from holding a set of relatively complex linear and non-linear exposures with respect to various risk factors. Often the reduction in performance comes from a small number of extreme events which are not captured well with the usual linear approach. (...)"
    Copyright GFM Limited [Full text]


  • NEWSManagers (16/07/2012)  
    L'EDHEC revisite la performance des hedge funds
    "(…) Dans le cadre des travaux pour la chaire de Newedge sur le thème “Advanced Modelling for Alternative Investments”, l'EDHEC-Risk Institute a adopté une nouvelle méthode d'évaluation de la performance des hege funds au moyen d'un ajustement non linéaire des performances au risque. Elle a été testée sur différents indices de hedge funds ainsi qu'à différents hedge funds pris individuellement en prenant en compte une série de facteurs de risque couvrant les actions, les obligations, le crédit, les devises et les matières premières. L'étude aboutit à la conclusion que ce qui était considéré indûment comme de l'alpha dans les analyses précédente est en réalité une forme de juste récompense pour les gérants de hedge funds pour la détention d'un ensemble relativement complexe d'expositions linéaires et non linéaires par rapport à différents facteurs de risque. Souvent, ajoute l' EDHEC, la baisse de la performance provient d'un petit nombre d'événements extrêmes qui ne peuvent pas être correctement capturés avec la méthode linéaire traditionnelle. (…)"
    Copyright Agefi [Full text - French - Registration required]


  • Asset International (13/07/2012)
    Hedge Fund Performance to Be Based on Investor Risk-Tolerance
    "(...) Hedge fund performance may soon be measured relative to the end investor's risk tolerance, as a new method to do so has been published by a leading European research unit. The EDHEC-Risk Institute has published a paper illustrating the failings of current performance measurement of hedge funds and offers an alternative. It said that the wide range of investment strategies in the hedge fund sector made it difficult to benchmark outperformance by individual firms. The study added that risk tolerance amongst investors also varied significantly, and this was to be considered when plotting out a fund's results. The report said: "A main drawback of the current approaches is to relate hedge fund returns to such risk factors linearly since it has been shown that hedge fund returns exhibit complex nonlinear exposures to traditional asset classes. In this paper, we propose a new method that captures the complex nonlinear exposures of a hedge fund strategy to several risk factors." In addition to measuring asset class exposure in a different way to the method used to benchmark traditional fund managers, the EHDEC proposal produces a risk adjustment function that weights hedge fund returns depending on the risk tolerance of an investor. (...)"
    Copyright Asset International [Full text]


  • Investment Europe (13/07/2012)
    EDHEC-Risk Institute research finds hedge fund alpha not correctly measured
    "(...) Research by the EDHEC-Risk Institute into non-linear risk adjusted hedge fund returns has found flaws in measurements made via previous studies into the source of alpha. Its latest study - Robust Assessment of Hedge Fund Performance through Nonparametric Discounting - suggests that "what was incorrectly measured as hedge fund alpha in previous studies is actually some form of fair reward obtained by hedge fund managers from holding a set of relatively complex linear and non-linear exposures with respect to various risk factors." These risk factors include equities, bonds, credit, currencies and commodities. By measuring performance according to non-linear risk exposure, the research also concludes that individual fund managers can measure the sensitivity of their portfolios to shocks affecting the risk factors, such as macro shocks. This type of measurement facilitates evaluation of hedge fund managers' performances in light of bull or bear markets, liquid or illiquid markets, and high or low interest rates, the research adds. (...)"
    Copyright Incisive Media [Full text]


  • Investment Magazine (09/07/2012)
    Flexible framework needed 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 inter-generational hybrid, with risk-sharing mechanisms between members and with sponsors. The degree of hybridity of a pension plan can be defined 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 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-contribution (CDC) and DC funds, where risk is entirely borne by individuals, both lie at the other end of the spectrum. However, as the market value of the pension rights in individual DC funds is always equal to the market value of the fund where all pension assets are invested and risk is individualised, they stand apart because they are not collective solutions. (...)"
    Copyright Investment Magazine [Full text]


  • Benefits Canada (09/07/2012)
    Beyond market cap: Why weight shouldn’t matter
    "(...) Just how dissatisfied are investors with the use of cap weightings? According to survey results from the EDHEC-Risk Institute which show that 100% of North American investors see the size biases associated with cap-weighted indices as a very important issue (versus just 71% of European investors). So what are the options? Well, there aren’t many at this point – which is why they’ll remain the reference for equity portfolios for the foreseeable future – according to EDHEC’s survey, only 23% see alternative indices as a viable means of replacing cap-weighted products. In the ETF space, there are a few new options. “Smart beta” options have been cropping up as a way to get around the market cap dilemma – such indices are based on factors or risk premia. Such products could help investors challenge the market cap status quo – provided the index is explained properly and clearly. Until then, according to the EDHEC survey, it looks like size will continue to rule. (...)"
    Copyright Rogers Publishing Limited [Full text]


  • Investment Europe (09/07/2012)
    Demanding new types of indices
    "(...) Beckley notes recent research has found traditional market cap benchmarks lacking, notably through the tech bubble and financial crisis. This has led to a host of non market cap weighted benchmarks becoming available. (...) The index provider has developed other partnerships, including one with French business school EDHEC to produce the Risk Efficient Index Series, which weights constituents according to their ability to maximise reward to risk ratios – while also working with major asset owners in terms of specific non market cap mandates. (...)"
    Copyright Incisive Media [Full text]


  • Financial News (08/07/2012)
    Jury still out over new smart beta ETFs
    "(...) The European exchange-traded fund market rarely stands still. Despite being ravaged by weak volumes and the heavy scrutiny of regulators last year, the industry has quickly reinvented itself in the first six months of this year, posting promising growth rates and diversifying into new, lower risk products. Among the sectors proving most promising, is smart beta ETFs. These ETFs are often based on alternative indices, which apply different weighting methods to stocks, unlike traditional, market capitalisation-weighted benchmarks. (...) According to a survey of the ETF market conducted by French think tank EDHEC-Risk Institute in March, 39% of respondents said that they would like to see more ETFs based on alternative indices, up from 29% in last year’s survey. This was viewed as a mandate for growth by the ETF industry, which suffered at the hands of regulatory debate last year. (...)"
    Copyright Financial News [Full text - Registration required]


  • Investment Europe (06/07/2012)
    North American investors concerned about index cap-weightings - EDHEC-Risk
    "(...) Results of EDHEC-Risk Institute's first survey of North American investment professionals points to concerns in the area of index investing stemming from bias in cap-weighted indices. Many more North American investors pointed to this as an issue compared to European investors surveyed in previous research. However, despite the concerns, 77% of respondents also said that they did not see alternative indices as a means for replacing cap-weighted indices. EDHEC-Risk's similar survey of Asian investors suggests that they are more satisfied with the equity indices they use. European investors are using equity volatility indices for diversification benefits, rather than hedging per se. (...)"
    Copyright Incisive Media [Full text]


  • IPE (04/07/2012)
    UK minister calls for industry to guarantee minimum pensions
    "(…) Pension funds in the UK should consider the introduction of a pot option that would safeguard the overall value of any contributions made, according to the country's pensions minister. Speaking at an event organised by EDHEC and hosted by Axa Investment Managers, Steve Webb deviated from his recent call for risk-sharing among employers and employees, advocating investment approaches that would offer a guaranteed retirement saving. (…)"
    Copyright IPE [Full text - Registration required]


  • L'Agefi (04/07/2012)  
    Les investisseurs américains restent fidèles aux indices capi-pondérés
    "(...) Un sondage de l'EDHEC-Risk Institute auprès de 139 professionnels nord-américains spécialistes de l'investissement indiciel montre que cette population est certes consciente des biais que comportent les indices capi-pondérés, mais qu'elle ne souhaite pas pour autant les remplacer. Si près de 100 % des personnes interrogées jugent que les biais liés à la taille dans les indices capi-pondérés sont une question importante ou très importante (contre 71 % en Europe), seuls 23 % des professionnels estiment que des indices "alternatifs" pourraient remplacer les indices capi-pondérés. (...)"
    Copyright L'Agefi [Full text - French - Registration required]


  • Barron's (03/07/2012)
    Cap Weighting: The Worst Index Method, Except For All The Others That Have Been Tried
    "(...) But investors still appear to find the well-known risk of putting too many eggs in one huge basket to be preferable to the other schemes that have been tried. That’s according to an EDHEC-Risk Institute survey of 139 institutional investors, asset managers and others in North America on the subject of index construction. Nearly 100% of respondents to the Nice, France research group’s survey view size bias as a “very important issue,” according to a release this morning. That’s a much bigger percentage than what the group has found in Europe, where just over two-thirds of investors called it a big issue. Meanwhile, only 23% said they viewed alternative indices — a group that may include equal-weight indexes, complex “intelligent” indexes and others — as a means of replacing cap-weighted indexes. The majority appear to view those indexes as complements to cap-weighting. “Cap-weighted indices – despite the fact that their shortcomings are widely acknowledged by respondents – are likely to remain the reference for equity portfolios for some time to come,” the group concludes. (...)"
    Copyright Dow Jones & Company, Inc. [Full text]


  • Financial News (03/07/2012)
    MP wants right to choose your regulator
    "(...) The Tory MP for Clacton told delegates at a roundtable organised by EDHEC Business School that a system of competition should be introduced. (...) His views were echoed with by several members of the roundtable, and Nöel Amenc, professor of finance and director of development at EDHEC Business School and the director of EDHEC-Risk Institute, went one step further: “I agree – and we could have class actions against regulators. No regulator is accountable for regulation. You could have bonuses for regulators, and also penalties.” (...) Amenc said: “What is supposed to drive the regulatory agenda is based on economic theory, and the fact that we want to improve market activities and the function of the market. This was the traditional approach. The market is a real place to make decisions and to find an equilibrium, so you should ensure the market is well informed.” He said the past few years have seen a distrust of the market, and the regulatory agenda has been driven by the assumption that market participants are “irrational, short-termist and taking more risk than is needed”. That, Amenc said, is a big change in the minds of the regulatory bodies: “Instead of trusting the market they want to trust processes. And they come up with compliance tick boxes; at the end everybody will not be responsible for their acts and for their good decisions, but for ticking the box and respecting the process.” (...)"
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  • Asset International (03/07/2012)
    What’s Your Benchmark? It Depends on Where You Are
    "(...) The attitude toward benchmarks to measure risk and return depends on geographical location, a survey of international investors' attitudes has revealed. North American investors are generally content with their equity benchmarks, due to their overall investment philosophies, while Europeans are demanding alternatively weighted measurements, a survey by the EDHEC-Risk Institute has found. In reference to equities, investors on the west of the Atlantic favour a buy-and-hold strategy, which sits more comfortably with a market capitalising-weighted index. Conversely, Europeans are not as concerned with this investment philosophy and favour more innovative theories behind indexes, a paper written on the survey reported. (...)"
    Copyright Asset International [Full text]


  • Financial News (02/07/2012)
    Conflict disclosure could soften shocks
    "(...) Florencio Lopez de Silanes, head of a new research programme on regulation and mutual fund governance, says the world lacks adequate rules governing pre-transaction declarations and has called for public regulation that requires full disclosure of potential conflicts of interest by executives, the approval of deals by disinterested shareholders, and proper legal recourse for shareholders if transactions sour. His study of situations in which managers or controlling shareholders use their power to personally benefit – self dealing – includes a range of different corporate decisions and transactions, including excessive executive compensation, self-serving deals, corporate perks and transfer pricing. (...)"
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  • IPE (02/07/2012)
    The implementation game
    "(…) In France, Russell is positioning its services to the insurance sector (which, in any case, accounts for the bulk of institutional assets) and has sponsored EDHEC Risk Institute’s Solvency II Benchmarks chair. (…)"
    Copyright IPE [Full text - Registration required]


June 2012

  • Risk.net (29/06/2012)
    ETFs under the microscope
    "(...) Regulators argue there is currently little transparency and disclosure on any of these points: the composition of the collateral, the haircut policy and the risk of exposure to a default of the swap counterparty. These concerns were echoed by Tony Hanlon, manager of the asset management sector team at the Financial Services Authority (FSA), speaking at a conference run by the EDHEC-Risk Institute in London in March. “We have identified that there is some funding benefit for the sponsoring investment bank of an ETF,” he said. “That creates a new set of risks, which must be disclosed and managed.” (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Benefits and Pensions Monitor (27/06/2012)
    Inflation-linked Bonds May Provide Solution
    "(...) The issuance of inflation-linked bonds may provide a solution for both institutional investors and members of corporate finance departments, says a survey by EDHEC-Risk Institute. The survey was conducted to seek reaction to the conclusions of a study entitled ‘Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks,’ produced as part of the Rothschild & Cie research chair. The results indicate that the research topic is perceived as highly relevant to current investor concerns and issuers of corporate debt. For investors, inflation-linked corporate debt could be an ideal instrument for hedging their liabilities at a time when sovereign debt is no longer considered the default asset for pension fund asset-liability management. For corporations, issuing inflation-linked debt would ultimately limit the firm’s risk and increase the value of its shares. Overall, the responses support the central tenet of the study that for many firms, current debt-management practices can be improved through the issuance of inflation-linked debt. (...)"
    Copyright Benefits and Pensions Monitor [Full text]


  • Market News International (27/06/2012)
    Corporate Inflation-Linked Bond Pricing Unattractive
    "(...) Vincent Milhau, deputy scientific director of EDHEC-Risk Institute, told MNI Wednesday that "The main impediment is likely to come from issuers, not from investors." "The recent sell-out of Tesco's inflation-linked bonds," at the end of 2011 "shows that investors have an appetite for such products," he said. "On the other hand, issuers seem to be more reluctant to engage in the issuance of these bonds," Milhau added. "This has to do with the perceived low or negative correlation of their cash-flows with inflation, or the exposure of the company's revenues to inflation risk from several countries," he commented. He reiterated some of the survey findings published on Tuesday, noting it "points to increased interest from both investors and issuers for corporate inflation-indexed bonds." But despite investors' interest, "A key point is in fact that issuers be able to deliver higher payoffs in periods of increased inflation," Milhau told MNI. (...)"
    Copyright Market News International [mninews.deutsche-boerse.com]


  • CFO Insight (26/06/2012)
    Companies Flirt With “Linkers”
    "(...) The issuance of inflation-indexed bonds could begin to play a much larger role in capital market financing of large corporations. The French EDHEC-Risk Institute reveals these findings after a recent study, during which investors and issuers were questioned on the subject. So-called "linkers" could be an alternative, and provide an effective “natural hedge”, especially for companies whose cash flows are strongly correlated with the rate of inflation, such as suppliers and banks. Still, the borrowers issued volume is negligible for inflation-linked corporate bonds. For example, numbers from the United Kingdom show the outstanding volume of inflation-linked corporate bonds to total only $11 billion, compared with a total corporate bond volume of $342 billion. EDHEC argues that an explanation for this can be observed in the one-sided perception of risk on behalf of many CFOs. While interest rate risks were closely observed when making the choice between fixed and variable coupon bond issuances, CFOs did not regard inflation risks with similar prudence. (...)"
    Copyright Financial Gates [Full text]


  • Canadian Investment Review (26/06/2012)
    Time for Inflation-Linked Corporates? Yes according to survey by EDHEC-Risk Institute
    "(...) A little over a decade ago, pension funds could rely on allocations to government bonds to help fund their liabilities and manage risk. However, the fallout from the 2008 Financial Crisis combined with punishingly low yields on government bonds have fundamentally changed the role that sovereign debt plays in a pension portfolio. These same factors have also pushed more and more pension funds to explore new areas of fixed income, including greater allocations to corporate debt. As corporate debt becomes more important for pension funds and other institutional investors with inflation-sensitive liabilities, the EDHEC-Risk Institute has raised an interesting question: what if corporate market debt programs were designed to look more like the sovereign debt market? It’s the subject of a new study released today entitled “Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks.” In it, respondents suggest that the issuance of inflation-linked bonds may benefit both issuers and investors. (...)"
    Copyright Canadian Investment Review [Full text]


  • NEWSManagers (27/06/2012)  
    Les obligations indexées idéales pour les grands investisseurs
    "(…) Un sondage auprès de 21 investisseurs institutionnels et de 25 responsables financiers d'entreprises (émetteurs), principalement européens, réalisé par Edhec-Risk Institute et parrainé par Rothschild & Cie montre que les investisseurs jugent les obligations d'entreprises indexées sur l'inflation comme l'instrument idéal pour couvrir leurs engagements, maintenant que la dette souveraine n'est plus considérée comme un actif à l'abri du défaut dans le cadre de la gestion sous contrainte de passif effectuée par les fonds de pension. En ce qui concerne les entreprises, les personnes interrogées estiment que l'émission d'obligations indexées sur l'inflation est de nature à limiter en dernier ressort le risque de l'entreprise et à augmenter la valeur de ses actions. (…)"
    Copyright Agefi [Full text - French - Registration required]


  • Institutional Asset Manager (26/06/2012)
    Inflation-linked corporate bonds may provide institutional investors with substitute for sovereign debt, says EDHEC survey
    "(...) In a survey of institutional investors and members of corporate finance departments, EDHEC-Risk Institute sought reactions to the key conclusions of a study entitled “Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks”, which was produced as part of the Rothschild & Cie research chair. (...) Overall, the responses reflect strong agreement with many of EDHEC-Risk Institute’s key propositions, and the central tenet of the paper: that for many firms, current debt-management practices can be improved through the issuance of inflation-linked debt. (...)"
    Copyright GFM Ltd. [Full text]


  • Pensions Age (26/06/2012)
    Investors in favour of issuance of inflation-linked corporate bonds
    "(...) The issuance of inflation-linked corporate bonds may provide a solution for both institutional investors and corporations, according to new research by EDHEC-Risk Institute. Entitled Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks, the research found that the topic is perceived as highly relevant to current investor concerns and issuers of corporate debt. For investors, inflation-linked corporate debt could be an ideal instrument for hedging their liabilities at a time when sovereign debt is no longer considered the default asset for pension funds’ asset-liability management. For corporations it would ultimately limit their risk and increase the value of its shares. The institute said that potential issuers agreed with the positive attributes of inflation-linked debt, while over half of respondents recognised the prospects for the development of a highly liquid market as a result of this type of research. The paper found strong agreement among respondents that for many firms, current debt management practices can be improved through the issuance of inflation-linked debt. (...)"
    Copyright Pensions Age [Full text]


  • Le Temps (25/06/2012)  
    Le capital financier veut avoir un impact sur la société
    "(...) Par ailleurs, si l’on peut démontrer que les fonds gérés selon les approches durables ne pénalisent pas la performance financière, les historiques de rendement sont encore assez brefs. Les experts de l’EDHEC-Risk critiquaient récemment le choix des indices durables de référence, par exemple ceux qui pondèrent les actions en fonction de leur qualité durable. « Une priorité à l’analyse extra-financière ne doit pas devenir une excuse pour ignorer 50 ans de recherches sur la construction d’un portefeuille optimal », selon Véronique Le Sourd. (...)"
    Copyright Le Temps [Full text - French - Registration required]


  • Index Universe (22/06/2012)
    Corporate Bond Indices
    Article by Fahd Rachidy and Felix Goltz
    "(...) In recent years, investors have also been making increasing use of indices to manage their bond investments. When the first corporate bond exchange-traded fund (ETF) was launched by iShares in the United States in 2002, there were only a few fixed-income ETFs, whereas there are now more than 70 based on corporate bonds alone. According to the ETF Industry Association, bond ETF assets grew from about US$129 billion in 2010 to nearly US$180 billion at the end of last year: an impressive growth rate of 39.5%, compared to the 5% overall growth of the ETF industry. Furthermore, bond ETF inflows reached US$45 billion (38% of the industry’s total inflows). These numbers convey the recent increase in interest in passive investing in this asset class, but only recently have practitioners and academics begun to discuss the qualities of the indices underlying such funds. The bond indices offered by existing providers face a number of challenges. The major one for standard corporate bond indices, which simply weight the debt issues by their market value, is the so-called “bums’ problem” (Siegel 2003). (...)"
    Copyright Index Universe [Full text]


  • Futures (22/06/2012)
    Speculation debate: part 100
    "(...) Finance Watch blames speculation for price inflation, EDHEC offers contradictory evidence. (...) The debate on speculators’ role in the price of commodities has been going on for decades, but was reignited by spikes in commodities, particularly crude oil, in 2008. This has led to wave of calls for restrictions on speculators across the globe. France’s EDHEC-Risk Institute took a critical look at the position paper, “Investing not betting” published by Finance Watch, a Belgian-based public advocacy group, which is advocating for more active restriction on speculators. In the position paper Finance Watch takes a negative view of commodity speculation, asserting that it artificially inflates prices, which harms both producers and consumers and leads to increased social unrest. The group argues that speculators should constitute a minority of market participants, as “a market dominated by speculation quickly becomes divorced from economic activity, burdening society with a poor allocation of resources.” To solve the problem, the group recommends numerous regulatory reforms, including the imposition of ex-ante individual and market limits on speculative positions. EDHEC, however, challenges many of Finance Watch’s major points and cites several studies suggesting that commodities speculation actually tends to decrease price volatility. In a lengthy rebuttal, EDHEC also questions the premise that there should be a linear relationship between supply-and-demand and price. (...)"
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  • Commodities Now (22/06/2012)
    Who Sank the Boat?
    "(...) EDHEC-Risk Institute Warns against "Speculative" Regulatory Proposals for Commodities Markets in Europe: In a new position paper, EDHEC-Risk Institute responds to a recent report* by Finance Watch on regulatory proposals for commodity derivatives markets in Europe. The paper describes an alternative narrative for what caused the recent commodity price rises and then notes what implications this narrative has for addressing Finance Watch's regulatory proposals. In summary, the EDHEC-Risk position paper, entitled "Who Sank the Boat?" (in reference to the difficulty in apportioning causality for commodity price increases), agrees with Finance Watch's concerns regarding food and oil price spikes. "Our main concern is that the public interest group's specific proposals may actually be placebos (or worse) that distract from properly addressing the fundamental factors responsible for these price rises. "We review both the theory and empirical evidence regarding how commodity futures markets work, including the role of the speculator. We also discuss how difficult it is to apportion causality for commodity price spikes when inventories-relative-to-consumption become sufficiently low," says Noël Amenc, Professor of Finance, EDHEC Business School. (...)"
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  • La Tribune (22/06/2012)  
    Les gagnants du prix de l'innovation - Les Lauréats de 2012 : AXA, Amundi et THEAM
    "(...) PRIX PARTICULIER : UN FONDS COUVERT THEAM ORIGINAL POUR JOUER LES MARCHÉS EUROPÉENS
    THEAM Quant Equity Eurobloc Covered EDHEC, de chez BNP Paribas Investment Partners FFTW, éligible au PEA, est un fonds d'actions européen cherchant une maximisation du rendement avec une volatilité maîtrisée. L'innovation consiste à exposer le fonds via un indice spécifique le FTSE-EDHEC Risk Efficient Eurobloc. Cet indice développé par l'EDHEC mesure le rendement anticipé d'une action en fonction de son profil rendement/risque, le poids alloué à chaque action étant défini dans une optique d'optimisation du risque plutôt qu'en fonction des capitalisations comme dans les grands indices classiques. Par ailleurs, un mécanisme défensif de ventes systématiques d'options d'achats sur l'Euro Stoxx 50 permet d'offrir un coussin de protection supplémentaire en cas de baisse du marché et une source de surperformance en cas de marché stable ou modérément haussier.
    (...)"
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  • Futures and Options World Intelligence (19/06/2012)
    EDHEC-Risk Institute issues warning to commodity regulators
    "(...) EDHEC-Risk Institute says it has taken issue with a number of positions adopted by the public interest group Finance Watch. It objects to the paper’s comments that speculators must have a minority role in futures markets and that excessive speculation undermines the commodity price formation mechanism. The firm also disagreed with the call for a linear relationship between a commodity’s supply-and-demand data and its price. It has produced a counter-paper contesting the assertions, which were published by Finance Watch under the title: “Investing Not Betting: Making Financial Markets Serve Society.” “Modern commodity futures markets are the result of 160 years of trial-and-error efforts,” said Hilary Till, author of the EDHEC-Risk paper. “We further recommend that European Union policymakers instead consider studying market practices globally and then adopt what is demonstrably best practice, rather than invent new untested regulations.” (...)"
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  • HedgeWeek (19/06/2012)
    EDHEC-Risk Institute warns against “speculative” regulatory proposals for commodities markets in Europe
    "(...) In a robust critique of a recent paper by the public interest group Finance Watch (Investing Not Betting: Making Financial Markets Serve Society,” April 2012), EDHEC-Risk Institute has taken issue with a number of positions that this paper deems to be self-evident, e.g. that speculators must have a minority role in futures markets; that excessive speculation undermines the commodity price formation mechanism; and that there should be a linear relationship between a commodity’s supply-and-demand data and its price. Drawing on the theoretical and empirical evidence in the academic literature, the EDHEC-Risk Institute position paper, entitled: “Who Sank the Boat?” (in reference to the difficulty in apportioning causality for commodity price spikes), shows that the above assertions are simply wrong. According to the author of the EDHEC-Risk paper, Hilary Till: “Modern commodity futures markets are the result of 160 years of trial-and-error efforts. One result has been the creation of an effective price discovery process, which in turn assists in the coordination of individual efforts globally in dynamically matching current production decisions with future consumption needs in commodities. “Before performing surgery on these institutions, we suggest that Finance Watch’s supporters tread carefully and not adopt “speculative” regulatory proposals whose ultimate effects are unknown. We further recommend that European Union policymakers instead consider studying market practices globally and then adopt what is demonstrably best practice, rather than invent new untested regulations.” (...)"
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  • Risk.net (19/06/2012)
    EDHEC develops framework for Solvency II equity risk management
    "(...) EDHEC-Risk Institute, the risk and asset management research centre, has developed an investment framework that it claims will enable insurers to invest in equities at a lower Solvency II capital cost compared to a static equity allocation. The Solvency II benchmarks, which have been developed in conjunction with asset management firm Russell Investments, provide an objective, systematic set of rules for implementing a risk-controlled investment programme to manage the risk of equity investments, according to EDHEC. The strategy underlying the benchmarks uses a dynamic allocation strategy between equity and cash, rebalancing the allocation at regular intervals. The framework is designed to ensure that the maximum losses with 99.5% probability over a one-year time horizon do not exceed a certain threshold, defined by an insurer's Solvency II risk budget. This approach allows insurers to respect a maximum drawdown or maximum loss limit for specific time horizons, says EDHEC. The benchmarks use two indices from Russell Investments as proxies for the equity asset class, while the Euribor 1M is used as a proxy used for cash. The formula can be applied to other indices. EDHEC says the benchmarks can be used as a starting point for a partial internal model. The current and historical performances of the benchmarks are freely available with both returns and weights. (...)"
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  • FTfm (18/06/2012)
    Beware big risks in the new indices
    Article by Noël Amenc, director of EDHEC-Risk Institute
    "(...) In recent years, new forms of equity indices have proliferated and not a day goes by without a new benchmark being offered to investors. These new forms of indices are often presented as sources of outperformance, but it is clear that the alpha they provide is not a free lunch. There are two major sources of related risk. First, risks that stem from a more pronounced “structural” exposure to risk factors, which, through their associated premia, lead to outperformance of cap-weighted indices over the long term, but which, in certain conditions, can negatively affect the performance of these new indices. (...) Second, every weighting scheme, whether it is qualitative or quantitative, corresponds to a choice of model and therefore contains model risk. Even if financial research allows one to hope for a certain robustness in the models used, the fact remains that every index construction method relies on assumptions and meets what academics modestly refer to as conditions of optimality, but what practitioners understand as limitations to the promise of outperformance. (...)"
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  • Pensions & Investments (18/06/2012)
    Emerging markets hedge funds hit hardest in May
    "(...) After leading all hedge fund strategies through April, emerging markets hedge funds were hit the hardest during May as markets across the globe pulled back on fears about Europe's financial crisis. Data released Monday by EDHEC-Risk show that convertible and fixed-income arbitrage strategies have held up well alongside distressed assets through the first five months of the year. (...)"
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  • Asia Asset Management (15/06/2012)
    EDHEC and Russell make Solvency II benchmarks available online
    "(…) The EDHEC-Risk Institute has announced the launch of its new Solvency II benchmarks, constructed in cooperation with multi-asset solutions manager Russell Investments. The new benchmarks for European insurance companies are representative of a dynamic allocation strategy to equities. The benchmarks, which are based on two underlying indices from Russell Indexes, Russell Developed and Russell Global, rely on dynamic core-satellite and life-cycle investing techniques and allow investors to respect a maximum loss limit in each calendar year. The benchmarks’ current and historical performance, with both returns and weights, along with a full set of documentation, are freely available for download online at the following address: www.edhec-risk.com/solvencybenchmarks. (…)"
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  • Le Figaro (15/06/2012)  
    EDHEC-Risk Institute lance de nouveaux indices Solvabilité II
    "(...) EDHEC-Risk Institute a annoncé aujourd'hui le lancement de ses nouveaux indices Solvabilité II (les « EDHEC-Risk Solvency II Benchmarks »), construits en collaboration avec le gestionnaire d'actifs mondial Russell Investments. Ces nouveaux indices destinés aux compagnies d'assurance européennes représentent une stratégie d'allocation dynamique en actions. Les indices, qui sont calculés en utilisant les indices sous-jacents « Russell Developed and Russell Global », reposent sur des techniques d'allocation dynamique coeur-satellite et de gestion à cycle de vie, et permettent aux investisseurs de respecter une limite de perte maximale chaque année calendaire. (...)"
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  • NEWSManagers (15/06/2012)  
    L'EDHEC-Risk Institute lance les indices Solvabilité II élaborés avec Russell
    "(…) L'EDHEC-Risk Institute a annoncé le 14 juin le lancement de ses nouveaux indices Solvabilité II (les « EDHEC-Risk Solvency II Benchmarks »), construits en collaboration avec le gestionnaire d'actifs Russell Investments. Ces nouveaux indices destinés aux compagnies d'assurance européennes représentent une stratégie d'allocation dynamique en actions. Les indices, qui sont calculés en utilisant les indices sous-jacents « Russell Developed and Russell Global », reposent sur des techniques d'allocation dynamique coeur-satellite et de gestion à cycle de vie, et permettent aux investisseurs de respecter une limite de perte maximale chaque année calendaire. (…)"
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  • Ignites Asia (14/06/2012)
    Value of returns under threat in FOFs
    "(...) There has been a huge value destruction on returns in the past 20 years by funds of funds (FOFs), according to François-Serge Lhabitant, a Lille, France-based affiliate professor of finance at EDHEC Business School and chief investment officer at London-based Kedge Capital. Lhabitant made the comment last month during the EDHEC-Risk Days Asia 2012 conference in Singapore, where he presented his views on the current state of the hedge fund industry. According to Lhabitant, in a span of 20, 10 or even five years, there has been a huge difference in the returns made between Hedge Fund Research’s HFRI Fund Weighted and the HFRI FOF Index. “The reason why a lot of people are not happy is because of the value destruction,” he said. Lhabitant said that investors expect hedge funds to offer some “decorrelation” from traditional portfolios. (...)"
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  • Hedge Funds Review (June 2012)
    Research shows only 10-15 hedge funds needed for optimum portfolio diversification
    Article by François-Serge Lhabitant, chief executive officer and chief investment officer of Kedge Capital and an associate professor of finance at EDHEC Business School
    "(...) Hedge fund investors are returning to the concept of modern portfolio theory: diversification by combining several hedge funds with different return distributions and risk profiles to diversify risk. (...) Harry Markowitz’s 1952 seminal paper on modern portfolio theory contains the foundation of what seems to be the only free lunch in finance: the reduction of risk through portfolio diversification. An investor who spreads wealth among many imperfectly correlated assets will observe a decrease in the volatility of their portfolio, says Markowitz. When properly executed, there is no reduction in average return and so, apparently, no bill for the lunch. Since Markowitz the idea of portfolio diversification has been gradually applied to a variety of asset classes. However, it is in equity that most of the related research has mushroomed. One question that has received considerable attention in financial literature is the number of common stocks required in a portfolio to achieve an adequate level of risk diversification. (...)"
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  • Ignites Asia (14/06/2012)
    Use risk-adjusted returns to assess hedge funds
    "(...) The performance of hedge funds should be assessed using risk-adjusted returns, which would give a more robust assessment of the portfolio, according to René Garcia, Nice, France-based academic director at EDHEC-Risk Institute and a professor of finance at EDHEC Business School. “Since not all investors have the same risk tolerance, you can ask yourself if the performance of this hedge fund will appeal to all investors or to certain investors,” Garcia said last month during the EDHEC-Risk Days Asia 2012 conference in Singapore. He said that performance varies according to the risks taken by a portfolio manager, and thus, performance assessment of hedge funds should be robust and applicable to various models. Investors should also consider the timing of returns or losses, as well as whether or not a small change in the risk-factor profile has induced a large change in the performance of a particular fund. (...)"
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  • Funds Europe (June 2012)
    EDHEC Research: A strong message about transparency
    Article by Samuel Sender, applied research manager at EDHEC-Risk Institute
    "(…) The EDHEC-Risk Institute said in 2010 that non-financial risks needed more attention. Samuel Sender, research manager, dissects a recent attempt to find out if the investment community agrees. (...) To date, no satisfactory measures have been taken either by the national and supranational regulators, or by the industry itself, to put non-financial risks under control. Growing sophistication of operations and investment strategies, together with their progressive internationalisation, have outpaced the capacity to establish proper risk management practices. In our 2010 study, The European Fund Management Industry Needs a Better Grasp of Non-financial Risks, by Noël Amenc and Samuel Sender, we insisted that transparency and governance were at the forefront when trying to tackle non-financial risk. Those improvements could come from regulators, self-regulation by industry bodies, or both. (...)"
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  • Ignites Asia (12/06/2012)
    EDHEC proposes new volatility indices for Asia
    "(...) Cross-sectional volatility indices may be used in measuring volatility in Asia, according to Stoyan Stoyanov, Singapore-based head of research at EDHEC-Risk Institute-Asia and a professor of finance at EDHEC Business School. Currently, option-implied volatility indices are used in measuring volatility in the region. Those indices include Australia’s S&P/ASX 200 (VIX), Japan’s Nikkei Volatility Index (VNKY), India’s India NSE VIX (INVIXN), South Korea’s Kospi 200 Volatility Index (VKospi) and Hong Kong’s Hang Seng Volatility Index (VHSI), according to Stoyanov. However, volatility indices depend on the option market, which poses several problems, he said. “It makes sense to look for a new methodology that does not depend on the option market,” Stoyanov said last month at the EDHEC-Risk Days Asia 2012 conference in Singapore. (...)"
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  • Ignites Asia (12/06/2012)
    ETFs "winning" products in index space: Deutsche
    "(...) In the same conference, Frédéric Ducoulombier, Singapore-based director at EDHEC-Risk Institute-Asia, said in a presentation given a day before Montanari’s talk that securities lending provides ETFs with more opportunities to take on more unmitigated and non-transparent counterparty risk, as reported. Derivatives are usually associated with synthetically replicated ETFs, while securities lending is associated with physically replicated ETFs, according to an EDHEC research paper titled “What are the risks of European ETFs?”. (...)"
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  • Financial News (08/06/2012)
    Insurers continue to back private equity
    "(...) The news comes amid fears that Solvency II regulations due to be introduced by the European Commission will constrain the sector's ability to invest in private equity. Under Solvency II, unlisted private equity and hedge funds will sit under the “other equities” umbrella group, which is currently allocated a shock buffer of 49%. This means that for every €100 invested the insurer would be required to hold up to €49 of capital – known as a "shock buffer" – against that investment, one of the highest buffers in the legislation. Despite the upcoming changes, which are due to come into effect in 2014, only 22% of insurance companies say they are unsure of the timeframe of their next private equity commitment. One investor partly attributed the figures to insurers being able to lower the shock buffer if they can justify to their national regulator that their internal risk controls are adequate. There are also other ways to lower the capital buffer. In March, the EDHEC business school published research arguing the capital charge would fall to 25% if clients can reassure regulators that they are hedging their risks. (...)"
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  • L'Agefi Actifs (08/06/2012)  
    Les Actifs de l'Innovation - OPCVM; Actifs de bronze - Theam Covered EDHEC Eurobloc Equity
    "(...) Si les indices traditionnels constituent bien une référence incontournable pour les investisseurs, les dernières années ont prouvé que les biais qu’ils présentaient pouvaient générer des expositions à des risques non maîtrisés. Theam, en partenariat avec l’EDHEC Risk Institute, a donc décidé de lancer Theam Covered EDHEC Eurobloc Equity, un produit utilisant sa stratégie de vente d’options (déjà en place dans sa gamme « covered ») sur l’indice FTSE-EDHEC Risk-Efficient Eurobloc, prenant en compte le risque des actions qui le composent. (...) Cependant, la nouveauté de ce produit provient du fait que la société de gestion a appliqué cette technique sur un indice construit par l’EDHEC Risk dans le but de maximiser le rapport rendement/risque du portefeuille. Plutôt que de se baser sur la capitalisation boursière des entreprises qui composent l’indice, l’institut calcule le poids de chacun de ses constituants à partir du risque qu’il représente et de son comportement par rapport aux autres. Une approche de composition des portefeuilles basée sur le risque, très demandée aujourd’hui non seulement par les institutionnels devant optimiser leurs ratios réglementaires, mais aussi par les particuliers. Le jury a retenu - La protection ou le rendement supplémentaire procuré par la vente d’options aujourd’hui déjà éprouvée.- L’utilisation d’un indice novateur prenant en compte le niveau de risque de ses constituants. (...)"
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  • Hedge Fund Journal (07/06/2012)
    EDHEC-Risk latest research
    "(...) Recent EDHEC-Risk research has highlighted benefits of diversifying equity portfolios with volatility derivatives. In a new publication entitled “The Benefits of Volatility Derivatives in Equity Portfolio Management,” produced with the support of Eurex Exchange, EDHEC-Risk researchers show how volatility derivatives can be used to optimise access to the equity risk premium in a controlled volatility risk environment, and to engineer equity portfolios with attractive downside-risk properties. The research demonstrates that a long volatility position shows a strongly negative correlation with respect to the underlying equity portfolio and adding a long volatility exposure to an equity portfolio results in a substantial improvement of the risk-adjusted performance of the portfolio. (...)"
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  • NEWSManagers (07/06/2012)  
    Les dérivés de volatilité ont une incidence bénéfique sur les portefeuilles d'actions
    "(…) Selon une étude d'EDHEC-Risk sponsorisée par Eurex, l'utilisation d'une position longue sur la volatilité affiche une corrélation fortement négative avec le portefeuille d'actions sous-jacent, ce qui permet d'améliorer la performance ajustée du risque de ce portefeuille. L'effet bénéfique le plus important d'une exposition longue à la volatilité est le plus sensible en période de baisse des marchés. (…)"
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  • Asset International (06/06/2012)
    EDHEC: Diversify Equity Portfolios With Volatility Derivatives
    "(...) Investors should look into diversifying equity portfolios with volatility derivatives, research by the EDHEC-Risk Institute concludes. Interest has grown in the possible use of equity volatility derivatives as diversifiers for traditional and alternative portfolios, according to a paper titled “The Benefits of Volatility Derivatives in Equity Portfolio Management" published by the institute. The research shows how volatility derivatives can be used to engineer equity portfolios with downside-risk protection. "This research proposes a novel approach to the design of attractive equity solutions with managed volatility, based on mixing a well-diversified equity portfolio with volatility derivatives, as opposed to minimizing equity volatility through minimum variance approaches, and shows that trading in volatility index futures or options can provide access to the equity risk premium while allowing for explicit management of the volatility risk budget," Noël Amenc, Director of EDHEC-Risk Institute, said in a release. (...)"
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  • Ignites Asia (05/06/2012)
    Review economic risks in equities portfolios: EDHEC
    "(...) Asian economic exposure must be assessed when investing in Asian equities, according to Felix Goltz, Nice, France-based head of applied research at EDHEC-Risk Institute. The typically quick way of getting Asian exposure is through a stock market index, but “it is not that simple”, Goltz said last month at the EDHEC Asia Risk Days 2012 conference held in Singapore. According to Goltz, standard indices select stocks by their place of listing, but some Asian-listed stocks may have no strong link to the Asian economy. For example, Glencore, which is listed in London and Hong Kong, is a Swiss-based company that derives 26% of its sales from Asia and 63% from Europe and the Americas. Furthermore, cap-weighted indices in Asia ex-Japan only have around 60% of their revenues generated within Asia, as reported. Goltz said that equities investors who seek economic exposure to Asia may consider two themes: exposure to Asian internal demand growth, which can be attained by investing in companies that are highly dependent on internal demand within the region; or exposure to Asian competitiveness, which can be attained by investing in companies that benefit from external demand or exports. (...)"
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  • Ignites Asia (05/06/2012)
    High-frequency trading expected to rise in Asia
    "(...) Algorithmic trading, or high-frequency trading (HFT), is expected to increase in Asia, according to panellists at the EDHEC-Risk Days Asia 2012 conference in Singapore last month. (...) Automation is bound to come to Asia, according to Ekkehart Boehmer, Nice, France-based member of the EDHEC-Risk Institute and a professor of finance at the EDHEC Business School. However, industry players must realise that Asian markets are different compared with those in the U.S. and in Europe. “The markets are more segmented… it looks a little bit different because there are different markets with more currencies.” (...) Algorithmic trading, or HFT, on average, improves liquidity and information efficiency, as well as increases volatility of prices in equities markets, according to EDHEC-Risk Institute’s Boehmer. He noted, however, that increased algorithmic trading increases the transaction costs for investing in small-cap equities and does not improve efficiency for small companies. He said HFT is just one component of algorithmic trading. Between 60% and 80% of market share is dominated by HFT in the U.S. and Europe. Most of the markets in the U.S. and Europe, except for a very few, specialise in HFT, because there is a lot of demand for HFT infrastructure, and so exchanges accommodate that demand, he added. (...)"
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  • IPE (01/06/2012)
    Smart Beta: How equal-weighting wins
    "(…) Yuliya Plyakha, Raman Uppal and Grigory Vilkov discover a surprising crop of non-systematic alpha generated by the monthly rebalancing process. (...) It is important to understand the difference in performance of the equal and value-weighted portfolios, given the central role that the value-weighted market portfolio plays in asset pricing – for instance in the Capital Asset Pricing Model of Sharpe (1964) – and also as a benchmark against which portfolio managers are evaluated. Our objective was to compare the performance of the equal-weighted portfolio relative with the value and price-weighted portfolios, and to understand the reasons for differences in performance across these three weighting rules. Our main contribution is to show that there are significant differences in the performance of equal, value, and price-weighted portfolios, and to explain that only a part of this is because of differences in exposure to systematic risk factors, and that a substantial proportion comes from rebalancing the equal-weight portfolio. (...) Grigory Vilkov is assistant professor for derivatives and Yuliya Plyakha is a PhD candidate at the Goethe University, Frankfurt. Raman Uppal is professor of finance at the EDHEC Business School. This is a summary of a paper that won the $50,000 first prize in the 2011 Standard & Poor’s Index Versus Active (SPIVA) Research Awards. (…)"
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  • Asia Asset Management (June 2012)
    Handling the volatility and downside risk of equity holdings
    "(…) In 2008, worldwide equity markets collapsed and many assets that conventional investment wisdom until then regarded as effective equity diversifiers, such as commodities, also experienced dramatic falls. Meanwhile, equity volatility skyrocketed, causing long positions in equity volatility to rally. These events, as well as regulatory developments, dashed the hopes placed in traditional forms of diversification and prompted investors to pay increased attention to the volatility and downside risk of equity holdings. In this article, Lionel Martellini, scientific director, and Renata Guobuzaite, research assistant, EDHEC-Risk Institute, look at the possible use of equity volatility derivatives as diversifiers for traditional and alternative portfolios in general, and equity positions in particular. (…)"
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  • IPE Special Supplement (June 2012)
    EDHEC-Risk Institute Research Insights Summer 2012
    • Is the crisis financial?; Noël Amenc
    • How to allow insurance companies to benefit from investment in equities within the framework of Solvency II; François Cocquemas
    • Shedding more light on non-financial risks — a European survey; Samuel Sender
    • The use of ETFs by European institutional investors and asset managers; Felix Goltz
    • Dynamic investment strategies for corporate pension funds in the presence of sponsor risk; Lionel Martellini, Vincent Milhau, Andrea Tarelli
    • Shifting towards hybrid pension systems: a European perspective; Samuel Sender
    • How investors can respond to the shifting pension landscape; Erwan Boscher, AXA Investment Managers

    Copyright IPE [www.ipe.com - Registration required]


May 2012

  • Ignites Asia (31/05/2012)
    Counterparty risks in both synthetic, physical ETFs
    "(...) Portraying counterparty risk as being present only in synthetic exchange-traded funds (ETFs) and not in physically replicated ETFs is misleading, according to Frédéric Ducoulombier, Singapore-based director at EDHEC-Risk Institute-Asia. The discussion on the differences on counterparty risk regarding different replication methods has been “spinning out of control”, Ducoulombier said earlier this month at the EDHEC-Risk Days Asia 2012 conference in Singapore. According to Ducoulombier, in a full physical replication approach, an ETF holds the index constituents in the proportion of an index, while in synthetic replication, an ETF enters into a swap agreement with a third party that promises to deliver the index performance in exchange for the performance of a portfolio that remains with the ETF (unfunded swap) or is transferred to a counterparty and held in the name of, or pledged to, the ETF (funded swap). Ducoulombier said that in synthetic replication, the tracking error risk is transferred to the bank, but in exchange, counterparty risk is assumed. “That is the counterparty risk that you hear about when physical replication providers mention counterparty risk,” he said. However, most physically replicated ETFs and Undertakings for Collective Investment in Transferable Securities (Ucits) engage in securities lending, and this provides them with more opportunities to take on more unmitigated and not transparent counterparty risk, he said. (...)"
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  • Funds Europe (May 2012)
    Heading off course
    Article by Felix Goltz, head of applied research at EDHEC-Risk Institute
    "(…) Revisions to the Mifid directive could increase investor protection rules surrounding ETFs. (...) While this is language that has been used to describe structured Ucits, it may leave some scope for interpretation over whether the use of derivatives by Ucits would render them unfit for execution only distribution in general and whether synthetic-replication Ucits would be excluded. It is important the proposal does not create a complex Ucits category but considers structured Ucits to be a priority complex. It is surprising to see so much regulatory interest being concentrated on a segment of the European investment management industry that is not only narrow (less than 3% of overall assets) but already the most highly regulated. It appears that the overarching objectives of the regulator (to achieve a level playing field and a high-level of retail investor protection across the industry) would be better staying on the initially charted course of harmonising regulation to generalise the high standards of protection afforded by Ucits and Mifid to all packaged retail investment products and the institutions and individuals involved in their distribution. (...)"
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  • L'Agefi Suisse (31/05/2012)  
    Trop liquides pour être sauvées
    "(...) L’EDHEC-Risk Institue suggère un capital tampon permettant aux banques systémiques de se sauver elles-mêmes en période de crise. (...) Il n’y a pas de crise financière. Seulement des crises réglementaires, c’est-à-dire politiques. C’est ce qui ressort du compte rendu d’une conférence tenue à Nice en début d’année, compte rendu publié la semaine dernière par l’institut français EDHEC, notamment spécialisée dans la recherche relative à la gestion du risque. Pourtant, les participants notent que les institutions financières les plus régulées, les banques universelles, sont plus toxiques et stimulatrices de crises systémiques que les entités les moins encadrées jusqu'ici, à savoir les fonds spéculatifs. Selon l'EDHEC, l'hypocrisie politique qui consiste à se servir des hedge funds comme boucs-émissaires produira la prochaine grande crise. La haute école invite les autorités à développer une nouvelle approche d'encadrement des banques, notamment via du capital tampon. (...)"
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  • Ignites Asia (30/05/2012)
    Asian equities indices are inefficient: EDHEC
    "(...) Capitalisation-weighted equities indices in Asia are inefficient, according to Felix Goltz, Nice, France-based head of applied research at EDHEC-Risk Institute. Goltz made the comment earlier this month at the EDHEC-Risk Days Asia 2012 conference in Singapore, where he assessed the quality of existing indices in Asia in terms of their risk-return efficiency, concentration effects, stability to style, and sector exposures and representativeness. The inefficiency of cap-weighted indices echoes the results of the EDHEC-Risk Asian index survey 2011, which show that although equities indices are commonly used in Asia, satisfaction rates are only “moderate to low”, as reported. According to the survey, nearly 60% say they see significant problems with standard cap-weighted equities indices. (...)"
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  • Investment Europe (25/05/2012)
    EDHEC study explains hurdles to index product sales in Asia
    "(...) European passive fund managers selling to Asia should concentrate above all else on transparency, liquidity, and offering more than just standard cap-weighted methodology products, suggests a study on index appetite in Asia by EDHEC. French business school's survey in April/May 2011 of 127 Asian investors, from asset managers to professional fund buyers - mostly in Australia, Singapore and Hong Kong, only 4% in Japan - found these were the main requirements for the region. Many fund selectors complain of the active fund industry's mistakes and shortcomings, but EDHEC's research suggested the $6trn passive industry has room to improve, for Asian buyers at least. "A generic index construction approach is not necessarily consistent with investor's varying investment objectives, which can differ across asset classes or even across investors who invest in the same asset class," the study's authors noted. "The challenge for indices in the future may be to find a better match between the requirements and objectives of investors and the properties of the indices and benchmarks they have at their disposal." (...)"
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  • Benefits and Pensions Monitor (25/05/2012)
    Funding Floor And Cap Can Be Positive
    "(...) The placing of a cap as well as a floor on the funding ratio of pension schemes can be positive for both pensioners and bondholders, says a publication from the EDHEC-Risk Institute. ‘Dynamic Investment Strategies for Corporate Pension Funds in the Presence of Sponsor Risk,’ produced as part of the BNP Paribas Investment Partners research chair on asset-liability management and institutional investment management, recognizes that pension risk is not only driven by the funding ratio of the pension fund, but also by the financial strength or weakness of the sponsor company. It finds that implementing risk-controlled strategies aimed at insuring a minimum funding ratio level allows shareholders to gain access to the upside performance of risky assets, while ensuring that pensioners will not be overly hurt by the induced increase in risk. (...)"
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  • Citywire (24/05/2012)
    Four steps to finding the right ETF
    "(…) The criteria investors use to select ETFs was analysed in the recent EDHEC-Risk Institute study, covering 174 institutional investment managers and private wealth managers based in Europe who already use ETFs. It is important to remember that the majority of respondents said they primarily use ETFs to gain broad market exposures, while over half use ETFs for buy-and-hold investments and to implement dynamic asset allocation. The findings indicate that users of ETFs go through a four-step decision-making process when selecting an ETF. (…)"
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  • Asset International (24/05/2012)
    How Dynamic Portfolio Strategies Can Help Corporate Pensions
    "(...) Corporate pension funds should implement dynamic portfolio strategies in order to meet their challenges, according to research published by the EDHEC-Risk Institute. Pension risk is not only driven by the funding ratio of the pension fund, but also by the financial strength or weakness of the sponsor company, the paper – produced alongside BNP Paribas Investment Partners – concludes. One of the key findings of the paper shows that imposing a cap on funding ratio has a positive impact on both pensioners and bondholders, while only having a minor negative effect on equity value. Dynamic asset allocation strategies aim to control sponsor risk by avoiding states of the world where the pension fund is underfunded and the sponsor is unable to make up for the gap, the paper says. (...)"
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  • Asia Asset Management (24/05/2012)
    Pensions can profit by employing dynamic allocation strategies
    "(…) A new publication entitled “Dynamic Investment Strategies for Corporate Pension Funds in the Presence of Sponsor Risk”, produced as part of the BNP Paribas Investment Partners research chair on asset-liability management and institutional investment management at EDHEC-Risk Institute, shows that sophisticated dynamic allocation strategies can usefully be implemented by pension funds. (...) The paper analyses the benefits that arise from a variety of dynamic liability-driven investing strategies designed to maximise stakeholders’ welfare within an integrated asset-liability management context. It finds that implementing risk-controlled strategies aimed at insuring a minimum funding ratio level allows shareholders to gain access to the upside performance of risky assets, while ensuring that pensioners will not be overly hurt by the induced increase in risk. (…)"
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  • European Pensions (23/05/2012)
    Imposing a cap on funding ratio has positive impact – EDHEC-Risk Institute
    "(…) Imposing a cap on the funding ratio, in addition to a floor, has a positive impact on both pensioners and bondholders, while only having a minor negative effect on equity value, a new study by EDHEC-Risk Institute has found. Entitled Dynamic Investment Strategies for Corporate Pension Funds in the Presence of Sponsor Risk, the paper introduced new forms of dynamic strategies that also take into account the financial strength of the sponsor company. These strategies aim to control sponsor risk by avoiding circumstances where the pension fund is underfunded and the sponsor is unable to make up for the gap. Implementing risk-controlled strategies aimed at insuring a minimum funding ratio level allows shareholders to gain access to the upside performance of risky assets, while ensuring that pensioners will not be overly hurt by the induced increase in risk, the institute said. It added that strategies aimed at controlling sponsor risk by providing insurance against the joint occurrence of an underfunded pension plan and a weak sponsor company are found under most circumstances to increase pensioners’ and bondholders’ welfare compared to basic CPPI strategies adapted to the asset-liability management context. (…)"
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  • Risk.net (23/05/2012)
    Current crop of equity and bond indexes criticised by Asia-Pacific investors
    "(...) Asian investors have expressed their dissatisfaction with equity and bond indexes, which are falling short of their requirements, according to a survey by EDHEC-Risk Institute in partnership with exchange-traded funds (ETF) provider Amundi ETF. While 71% of equity index users surveyed expressed satisfaction with current indexes, the report says such a level implies that there might be issues associated with industry standard practice on index construction. The survey, carried out among asset and fund managers, institutional investors and private wealth managers, also found that only half of respondents that use fixed-income indexes are satisfied with them. "A key finding is that the rate of usage for these indexes is very high {but} at the same time the rate of satisfaction is low," says Felix Goltz, head of applied research at EDHEC-Risk Institute in Paris. "However, while investors aren't very satisfied, no clear alternative is emerging," he says. Issues relating to standard capitalisation-weighted equity indexes, such as concentration and lack of diversification, were highlighted in the survey, with almost two-thirds of respondents reporting significant problems with them. (...)"
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  • FTfm (23/05/2012)
    Many synthetic ETFs in ‘danger zone’
    "(...) More than three-quarters of the synthetic exchange traded funds listed in Europe are at risk of closure after failing to attract sufficient inflows in their first three years since launching, according to Rick Genoni, global head of ETFs for Vanguard. (...) Speaking on the sidelines of an event to mark the listing of Vanguard’s first five ETFs in London, Mr Genoni emphasised that he was not predicting widespread closures of synthetic ETFs as these instruments provided their parent investment banks with other important revenue generating opportunities, such as selling derivatives. But Mr Genoni said survey evidence from the EDHEC Risk Institute showed that 80 per cent of investors preferred physical replication ETFs that buy the constituents of an index, compared with 20 per cent that expressed a preference for synthetic funds that use derivatives to provide returns. (...)"
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  • Plan Sponsor (23/05/2012)
    Coverage Ratio Caps Could be Good for Pension Schemes
    "(...) The placing of a cap as well as a floor on the funding ratio of pension schemes can be positive for both pensioners and bondholders, according to a publication from the EDHEC-Risk Institute. The publication entitled “Dynamic Investment Strategies for Corporate Pension Funds in the Presence of Sponsor Risk,” produced as part of the BNP Paribas Investment Partners research chair on asset-liability management and institutional investment management says imposing a cap on funding ratios as well as a floor, has a positive impact on both pensioners and bondholders, while only having a minor negative effect on equity value. The paper recognises that pension risk is not only driven by the funding ratio of the pension fund, but also by the financial strength or weakness of the sponsor company. (...)"
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  • Financial News (22/05/2012)
    Amundi buys into ‘smart beta’
    "(...) These "non-cap weighted" indices contrast the most widely-used indices such as the FTSE100, S&P500 or MSCI World index, which weight each stock in the index by its market capitalisation. The managers of "non-cap weighted" indices, and of the funds that follow that approach, say their indices or funds are put together more intelligently, although they still follow rules rather than an individual's discretion. This idea of "intelligent rule following" is behind the term investment consultants use for this approach - "smart beta". (...) And FTSE Group, in partnership with French business school subsidiary the EDHEC-Risk Institute, offers the FTSE-EDHEC Risk Efficient Index Series, which, according to FTSE's literature, "are intended to give equity market returns with an improved risk/reward efficiency compared to cap-weighted indices". (...)"
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  • Pensions & Investments (21/05/2012)
    Distressed and emerging markets hedge funds continue to lead
    "(...) Final April returns for the EDHEC-Risk Alternative indexes, published Monday, reveal that distressed securities and emerging markets hedge funds posted the strongest returns through the first four months of the year. Short-selling hedge funds were down 11.8%, while the S&P 500 was up by the exact same percentage through April 30. (...)"
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  • Investment Magazine (May 2012)
    SWFs need customisation and engagement
    Article by Frédéric Ducoulombier, director of EDHEC Risk Institute–Asia
    "(...) Broadly speaking, there are three kinds of sovereign wealth funds (SWFs): natural resource funds such as those of Abu Dhabi and Kuwait, foreign reserve funds such as China’s and Singapore’s, and pension reserve funds, such as those we have in Australia and New Zealand. In view of the rapid growth of SWFs, it is important to study their optimal-investment policy and riskmanagement practices. This has been the objective of the research chair set up by EDHEC-Risk Institute and Deutsche Bank in 2009. To date, the research chair publications have adapted the asset-liability management (ALM) framework applied in the pension fund industry to the unique characteristics of SWFs and explored the management of natural resources funds. In this report, we present the results of a paper on a dynamic ALM model, developed to guide asset allocation and risk management decisions at the SWF level, and describe the results of feedback on its theoretical and practical appeal to sovereign-fund management. (...)"
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  • FTfm (21/05/2012)
    What quants can learn from the Axa case
    Article by Bernhard Scherer, Chief Investment Officer, FTC Capital and Affiliate Professor of Finance, EDHEC Business School
    "(...) It sounds like an episode from the TV drama The Good Wife. Ambitious government (SEC) lawyers end the career of Barr Rosenberg, the most distinguished and influential quantitative analyst (both academically and professionally) our industry ever produced. Many of us use his ideas without even knowing they are from him. Mr Rosenberg experimented with stochastic volatility and factor models long before mainstream financial academics such as Robert Engle (the later Nobel Prize winner) started working on them. What happened? Due to a programming error at Axa Rosenberg a risk factor was many times smaller (the rumour is 100 times) than intended, rendering the factor unimportant for modelling portfolio risks. Rather than fixing this immediately after its discovery, the new code was scheduled for the next model release, which is not unusual for software companies. However this was the problem. Mr Rosenberg was accused of misrepresenting his investment process. The SEC logic was that although Mr Rosenberg knew about the coding error, he still used legal disclosure documents that displayed a formula that should have been implemented but wasn’t. (...)"
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  • Ignites Asia (17/05/2012)
    Asian indices need better risk-return efficiency: EDHEC
    "(...) Asian investors pay less attention to an index’s transparency compared with their European and North American counterparts, and they believe objectivity and risk-return properties are more important, according to Felix Goltz, Nice, France-based head of applied research at EDHEC-Risk Institute. Goltz made the comment last week at the EDHEC-Risk Days Asia 2012 conference in Singapore, where he presented the results of the EDHEC-Risk Asian index survey 2011. The respondents of the Asian survey are also “more demanding” when it comes to risk-return properties compared with European and North American investors, Goltz said. According to the survey, a possible explanation for Asian investors paying less attention to an index’s transparency is the typically “less developed and less transparent” Asian markets compared with European and U.S. markets, which lead investors to have “weaker requirements for indices”. Since Asian investors consider risk-return properties to be more important than their North American and European counterparts, index providers may have to put more effort into improving the risk-return efficiency of an index beyond the traditional benchmarks of transparency, liquidity and objectivity, the survey adds. (...)"
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  • IPE Asia (15/05/2012)
    The role of LDI in Asia
    "(…) Some commentators have seen possible usage of LDI by the large sovereign wealth funds in Asia. As well as the pension reserve funds, the other major class is the foreign reserve funds such as CIC in China, GIC in Singapore and KIC in Korea. The EDHEC Business School argues the endowment stream of the foreign reserve funds is linked to the current account surplus of the corresponding economies and their objectives should be to hedge away the factors behind the commercial surplus. (…)"
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  • Ignites Asia (15/05/2012)
    Heed the indirect effects of regulations: EDHEC
    "(...) Regulators should pay attention to indirect consequences and “spillovers” when introducing financial market regulations, according to Raman Uppal, a London-based member of the EDHEC-Risk Institute and professor of finance at EDHEC Business School. When introducing regulatory policies, it is important for regulators to know how the policies should be introduced and to understand both the direct and indirect effects of these policies, Uppal said during a panel discussion last week at the EDHEC-Risk Days Asia 2012 conference in Singapore. According to Uppal, the financial sector has undergone multiple changes over the past few decades, including deregulation, globalisation, functional integration and financial innovation. (...)"
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  • IPE Asia (11/05/2012)
    Investors mull 3 key factors in assessing an index
    "(…) Liquidity, objectivity and transparency are the three most important criteria for institutional investors in selecting or assessing an index, EDHEC-Risk Institute found in its inaugural Asian Index Survey. Currently, numerous index providers do not provide free and easy access to the composition of their indices, according to the survey of 127 Asian investment professionals, including asset managers, institutional investors, investment consultants, and private wealth managers. The survey shows a generic index construction approach is not necessarily consistent with investor’s varying investment objectives, which can differ across asset classes or even across investors who invest in the same asset class. The challenge for indices in the future may be to find a better match between the requirements and objectives of investors and the properties of the indices and benchmarks they have at their disposal. The results show that while indices are relatively widely used in all asset classes, satisfaction rates are moderate to low, especially for fixed-income indices, where fewer than 50% of respondents are satisfied with the indices they are using. Nearly 60% of respondents see significant problems with standard cap-weighted equity indices, while only 17.6% see no issues with such indices. (…)"
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  • Funds Europe (11/05/2012)
    Asian fund professionals unhappy with indices
    "(…) Asian investment professionals are frequently dissatisfied with the indices they use, especially fixed income indices, which were judged to be satisfactory by less than half the respondents in a survey by the EDHEC-Risk Institute. Corporate bond indices were identified as especially problematic, with 77% of respondents stating they found these indices to be unreliable in terms of interest rate and credit risk. Meanwhile, 60% of respondents said they saw significant problems with traditional cap-weighted indices. Less than 20% saw no problems with these tools, with the remainder declining to offer an opinion. The survey found that nearly 90% of respondents judged transparency to be one of the three most important factors when selecting an index. But EDHEC stated that numerous index providers do not give free and easy access to the composition of their indices. The survey was based on responses by 127 investment professionals in the Asia-Pacific region, principally from Australia, Singapore and Hong Kong. (...)"
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  • Ignites Asia (11/05/2012)
    Satisfaction rates for Asian indices: moderate to low
    "(...) Asia-Pacific investors are far from thrilled with their index choices, according to new research from the EDHEC-Risk Institute. A survey of investors' asset managers, institutional asset owners, investment consultants and private wealth managers in the region finds index use is common, especially by equities investors, but satisfaction rates are only "moderate to low". Nearly 90% of equities investors said they use equities indices, while 51.5% of government bond investors and 40.8% of corporate bond investors use indices for those asset classes. Many of them are unsatisfied with the indices. Equities indices draw the highest satisfaction rates, with about 71% of respondents saying they were satisfied, but just 49.2% say the same for government bond indices and 59.8% for corporate bond indices. The dissatisfaction stems from factors including lack of transparency and unreliability. Eighty-eight percent of respondents say they consider transparency a key factor, though often index providers do not provide free and easy access to their index composition, the study says. More than 77% of respondents say corporate bond indices lack reliability in terms of interest rate and credit risk, while nearly 60% say they see significant problems with standard cap-weighted equity indices. Customising indices for each asset class could boost satisfaction rates, the study says. (...)"
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  • Central Banking (10/05/2012)
    MAS assistant managing director discusses importance of market research
    "(…) Jacqueline Loh, assistant managing director of the Monetary Authority of Singapore, said on May 9 that greater levels of financial research are imperative to fostering future Asian economic development. Speaking at the EDHEC-Risk Days Asia 2012 conference in Singapore, Loh said investment in Asian markets is "not without risk" and that market participants should build strong risk management expertise and deeper market knowledge to mitigate these risks. Loh added that as "financial systems continue to evolve, there is increasing need to better understand how markets operate, and how investors and institutions respond to opportunities and risks". (…)"
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  • Financial Times (08/05/2012)
    Asian investors less satisfied with indices
    "(...) Asian investors’ satisfaction rates with indices are only “moderate to low”, with government bond indices faring particularly badly, according to a survey by EDHEC-Risk Institute, part of EDHEC Business School. The inaugural EDHEC-Risk Asia Indexing survey is the first to ask Asian investors for their views on indices and passive investment. The research was conducted in 2011 and supported by Amundi ETF. More than 70 per cent of Asian investors declared themselves satisfied with equity index products which are widely used in the region. But both usage and satisfaction rates drop sharply for government bond indices. Just 51.5 per cent of Asian investors used government bond indices and less than half described themselves as satisfied. For corporate bond indices, usage was lower (40.8 per cent) but user satisfaction was higher (59.8 per cent). However, more than three-quarters of those surveyed also said that corporate bond indices lacked reliability in interest rate and credit risk. EDHEC said investors saw differing problems applying to indices across asset classes. Fixed income investors were concerned by duration risks, stability and liquidity while equity investors feared overpriced stocks and the threat of insufficient diversification. (...)"
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  • IPE (08/05/2012)
    DC pensions should follow DB schemes in adopting ALM strategies – EDHEC
    "(…) Defined contribution (DC) pension schemes are "under-diversified" and need to adopt asset-liability management strategies to tackle inflation and longevity risks, according to EDHEC-Risk Institute. In a new survey sponsored by AXA Investment Managers (AXA IM), EDHEC argues that companies must improve their DC product offerings "considerably" by implementing more guarantees and improving transparency, as well modifying the traditional investment strategy. The report concluded that DC funds needed to adopt asset-liability management strategies in the manner that defined benefit (DB) funds do, since participants in DC schemes were "first and foremost" exposed to inflation and longevity risk. "Today, DC funds are under-diversified, and they need to stop solely investing in equities and government bonds, thus observing the first principle of modern portfolio theory," EDHEC said. "Such a diversification of asset classes should allow them to invest in illiquid assets in order to benefit from their risk premium over the long term." According to EDHEC, DC pension schemes also need to adopt professional risk management practices. The research company argued that, when the investment horizon, liabilities and eventual guarantees were taken into account, dynamic risk management strategies needed to be put in place. (…)"
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  • Asia Asset Management (May 2012)
    Indices and passive investment
    "(…) The EDHEC-Risk Asia Indexing Survey 2011, conducted with support from Amundi ETF, is the first comprehensive survey of Asian investment professionals to analyse the current uses of and opinions on stock and bond indices. In this article, Felix Goltz, head of applied research with EDHEC-Risk Institute, outlines some of the main results of the survey. (...) The EDHEC-Risk Asia Indexing Survey 2011 was conducted during April and May of 2011, and received a total of 127 responses. The respondents included asset managers, institutional asset owners, investment consultants and private wealth managers of different size categories from the Asia-Pacific region. The survey mainly represents respondents from the major asset management centres of Australia, Hong Kong and Singapore, which each account for roughly 20% of overall respondents. We find that liquidity, objectivity and transparency are the three most important criteria to select or assess an index. Unlike investors in Europe and North America, Asian investors consider the risk-return properties of an index to be more important when making the decision to adopt an index. (…)"
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  • Financial Times (07/05/2012)
    Comment: Action still needed two years after ‘flash crash’
    "(...) A blue ribbon committee of academics and industry veterans, assembled by US regulators, investigated the crash and came to the conclusion that “even in the absence of extraordinary market events, limit order books can quickly empty and prices can crash”. This is a feature of today’s markets that rightly spooks the public. A recent study by researchers at EDHEC Business School, the University of New South Wales and the University of Georgia found that markets around the world suffered increased volatility after they embraced high-speed trading. (...)"
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  • European Pensions (03/05/2012)
    DC schemes should offer some guarantees - EDHEC-Risk Institute
    "(…) The lack of guarantees and transparency in DC schemes could lead to a problem of trust, according to a new EDHEC-Risk Institute study. Entitled ‘Shifting Towards Hybrid Pension Systems: A European Perspective’, the study said it is important that some guarantees are offered in DC funds and that their costs are clearly explained in order to avoid creating a biased risk/return illusion. Primarily in the UK, DC scheme members bear all the financial risks, while no guarantees are offered by the sponsor or by prudential regulation. By offering some guarantees and more transparency, future disappointment amongst employees, who would reduce their participation in such schemes and potentially question their perception of their overall remuneration, would be avoided. The institute also said that DC funds are currently under-diversified and need to stop solely investing in equities and government bonds. It pointed out that regulators can also contribute to the adoption of professional management practices for pension funds, and that they have understood the dangers associated with transferring uncontrolled risks to members. (…)"
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  • Les Echos (03/05/2012)  
    La prise en compte de risques multiples
    "(...) La détérioration de l'environnement économique a remis sur le devant de la scène le risque que le sponsor d'un fonds de retraite d'entreprise fasse faillite. Interrogés dans le cadre de travaux de l'EDHEC Risk Institute sponsorisés par AXA IM, les conseillers (« trustees ») de la centaine de fonds de pension analysés voient dans le défaut du sponsor (l'entreprise), le risque principal. Pourtant 84% des acteurs interrogés ne couvrent pas ce risque. La raison ? Dans certains pays comme le Royaume-Uni, un système d'assurance protège déjà les retraités contre la faillite de leur entreprise. Ce n'est pas le cas partout, comme aux Pays-Bas. Une autre raison de ne pas couvrir le « risque de sponsor » est que « cela pourrait être interprété comme un geste hostile à son égard et, dans certains cas cela enverrait même un signal négatif au marché », explique Samuel Sender, auteur de l'étude. (...)"
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  • Bloomberg Businessweek (03/05/2012)
    EDHEC-Risk study highlights the need to reform retirement systems and corporate pension funds
    "(...) A new EDHEC-Risk Institute study entitled "Shifting Towards Hybrid Pension Systems: A European Perspective," made possible with the support of AXA Investment Managers, highlights the need to reform retirement systems and pension funds, as well as the need to adopt professional management structures and to considerably improve the product offering of defined-contribution (DC) funds. (...) Commenting on the study, Noël Amenc, Director of EDHEC-Risk Institute, said, "It is clear that complete reliance on sponsor guarantees for traditional DB funds makes little sense in view of the prevailing economic context and demographic trends in Europe. With more hybrid pension schemes in Europe, and a shift towards DC funds in the United Kingdom and the United States, there is a requirement for improved governance, investment options and communication to employees." (...)"
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  • Hedge Funds Review (May 2012)
    European fund managers concerned over increased non-financial risks from AIFM directive
    Article by Samuel Sender, Applied Research Manager at EDHEC-Risk Institute
    "(...) In a recent survey by EDHEC-Risk Institute, conducted as part of the CACEIS research chair on Risk and Regulation in the European Fund Management Industry, respondents were asked to evaluate the overall impact that the accelerated notification procedure and the alternative investment fund managers (AIFM) directive were each likely to bear on non-financial risks, and why. Over 160 high-level European fund management industry professionals were surveyed by EDHEC-Risk. The respondents said the main causes of the increase in non-financial risks are the growing sophistication of operations, a cause considered important by 77%, followed by the reduced capacity of some intermediaries to guarantee deposits (59%), unclear or inappropriate regulation (57%) and the absence of responsibility of management companies regarding ­restitution (53%). (...)"
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April 2012

  • The Asset (April 2012)
    Guiding lights help fill a vacuum
    "(...) Last year probably marked a watershed for Asia’s private equity (PE) industry. And like all such milestones, the seeds were planted many years earlier. The industry’s rapid rebound from the 2008 financial crisis highlights the changes which have taken place since the then nascent PE industry struggled to find its footing following the 1997 financial crisis. (...) A study of 7,500 PE investments released by EDHEC business school last year found below-average returns for investments in emerging markets. (...)"
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  • FTfm (23/04/2012)
    Sovereign wealth needs risk management
    Article by Frédéric Ducoulombier, Director of EDHEC Risk Institute—Asia
    "(...) Sovereign wealth funds are estimated to manage close to $5tn of assets, twice as much as the hedge fund industry. According to popular belief, these funds can invest for the long term without the baggage of liabilities and short-term constraints that impede other institutional investors. Research organised by the EDHEC-Risk Institute and Deutsche Bank has suggested otherwise, and a survey conducted in 2011 confirms this view. A paper published in 2010 put forward a model to optimise the investment and risk management practices of sovereign wealth funds, drawing on the liability-driven investing paradigm developed in the pension fund industry. (...) These academic findings contradict the widespread view of sovereign wealth funds as relatively free agents, so the EDHEC-Risk Institute asked sovereign investment practitioners about their perceived constraints and liabilities and the theoretical and practical appeal of dynamic asset-liability management. Conducted over 2011, the survey generated 27 responses from senior executives and investment officers working for 24 sovereign investment vehicles and central banks around the world. A large majority (89 per cent) of the respondents agree that sovereign wealth funds are subject to implicit short-term constraints such as maximum drawdown and minimum performance due to peer comparison, loss aversion or sponsor risk. Just as many respondents (92 per cent) think implicit liabilities, such as the future use of the wealth, should be taken into account. (...)"
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  • Risk.net (23/04/2012)
    Regulators failing on transparency, asset manager survey finds
    "(...) Operational risks are growing in the fund management industry, and regulators' responses may be dangerously misdirected, according to a survey by EDHEC-Risk and fund administrator CACEIS published this month. European asset managers polled by the institute traced the rise of non-financial risk to increasingly complex operations and intermediaries' reduced ability to guarantee deposits. They also claimed regulatory priorities were significantly at odds with what the industry actually needed. The most important themes – transparency around non-financial risks and accountability of distributors and structures – tended to be those that regulators were neglecting, respondents said. One of the survey's authors, Samuel Sender, an applied research manager at EDHEC in Paris, says: "They think the regulators have been looking at it the wrong way. Everyone is aware now of non-financial risks, but the regulators are tempted to try to suppress the risks and super-regulate the industry to remove them. But these risks exist, and can't be removed through regulation. There are two ways to deal with them – either through product design, where you design products that are non-risky, or through transparency on risk products, which doesn't exist for non-financial risks. The survey found that more responsibility and more transparency were priorities in the industry." (...)"
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  • FT Adviser (19/04/2012)
    EDHEC-Risk urges Esma to enhance clarity on ETFs
    "(...) In its response to a 78-page consultation from the European Securities and Markets Authority, EDHEC-Risk claimed that while some proposals were welcome, other areas had been overlooked. The response backed calls for providers to underline the differences between passively and actively managed funds, but claimed that passive management was ill-defined. The document said: “EDHEC-Risk strongly believes that for an index-tracking vehicle to be considered a passive investment vehicle, it is also necessary that the underlying index be a financial index whose composition is dictated by a set of pre-determined rules and objective criteria allowing for strict systematic implementation. “For an index to be considered representative of passive management, its ground rules should leave no room for implicit, let alone explicit, discretionary choices.” EDHEC-Risk also warned that suggestions to make the performance of indices freely available to investors should go further and reveal the historical composition. Instead it claimed more attention should be given to the quality of index governance and the auditability of decisions made by index committees. It called for Esma to launch a consultation on the transparency of indices. (...)"
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  • Investment Europe (19/04/2012)
    Transparency, information and governance top Europe's fund manager concerns, EDHEC survey finds
    "(...) In regards the financial responsibility of managing non-financial risks, the second greatest concern - for 79% of the respondents - was that "fiduciary duties of asset managers should be reinforced, by stating that (managers) must invest for the sole benefit of their clients". Some 67% agreed on the proposition asset managers should have greater responsibility for non-financial risks. A similar proportion (68%) said the responsibilities for the restitution of assets should be contractually defined between depositaries and asset managers, though 69% were concerned that the depositaries only be responsible for the assets they control, and that responsibilities should be defined by asset class. The latest survey follows a previous study conducted last year by the EDHEC-Risk Institute, within the same research chair, entitled The European Fund Management Industry Needs a Better Grasp of Non-Financial Risks. This study held that the responsibility for decisions and compliance with regulatory obligations did not rest with the depositary alone. Costs of stronger protection should be largely borne by the industry, and would therefore result in a net cost for asset managers, said similar proportions of depositories (69%), custodians (73%) and respondents overall (70%). (...)"
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  • IPE (18/04/2012)
    Fund managers increasingly worried about risk of ‘inappropriate’ regulations
    "(…) European fund managers are increasingly concerned about the implementation of "unclear" or "inappropriate" regulations that could increase non-financial risk, according to a survey conducted by the EDHEC-Risk Institute. At present, the non-financial risks foremost in respondents' minds are the growing sophistication of operations (77%) and the reduced capacity of some intermediaries to guarantee deposits (59%), EDHEC said. However, its survey – entitled ‘Shedding light on non-financial risks’ – also highlights fund managers' growing concerns over new regulations coming into the market, notably the Alternative Investment Fund Managers (AIFM) Directive. Survey respondents said "transparency, information and governance" remained the top priorities for the regulation of non-financial risks. More than 90% said the regulator must ensure information was "genuinely fair, clear and not misleading". In addition, respondents acknowledged that the industry had its own financial responsibility, with 53% denouncing the total absence of responsibility of management companies regarding restitution. (…)"
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  • Citywire (18/04/2012)
    Regulation won’t solve transparency issues, warns EDHEC survey
    "(…) Growing sophistication in operations alongside the capacity of global intermediaries to guarantee deposits were top concerns in an EDHEC survey of 160 fund management industry professionals, which also emphasised the need for ‘appropriate’ regulation. The survey by the EDHEC-Risk Institute comes as the Alternative Investment Fund Managers Directive (AIFMD), which has received outspoken criticism from the fund management industry, is under revision by the European Commission. A note by the EDHEC report’s authors, headed by the director Noël Amenc, outlines the potential for the AIFMD to guarantee deposits however underlines ‘political’ regulatory processes as a constraint. ‘The AIFMD offers the possibility for depositaries to transfer or discharge their responsibility of restitution for the assets that they cannot safe-keep,’ the report reads. The note however adds that, ‘the factual analysis of answers also carries an implicit criticism of the EU regulatory process, which is unfortunately too politically driven.’ The growing sophistication of operations was considered as a main financial risk according to 77% of respondents. Reduced capacity of some intermediaries to guarantee deposits was the second biggest perceived threat. (…)"
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  • ETFI Asia (23/04/2012)
    Construction of corporate bond indices and benchmarks
    Article by Felix Goltz, head of applied research, and Carlos Campani, research assistant, at EDHEC-Risk Institute
    "(...) Traditionally, indices of financial securities were created to measure the market performance of the respective asset class. If the purpose of a corporate bond index is to measure the performance of the corporate bond market, this measurement should be done as accurately as possible. First, to be representative of the entire market, such an index should include as many different corporate bonds as possible, as long as reliable prices are available. Second, indices whose purpose is to measure the entire corporate bond market could justify weighting their components by capitalisation since this is a fair means of reflecting the total performance of the market. Most indices, such as the well-known Barclays (former Lehman Brothers), Citigroup, and BofA Merrill Lynch US bond indices, are in this category. More recently, indices have also been used as performance benchmarks. (...)"
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  • NEWSManagers (18/04/2012)  
    Non-financial risks: Professionals want more transparency, information and governance
    "(…) The major causes of rising non-financial risks are increased complexity of operations (a cause considered significant by 77% of respondents), followed by reduced capacity on the part of some providers to guarantee deposited assets (59%), unclear or inadequate regulations (57%) and lastly, a total lack of responsibility on the part of asset management firms in relation to restitution of assets (53%), according to an Edhec-Risk survey. The study, entitled “Shedding Light on Non-Financial Risks – a European Survey,” was undertaken as part of the second year of work by the research chair in “Risks and regulation of the fund industry in Europe,” created in partnership with Caceis. The study clearly finds that regulatory priorities need to address themes to which the regulator has paid limited attention in its recent work, particularly the MiFID directive. The priorities cited are transparency, information and governance, in relation to regulation of non-financial risks, followed by financial responsibility in the industry. On this latter point, the fact must be underscored that non-financial risks are largely the result of decisions by the asset management firm. (…)"
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  • European Pensions (17/04/2012)
    Transparency, information and governance main non-financial risk
    "(…) Transparency, information and governance is the main concern in the area of non-financial risk management for European fund managers, a new EDHEC-Risk survey has found. (...) The second greatest concern is the financial responsibility of the industry, with fund managers recognising that non-financial risks are largely the consequence of the fund manager’s decisions. A majority of 79% agreed that ‘fiduciary duties of asset managers should be reinforced by stating that they must invest for the sole benefit of their clients’, and 67% believe asset managers should have greater responsibility for non-financial risks. The costs of strengthening the regulation would not be totally transferable to investors, as 70% of respondents believe it would result in a net cost for asset managers, followed by depositaries (69%) and custodians (73%). (…)"
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  • Global Custodian (17/04/2012)
    Survey Reveals Top Concerns for European Fund Managers In Non-financial Risk Management
    "(…) European fund management industry professionals in a survey said the main cause of the increase in non-financial risks are firstly the growing sophistication of operations (a cause considered important by 77% of respondents), followed by the reduced capacity of some intermediaries to guarantee deposits (59%), unclear or inappropriate regulation (57%) and finally the total absence of responsibility of management companies regarding restitution (53%). French higher education institute EDHEC-Risk revealed the findings in a publication titled "Shedding light on Non-Financial Risks – a European Survey." More than 160 senior-level European fund management industry professionals were surveyed by EDHEC-Risk as part of the “Risk and Regulation in the European Fund Management Industry” research chair, sponsored by CACEIS. (…)"
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  • Bloomberg Businessweek (17/04/2012)
    A new EDHEC-Risk survey reveals that "transparency, information and governance" tops the list of concerns for European fund management industry professionals in the area of non-financial risk management
    "(...) More than 160 high-level European fund management industry professionals were surveyed by EDHEC-Risk as part of the "Risk and Regulation in the European Fund Management Industry" research chair, sponsored by CACEIS. For the respondents to this survey, entitled "Shedding Light on Non-Financial Risks - a European Survey," the main causes of the increase in non-financial risks are firstly the growing sophistication of operations (a cause considered important by 77% of respondents), followed by the reduced capacity of some intermediaries to guarantee deposits (59%), unclear or inappropriate regulation (57%) and finally the total absence of responsibility of management companies regarding restitution (53%). (...)"
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  • Funds Europe (17/04/2012)
    Senior fund professionals say regulation is unclear
    "(…) ‘Transparency, information and governance’ topped the list of concerns for 160 high-level European fund management industry professionals in the area of non-financial risk management, a survey revealed. In this category a huge majority (91%) agreed that the European regulator must ensure that information is genuinely fair, clear and not misleading. The EDHEC-Risk Institute, which carried out the Shedding Light on Non-Financial Risks survey, said the main message from this study is that respondents are concerned about themes that Europe’s regulator has not paid attention to lately, such as the Alternative Investment Managers (Aifm) Directive. One area that Aifm deals with is the responsibilities for the restitution of assets should a fund lose them. The survey found that this should be contractually defined between depositaries and asset managers. For 68% of respondents this should be done at the creation of the fund. Moreover, the depositaries should only be unconditionally responsible for the assets that they actually control, according to 69% of respondents, and responsibilities should therefore be defined by asset class. (...)"
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  • Pensions & Investments (16/04/2012)
    New strategy puts volatility forecast in driver's seat
    "(...) Stoyan Stoyanov is head of research at EDHEC Risk Institute-Asia and author of “Structured Equity Investment Strategies for Long-Term Asian Investors,” a paper published last year with financial support from Societe Generale SA. He said the strategy could be “especially interesting” in Asia, where the use of derivatives to hedge portfolios may be more costly and difficult to execute. “Target volatility can be used to indirectly hedge fat-tail risks to a degree,” said Mr. Stoyanov, who is based in Singapore. (...) Another advantage is when combined with other hedging strategies, target volatility strategies can offset the cost of hedging and result in a more precise level of portfolio protection. However, Mr. Stoyanov pointed to possible high portfolio turnover as a significant drawback, but one that can be mitigated in the implementation process, according to his paper. (...)"
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  • Financial News (16/04/2012)
    Funds forecast mammoth growth
    "(...) According to Mathieu Vaissié, research associate of the EDHEC-Risk Institute, part of the French business school, capacity will be tightest on strategies that rely on stock-picking – long/short equity funds, for example. He said capacity was significantly less constrained for managers that focus on tactical asset allocation – changing between asset classes, and between characteristics such as volatility and bond duration – the sort of activity favoured by global macro hedge funds. Vaissié said this part of the industry could accommodate a “massive” increase in size, but it would be competing for investors with multi-asset or diversified growth funds, a burgeoning mainstream activity that also focuses on tactical asset allocation – but for a third of the fees. (...)"
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  • Financial Times (13/04/2012)
    EDHEC calls for index providers to improve transparency
    "(...) European regulators need to do more to improve standards governing the quality, governance and auditability of indices used by exchange traded fund providers and other passive fund managers, according to EDHEC-Risk Institute. “More attention should be given to the quality of index governance and the auditability of decisions made by index committees,” said Noël Amenc, director at EDHEC-Risk Institute. He said information on the historic composition of traditional indices was difficult to obtain and “almost impossible to procure at reasonable cost” for more complex strategy indices. Index providers should be required by regulators to make all information about the composition of their indices freely available to the public, Mr Amenc said. This change is currently being considered by the European Securities and Markets Authority. EDHEC said new draft guidelines on ETFs and other Ucits issues recently published by Esma had not gone far enough in clarifying the rules for passive index tracking vehicles such as ETFs. The Institute said ground rules for indices for passive ETFs should be dictated by pre-determined rules and objective criteria that leave no room for discretionary choices. It also wants regulators to specify the maximum level of acceptable tracking error as a standard to define passively managed funds. (...)"
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  • Investment Europe (12/04/2012)
    In defence of equal weighted portfolios
    "(...) Raman Uppal, member of the EDHEC-Risk Institute and professor of finance at the EDHEC Business School, claimed first prize at the SPIVA Awards for the paper Why Does an Equal-Weighted Portfolio Outperform Value-and Price-Weighted Portfolios? along with co-authors Grigory Vilkovand Yuliya Plyakha, both of Goethe University in Frankfurt. The awards were launched by S&P Indices as an international programme that recognises excellence in research on the topic of index-related applications. The first prize is awarded for distinctive, high-quality research in the use of financial market indices for investment analysis and management. (...) The winning study compares the performance of equal-, value-, and price-weighted portfolios of stocks in the major US equity indices over the past four decades. It finds the equal-weighted portfolio with monthly rebalancing outperforms the value-and price-weighted portfolios in terms of total mean return, four factor alpha, Sharpe ratio and certainty-equivalent return,even though the equal-weighted portfolio has greater portfolio risk. The total return of the equal weighted portfolio exceeds that of the value-and price-weighted because the equal-weighted portfolio has both a higher return for bearing systematic risk and a higher alpha when using the four-factor model. In the introduction to the paper, the authors said their aim was to understand the reasons for differences in performance across these weighting rules. (...)"
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  • Funds Europe (April 2012)
    EDHEC Research: Finding a good fit
    Article by Felix Goltz, Head of Applied Research at EDHEC-Risk Institute
    "(…) The exchange-traded funds (ETF) industry represents but a fraction of the fund management industry: at the end of the first half of 2011, the assets under management (AuM) in the ETF industry represented 2.7% of those of the overall fund management industry in Europe and 5.6% globally. In Europe, it represented 3.5% of the capitalisation of listed equity at the end of November 2011. The total ETF turnover conducted on exchange via the electronic order book was 8.5% of the equity turnover. The exchange traded product (ETP) industry is highly concentrated: while close to 200 providers vie for the global market, the top three players control over two-thirds of the AuM and the top ten players more than four-fifths of the AuM. (...)"
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  • FT Adviser (11/04/2012)
    Esma must clarify ETF rules, say fund managers
    "(...) The European Securities and Markets Authority (Esma) closed its consultation on ETF regulation within Ucits rules on April 3, having received several responses calling for greater clarity regarding its definitions. Research body Edhec Risk Institute said Esma should specify a limit on the maximum tracking error allowed in a passive fund in order to “frame” which funds were passive ETFs. “For an index to be considered representative of passive management, its ground rules should leave no room for implicit, let alone explicit, discretionary choices,” EDHEC’s response stated. Both the UK’s Investment Management Association and its European counterpart, the European Fund and Asset Management Association (Efama), have echoed Edhec’s concerns. (...)"
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  • IPE (11/04/2012)
    ESMA consultation on UCITS, ETFs "lacks clarity"
    "(…) Meanwhile, EDHEC-Risk Institute argued that the consultation paper fell short on a definition of passive management that would be framed in terms of a limit on the maximum level of tracking error acceptable. The research institute said: "For an index-tracking vehicle to be considered a passive investment vehicle, it is also necessary that the underlying index be a financial index whose composition is dictated by a set of pre-determined rules and objective criteria allowing for strict systematic implementation. "For an index to be considered representative of passive management, its ground rules should leave no room for implicit, let alone explicit, discretionary choices." EDHEC said ESMA should launch a new consultation paper on indices that would "pave the way for major progress in the information of UCITS and end-investors with respect to the quality, governance, and auditability of indices". (…)"
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  • Investment Europe (11/04/2012)
    EDHEC calls for reform of indices
    "(...) The EDHEC-Risk Institute has issued a report welcoming of the ESMA Consultation Paper on ETFs, which sees ETFs as part of the broader Ucits category, but notes a number of shortcomings. (...) The ESMA guidelines recommend that information on the performance of indices should be freely available to investors, but EDHEC-Risk “regrets that the proposed guidelines stop short of requiring that all information concerning indices–notably, their historical composition–be made freely available to the public. This information is difficult to obtain for traditional indices, even though the rules of the latter are typically simple, and in the case of strategy indices, it is almost impossible to procure at reasonable cost.” Free public disclosure of this information, for all types of indices, would not only allow UCITS and end-investors to perform their due diligence at minimal cost, but also foster the development of independent research on indices that would contribute to market efficiency. More attention should be given to the quality of index governance and the auditability of decisions made by index committees. (...)"
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  • IPE (11/04/2012)
    UK roundup: Tata Steel, British Steel Pension Scheme, PPF 7800 Index
    "(…) Tata Steel's UK subsidiary has agreed a number of changes to the British Steel Pension Scheme (BSPS) to address its funding shortfall, including enrolling new members into a defined contribution (DC) scheme from 2014. While the £11.3bn (€13.7bn) scheme reported a Section 75 deficit of £500,000 in March 2010, prior to Tata becoming sponsor following its acquisition of Corus Group, the new sponsor said this would be the first funding shortfall for the BSPS. Speaking at the EDHEC Risk conference late last month, investment committee member Allan Johnston declined to give the size of the deficit, but called it "manageable", while a Tata spokesman told IPE the results of the 2011 triennial valuation were currently unknown. (…)"
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  • L'Agefi (11/04/2012)  
    Indices : L'EDHEC critique l'insuffisance des propositions de l'AEMF
    "(...) S'il se félicite que le nouveau document consultatif de l'AEMF de janvier 2012 élargisse le spectre à une approche horizontale couvrant tous les fonds coordonnés au lieu de se focaliser uniquement de manière verticale sur les seuls ETF coordonnés, l'EDHEC-Risk Institute déplore dans sa réponse que le texte présenté n'aille pas plus loin dans plusieurs domaines clés. Les spécialistes de l'EDHEC regrettent que le régulateur européen n'ait pas jugé utile de proposer une définition de la gestion passive qui serait encadrée dans une limite d'écart de suivi acceptable. D'autre part, ils critiquent le fait que le texte de l'AEMF, s'il préconise la mise à disposition gratuite d'informations sur la performance des indices, n'impose pas que toutes les informations sur les indices soient publiées gratuitement, notamment celles concernant l'évolution historique de la composition de ces indices. De plus, l'EDHEC souhaiterait que la qualité de la gouvernance des indices et la possibilité d'auditer les décisions des comités des indices retienne davantage l'attention du régulateur. (...)"
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  • Citywire (10/04/2012)
    ETF regulation does not ‘go far enough,’ says EDHEC
    "(…) The EU’s financial safety watchdog ESMA must work harder to ensure the rules governing passive and actively-managed funds are clearer. That is the response of the research centre EDHEC-Risk Institute to the latest consultation launched by ESMA on improved transparency, governance and auditability of indices. The Paris-based organisation said while it welcomed the fact the consultation would be applicable to all Ucits rather than just Ucits ETFs, it regretted that the consultation ‘did not go far enough’. By failing to set a definite limit on tracking error, EDHEC said the paper fell short of conclusively defining passive management. At the core of its response, EDHEC said there should be no room for discretion over whether an index is representative of passive management. In its letter to ESMA, the organisation said: ‘The exercise of discretion in the implementation of ground rules blurs the distinction between passive and active management.’ It therefore said all passive indexes should have an underlying financial index, whose composition is dictated by a set of pre-determined rules and objectives criteria allowing for strict systematic implementation. In addition, EDHEC-Risk Institute said there should be free, public disclosure for all types of indices. (…)"
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  • Bloomberg Businessweek (10/04/2012)
    In response to ESMA consultation paper on ETFs, EDHEC-Risk Institute calls for improved transparency, governance and auditability of indices
    "(...) In commenting on the ESMA Consultation Paper entitled "ESMA's guidelines on ETFs and other UCITS issues" (ESMA/2012/44, January 2012), EDHEC-Risk Institute has welcomed the broadened focus of this new consultation, which goes a long way towards approaching important issues in a horizontal way across all UCITS, rather than in a vertical way limited to UCITS ETFs, but regrets that the consultation paper has not gone further in several key areas: While underlining the differences between passively and actively managed funds and proposing more disclosures on tracking error, the consultation paper falls short of giving a definition of passive management that would be framed in terms of a limit on the maximum level of tracking error acceptable. (...)"
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  • L'Agefi (05/04/2012)  
    Sovereign funds seeking asset liability management solutions
    "(...) Sovereign funds are calling for modifications to their investment practices, in order to account for short-term constraints (such as limiting maximal losses allowed in a given time period, or minimal performance objectives), according to a study by the EDHEC-Risk Institute undertaken last year by a research chair supported by Deutsche Bank. The study finds that sovereign funds find asset liability management (ALM) techniques to be relevant for their financial management, and that management of risks related to the United States is a part of their mission. The specific characteristics of their asset liability management is that it needs to cover not only liability risks, but also contribution risks. Sovereign funds estimate that the asset management sector does not provide liability-driven investment (LDI) solutions which are adapted to their particular situation. With this in mind, the study proposes a dynamic asset liability management model developed to guide allocation and risk management decisions by sovereign funds. (...)"
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  • The Treasurer (April 2012)
    No foundation for naked CDS ban
    "(...) Credit default swaps (CDS) were not to blame for the slide in bond prices that led to an EU ban last October on so-called naked CDS, claims new research. Paris-based business school EDHEC examined the relationship between eurozone sovereign-linked CDS and the same sovereign bond markets during the eurozone debt crisis of 2009-11. Its study concluded that CDS spreads did not drive sovereign bond spreads in all circumstances, and could actually have the opposite effect. EDHEC's affiliated professor of finance Dominic O'Kane added that CDS spreads were a "cleaner and more transparent measure of market-perceived credit than bonds since CDS are not limited by supply, are as easy to buy as to sell, and have a lower cost of entry". O'Kane added that bond spreads had been catching up with the "fair value" already established in the CDS market. The widening of Greek CDS before bond spreads in 2010 attracted criticism from governments, but was valid and proved the CDS market was "an earlier predictor of default than the bond market". EDHEC also warned that the ban "will make the market less liquid and will prevent many participants from easily hedging the sovereign risk they wish to avoid". (...)"
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  • Financial News (05/04/2012)
    ETF sector acknowledges physical-synthetic split
    "(...) The European Securities and Markets Authority in January published a consultation paper on the impact of ETFs on investor protection and market integrity in January, which market participants have provided now responded to. (...) But French institute EDHEC rejected the argument that synthetic ETFs posed a systemic risk: “Reports by regulators concerned with financial stability have trumped up the systemic risks of ETFs. The case is woven from broad brush parallels and dubious assumptions.” (...)"
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  • Financial Standard (05/04/2012)
    SWFs have liabilities to manage too
    "(...) The $5 trillion sovereign wealth fund sector is poorly served by the investment management industry which doesn't understand their risk management requirements, claims a just released joint study by the EDHEC Risk Institute and Deutsche Bank. The misunderstanding is caused by the misplaced perception that SWFs do not have liabilities to match against and so investment managers continue to present them with accumulation oriented products and investment strategies. "There are three kinds of SWFs - natural resources funds (eg Abu Dhabi and Kuwait), foreign reserve funds (eg China and Singapore), and pension reserve funds (eg Australia and New Zealand)," noted the report. Failure to appreciate the implications of these differences has lead to a common misconception that SWFs do not have explicit liabilities and so they are not presented with Asset Liability Management solutions (ALM), despite recognition by several SWFs that such solutions would actually suit their needs. Illustrating this gap between SWF requirements and the investment services they are being offered, a survey conducted by the EDHEC Risk Institute and Deutsche Bank found that 89% of the sovereign investment practitioners think that SWFs are subject to implicit short-term constraints. (...)"
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  • Index Universe (04/04/2012)
    Record Start To The Year For ETP Industry
    "(...) Investors’ continued demand for fixed income products helped push the global ETP industry to its best ever first quarter this year. (...) The demand for such funds was also noted in the results of a recent investor survey by the EDHEC-Risk Institute, which found interest in niche ETFs was growing strongly among European buyers. (...)"
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  • Financial News (04/04/2012)
    MSCI indices entice ETF providers
    "(...) Exchange traded fund providers could be a major target group for the products. According to a survey by French institution EDHEC, ETFs investors are increasingly keen to access lists of stocks which are different from those accessed by standard cap-weighted variants. (...)"
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  • L'Agefi Suisse (04/04/2012)  
    Le rôle relatif de la spéculation
    "(...) Une étude récente, publiée en mars par l'EDHEC Risk-Institute à Paris, risque de décevoir les amateurs de scénarios hollywoodiens. Hillary Till, professeur associé à l'EDHEC, a analysé les informations relatives aux échanges boursiers durant les phases de forte volatilité des cours des prix énergétiques. Par exemple, sur la base des données internes des gros négociants de la commission de surveillance du négoce des matières premières et des contrats à terme (Commodities and Futures Trading Commission, CFTC), il apparaît peu probable que les investisseurs indiciels aient été la source de la forte volatilité des cours du pétrole constatée lors du pic de 2008. Ce, compte tenu du fait que l'activité (OTC et en bourse) des investissements indiciels portant sur des contrats à termes ou des équivalents sur le pétrole était précisément en train de décliner entre le 31 décembre 2007 et le 30 juin 2008. Pour la période 2007-2008, la CFTC a consaté que seulement 41% des positions longues sur les contrats d'échange sur les marchés à terme du pétrole brut, correspondant à trois dates en 2007 et 2008, ont été associées aux positions d'achat des fonds indiciels. (...)"
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  • IPE (03/04/2012)
    Sovereign wealth funds must consider "implicit liabilities", says EDHEC
    "(…) Sovereign wealth funds (SWFs) must consider their implicit liabilities, according to a survey by the EDHEC-Risk Institute, which saw respondents arguing that liability-driven investment (LDI) approaches used within the pensions industry should be implemented by the funds. Gathering responses to a previously published research paper on the issue of liability management within SWFs, EDHEC found that 70% of respondents were in favour of an asset liability management (ALM) framework, as it would allow for a better understanding of each fund's optimal investment policy, as well as risk management practices. "More than half of the respondents (56%) agree there is a lack of dedicated ALM and risk management solutions for SWFs," said the paper, written by EDHEC-Risk Institute Asia director Frédéric Ducoulombier and research engineer Lixia Loh. "In particular, respondents think such issues have not been given much practical consideration or priority."(…)"
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  • Investment Magazine (03/04/2012)
    Infrastructure investors need better benchmarks
    Article by Frédéric Blanc-Brude, research director at EDHEC Risk Institute–Asia
    "(...) Institutional investors need better research if they are going to enter the infrastructure space in a meaningful way. Australia has pioneered institutional investment in infrastructure with pension fund allocations estimated at 6 per cent of assets. Specialised infrastructure investors argue that “for pension funds, the long duration, inflation hedging and steady cash flow nature of infrastructure investments holds considerable appeal”. However, recent academic research on the performance of infrastructure investment is mixed. Using samples of Australian, US and global data, both listed and unlisted, recent papers conclude that infrastructure returns can be high but only because risk is also high, that diversification benefits are limited and may disappear with time, that inflation protection is seldom experienced except in the utilities sector, and that downside protection, while real, can be hampered by fund-level risk. Of particular concern when it comes to Australia is the possibility of a historical bias in the data since numerous assets were sold at a discount by distressed local governments in the early 1990s. These results do not mean that infrastructure investment is not a good idea. (...)"
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  • Asset International (03/04/2012)
    Fund Managers Failing SWFs on LDI
    "(...) Sovereign wealth funds (SWFs) have accused fund managers of failing to acknowledge their financial liabilities and as a result not offering products that would help to meet them. Some 70% of respondents to a global survey carried out by the EDHEC-Risk Institute said asset-liability modelling (ALM) provided “a better understanding of optimal investment policy and risk management practices”, but the majority of respondents complained about the lack of such solutions for SWFs. The survey said: “More than half of the respondents (56%) agree that there is a lack of dedicated ALM and risk management solutions for SWFs. In particular, respondents think that such issues have not been given much practical consideration or priority. In addition, the respondents agree that extending the liability-driven investing (LDI) paradigm developed in the pension fund industry to SWFs provides a better understanding of the optimal investment policy and risk management practices.” (...)"
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  • Funds Europe (03/04/2012)
    Sovereign wealth funds must consider liability risk
    "(…) Sovereign wealth funds are not solely focused on accumulation but must also consider liability and contribution risks, such as the risk of failing to meet their objectives or having their contributions dry up, says a survey by the EDHEC-Risk Institute. The survey of sovereign wealth funds found that many respondents think the asset management industry is not providing liability-driven investment (LDI) services that are appropriate to their situation. Eighty-nine percent of the respondents said sovereign wealth funds are subject to short-term constraints, for instance limits on potential drawdown or minimum performance targets. Meanwhile, 92% said implicit liabilities reflecting the fund's objectives should be taken into account by asset managers. (...)"
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  • FTfm (02/04/2012)
    UK regulator declares ETF concerns
    "(...) The Financial Services Authority detailed its concerns about exchange-traded funds at an investment conference in London last week, with the UK regulator emphasising there were important differences between physical and synthetic ETFs that investors should be made aware of. Tony Hanlon, manager of the FSA’s asset management sector team, said the regulator had three main areas of concern: the taxonomy of ETFs, potential conflicts of interest and operational risks. (...) Mr Hanlon was speaking at an investment conference organised by the EDHEC Risk Institute. (...)"
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  • Financial News (02/04/2012)
    Sponsors offer personal packages to investors
    "(...) For the first time since the private equity industry’s boom period began 10 years ago there is a fear that a large number of firms will be unable to raise fresh capital from investors and, in effect, go out of business. (...) Under Solvency II proposals, institutions would suffer a 49% capital charge when buying direct stakes in hedge and private equity funds which often do not offer transparency to users. But according to a paper submitted by French business school EDHEC, the charge should fall to 25% if they succeed in providing transparency to clients and regulators. The preferred model is managed accounts, which often remain in the custody of clients while being managed by alternative managers. (...)"
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  • Hedge Funds Review (April 2012)
    Calculations and allocations
    Article by Mathieu Vaissié, research associate at EDHEC-Risk Institute and a senior portfolio manager at Lyxor Asset Management
    "(...) There is growing empirical evidence that the complexity of financial markets makes it increasingly challenging for institutional investors to manage their asset/liability profile efficiently. Changes in the regulatory framework and in accounting rules make it even trickier for insurance companies. Against this backdrop insurers have no choice but to rethink their overall investment policy. Since a great deal of information can now be obtained on hedge fund holdings, it could be argued that the solvency capital requirement (SCR) of hedge fund strategies should be based on their aggregate risk factor exposures. However, the Solvency II directive appears to be very much influenced by traditional investor practices, and certain risk-mitigation techniques have proved to be somewhat ill-suited for actively managed long/short portfolios. (...)"
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  • Investment Magazine (April 2012)
    Optimal asset allocation for sovereign wealth funds
    Article by Lionel Martellini, scientific director of EDHEC-Risk Institute
    "(...) In research conducted at EDHEC-Risk Institute as part of the research chair on asset liability management (ALM) techniques for sovereign wealth funds (SWF) management supported by Deutsche Bank, we propose a quantitative dynamic asset allocation framework for sovereign wealth funds, modelled as large long-term investors that manage fluctuating revenues typically emanating from budget or trade surpluses in the presence of stochastic investment opportunity sets. The optimal asset allocation strategy takes into account the stochastic features of the sovereign fund endowment process (where the money is coming from), the stochastic features of the sovereign fund’s expected liability value (what the money is going to be used for), and the stochastic features of the assets held in its portfolio. (...)"
    Copyright Investment Magazine [Full text]


March 2012

  • Risk.net (30/03/2012)
    ETFs have improved price efficiency between spot and futures markets, EDHEC
    "(...) The introduction of exchange-traded funds (ETFs) has had a positive effect on the related futures market and/or underlying securities, according to an EDHEC-Risk Institute March 2012 publication. Academic literature "suggests that the liquidity of the underlying index market increased after ETFs were introduced", states the report. "Market responses to observed price deviations are also swifter in periods during which there is an ETF on an index than they are in periods before the existence of the ETF." Thirteen per cent of respondents from EDHEC's European ETF investor survey observed that ETFs had improved the price efficiency between spot and futures markets, and 21% observed improved liquidity in the underlying markets. (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • FTfm (30/03/2012)
    Apple’s rise brings concentrations risks into focus
    "(...) Speaking at the EDHEC investment conference in London this week, professor Raman Uppal, said research provided robust evidence that a portfolio of randomly chosen equally weighted US stocks could deliver higher returns than either market cap weighted or price weighted portfolios. (Japan’s Nikkei 225 index is an example of a price weighted portfolio). The higher returns for an equally weighted portfolio are due to its larger exposure to smaller companies and value stocks but a large part of the outperformance is also down to regular rebalancing. Regular monthly rebalancing turns an equally weighted portfolio into a contrarian strategy involving buying previous losers and selling winners. Equally weighted portfolios do have a number of drawbacks compared with cap weighted and price weighted portfolios. They have higher volatility and larger maximum monthly drawdowns and they also have more turnover and higher transactions costs. But in spite of these drawbacks, equally weighted portfolios still registered significantly higher overall Sharpe ratios (which measure how well the return of an asset or portfolio compensates an investor for the risk taken). (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Index Universe (30/03/2012)
    Investors Increasingly Drawn To Smart Beta
    "(...) Exchange-traded funds based on alternative indices have been growing in popularity in recent years, and issuers have launched a range of so-called “smart beta” products to meet the increasing investor demand. But there’s still plenty of room for growth, according to the EDHEC-Risk Institute. In its 2011 European ETF survey, released earlier this week, it reported that 39 per cent of survey respondents said that they would like to see more ETFs based on alternative indices, up from 29 per cent in last year’s survey. Alternative indices have appeared in many guises, from accessing new asset classes through to factor or risk premia-based indices. However it is smart beta, a reassessment of how to weight existing assets to produce more efficient investments, that is capturing the attention of investors in Europe and worldwide. (...)"
    Copyright Index Universe [Full text]


  • Reuters (30/03/2012)
    Pension funds’ hedging dilemma
    "(...) Pension funds have no shortage of concerns: their funding deficits are rapidly growing in the current low-return environment, and ageing populations are stretching their liabilities. But a recent survey of pension funds trustees by French business school EDHEC has found that their biggest worry, cited by nearly 77% of the respondents, is the risk that their sponsor — the entity or employer that administers the pension plan for employees – could go bust. Yet 84% of respondents fail to manage the sponsor risk. So how do you hedge against such a risk? You could buy credit default swaps of the sponsor company or buy out-of-the-money equity put derivatives to seek protection. But both options are costly and illiquid. Moreover, it might send a negative signal to the market: after all, if the company’s pension fund is seen effectively shorting the company in an aggressive manner, investors may wonder “What do they know that we don’t?”. (...) Boscher, speaking at an EDHEC conference in London earlier this week, says taking out insurance is becoming more popular. “Now that insurance solutions are developing so we could see more creative solutions implemented.” (...)"
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  • IPE Special Supplement (March 2012)
    EDHEC-Risk Institute Research Insights Spring 2012
    • Lessons from history on commodity futures trading controversies; Hilary Till
    • Long-short commodity investing: implications for porfolio risk and market regulation; Joëlle Miffre
    • Commodity prices over the last decade were greatly influenced by the rise of emerging markets; Interview with Blu Putnam, Managing Director & Chief Economist, CME Group
    • Assessing the risks of European ETFs; Noël Amenc, Frédéric Ducoulombier, Felix Goltz, Lin Tang
    • Accounting and sponsor risks in European pension plans; Samuel Sender

    Copyright IPE [www.ipe.com - Registration required]


  • L'Agefi (30/03/2012)  
    Les EDHEC Risk Days s'imposent au coeur de la City
    "(...) La dernière édition des EDHEC Risk Days, qui s'est déroulée en plein centre de Londres du 27 au 29 mars, a rassemblé quelque 800 participants, avec une moyenne de 400 à 500 personnes lors de chacune de ces journées qui ont décliné trois grands thèmes d'actualité, la gestion passive, la gestion du risque et la gestion alternative avec la directive AIFM. C'est d'ailleurs probablement l'une des clés de la réussite de la manifestation: le choix de quelques grands thèmes d'actualité à la lumière des recherches en cours au sein des multiples chaires de l'EDHEC. (...)"
    Copyright L'Agefi [www.agefi.fr - French]


  • Investment Europe (30/03/2012)
    ETFs have improved price efficiency between spot and futures markets - EDHEC
    "(...) The introduction of exchange-traded funds (ETFs) has had a positive effect on the related futures market and/or underlying securities, according to an EDHEC-Risk Institute March 2012 publication. Academic literature "suggests that the liquidity of the underlying index market increased after ETFs were introduced", states the report. "Market responses to observed price deviations are also swifter in periods during which there is an ETF on an index than they are in periods before the existence of the ETF." Thirteen per cent of respondents from EDHEC's European ETF investor survey observed that ETFs had improved the price efficiency between spot and futures markets, and 21% observed improved liquidity in the underlying markets. (...)"
    Copyright Incisive Media [Full text]


  • Risk.net (29/03/2012)
    Physical ETFs are less risky, say European investors
    "(...) Investors believe that physically replicated exchange-traded funds (ETFs) are less risky than their synthetic counterparts, according to EDHEC-Risk's annual European ETF survey of European ETF investors. Fully replicated ETFs got a positive score of 2.28 out of three, according to the survey, while funds that engage in derivative swap contracts to gain exposure to an underlying only scored 1.41. "Even though almost all physical replication ETFs engage in securities lending, investors fail to appreciate the risk of this activity," according to the EDHEC-Risk Institute. The 174 respondents gave full replication a score of 2.11 out of three for operational risk caused by securities lending, compared to just 1.55 out of three for synthetic replication, "even though synthetic replication ETFs do not use securities lending directly," the report states. Industry communication on the risks of ETFs has led to underestimation of the counterparty risk of physical structures, according to the research institute. (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Funds Europe (29/03/2012)
    Investors misunderstand dangers of ETFs
    "(…) Industry communication about the dangers of synthetic exchange-traded funds (ETFs) has led investors to underestimate the risks attached to physically replicating products, according to an annual ETF survey by the EDHEC-Risk Institute. The survey suggests investors are widely aware that synthetic ETFs, which use swap transactions to replicate their index, are exposed to counterparty risk. But investors were much less likely to say that physical ETFs, nearly all of which engage in securities lending, are also risky. (...)"
    Copyright Funds Europe [Full text - Registration required]


  • L'Agefi (29/03/2012)  
    Les déboires de Crédit Suisse et de Barclays relancent le débat sur la sécurité des ETN
    "(...) Dans le cadre d'une étude dévoilée mercredi sur les ETF en Europe, l'EDHEC indique que les investisseurs jugent la réplication physique moins risquée que la réplication synthétique en termes de risque de contrepartie.(...)"
    Copyright L'Agefi [Full text - French]


  • Index Universe (28/03/2012)
    Demand For Niche ETFs Growing
    "(...) Investors want more ETFs based on indices that offer alternatives to the traditional market capitalisation approach, according to the EDHEC-Risk Institute. In its EDHEC European ETF Survey 2011, the academic institution said the number of respondents that thought ETFs should track niche markets had increased by 10 percent to 39 percent over the past year, indicating a “growing interest in alternative weighted indices”. An increasing number of investors were also interested in emerging market ETFs, particularly those offering exposure to bonds. However, this broadening of horizons did not extend to active management, with only 11 percent saying that ETFs should shift from being passive to active funds. “This finding underlines that ETFs are mainly used as beta tools or asset allocation tools, thus allowing investors to focus on the question of beta management which has been pointed out as being of first-order importance in investment management, rather than focusing on security selection issues,” said the report. (...)"
    Copyright Index Universe [Full text]


  • Financial News (28/03/2012)
    ETF investors should think before they leap
    "(...) Despite all the fuss over the rival qualities of physical and synthetic exchange-traded funds, it appears buyers can’t be bothered to work out the difference between them. For the record: you get physical ETFs by replicating indices through the ownership of their underlying stocks; you get synthetic ETFs by using swaps, manufactured by banks, which perform in parallel with indices. In its annual survey of ETF users, the EDHEC-Risk institute of France discovered that 84.7% of respondents felt good about counterparty risk as far as physical variants were concerned, while a mere 36.4% felt the same way about synthetics. EDHEC found the level of complacency over physical ETFs surprising because they regularly lend their shares to hedge funds via prime brokers. This suggests they are exposed to the counterparty risk of their stock borrowers, a point which respondents have overlooked. (...)"
    Copyright Financial News [Full text - Registration required]


  • Investment Europe (28/03/2012)
    Physical ETF counterparty risk underestimated - EDHEC
    "(...) The counterparty risk of physical ETFs is being underestimated, research by EDHEC-Risk has suggested. The EDHEC European ETF Survey 2011, which represents a comprehensive survey of 174 European ETF investors, suggested that industry communication on the risks of ETFs has led to the counterparty risk of physical ETFs being underestimated. The survey found that investors think that physical replication is less risky than synthetic replication in terms of counterparty risk. Investors fail to appreciate the risk of securities lending by physical replication ETFs, against synthetic replication ETFs which do not use securities lending directly. Investors also saw a need for further education to reduce confusion on the difference between highly regulated ETFs and low regulation ETPs. (...)"
    Copyright Incisive Media [Full text]


  • Portfolio Adviser (28/03/2012)
    ETFs still represent core rather than satellite
    "(...) Investors are using ETFs more heavily for dynamic strategies and specific sub-segment exposure than in the past, although the main use remains long-term buy and hold investing in broad market indices. This is the finding of a report by the EDHEC-Risk Institute on behalf of ETF provider Amundi, called "Core-Satellite and ETF Investment". The report also found investors were moving towards applying ETFs for portfolio optimisation and risk management, despite seeing them as index-replicating rather than active funds. Another trend has been an increasing demand for ETFs based on new forms of indices, such as alternative-weighted indices, which is up from 29% to 39% over the past year. (...)"
    Copyright Last Word Media Limited [Full text]


  • Asset International (28/03/2012)
    Equal vs. Value and Price-Weighted Portfolios: Who Wins?
    "(...) "Why does an equal-weighted portfolio outperform value- and price-weighted portfolios?," asks a newly released report. According to the authors -- Yuliya Plyakha and Grigory Vilkov of the Goethe University of Frankfurt and Raman Uppal from the EDHEC Business School -- the higher systematic return of the equal-weighted portfolio comes from its higher exposure to the market, size, and value factors. The report continues: "The higher alpha of the equal-weighted portfolio arises from the monthly rebalancing required to maintain equal weights, which is a contrarian strategy that exploits reversal and idiosyncratic volatility of the stock returns; thus, alpha depends only on the monthly rebalancing and not on the choice of initial weights." The report compares the performance of equal-, value-, and price-weighted portfolios of stocks in the major US equity indices over the last four decades. While an equal-weighted portfolio has greater portfolio risk, the report asserts that equal-weighted portfolios with monthly rebalancing outperform value- and price-weighted portfolios in terms of total mean return, four factor alpha, Sharpe ratio, and certainty-equivalent return. (...)"
    Copyright Asset International [Full text]


  • Pensions & Investments (27/03/2012)
    EDHEC survey: European investors see ETFs as better for beta
    "(...) European institutional investors primarily use exchange-traded products as beta tools or to implement asset allocation strategies, with few investors seeing demand for active ETFs, according to an EDHEC-Risk Institute survey released Tuesday. About 70% of the 174 European institutional managers and private wealth managers who responded to the survey said they primarily use ETFs to gain broad market exposures. About 56% use ETFs for buy-and-hold investments, while 54% use ETFs to gain short-term or dynamic asset allocation exposures. “There is an increasing demand for short-term dynamic strategies and subsegment exposures,” according to EDHEC's European ETF Survey 2011, which was conducted from June through August and is also supported by Amundi ETF, an ETF manager. About 74% of the respondents were institutional money managers. (...)"
    Copyright Pensions & Investments [Full text - Registration required]


  • Investment Europe (27/03/2012)
    SPIVA Award to paper on equal weighted portfolios
    "(...) Raman Uppal,Grigory Vilkov and Yuliya Plyakha have claimed first prize at the SPIVA Awards for the paper "Why Does an Equal-Weighted Portfolio Outperform Value- and Price-Weighted Portfolios?" Raman Uppal is a member of the EDHEC-Risk Institute and Professor of Finance at EDHEC Business School, while co-authors Grigory Vilkov and Yuliya Plyakha are at Goethe University in Frankfurt. The SPIVA Awards were launched by S&P Indices as an international programme that recognises excellence in research on the topic of index-related applications. The first prize is awarded for distinctive, high-quality research in the use of financial market indices for investment analysis and management. (...)"
    Copyright Incisive Media [Full text]


  • Reuters (27/03/2012)
    Exchange traded products poorly understood-survey
    "(...) Investors who buy Exchange Trade Products (ETPs) are not sufficiently aware of the distinctions between the different types to understand the potential risk exposures of each product, according to a survey on the subject. The survey, by EDHEC-Risk Institute, part of the French business school EDHEC, found that only 5 percent of institutional investment and private wealth managers who responded felt investors were sufficiently educated to understand them. "This clearly shows that there is a need for both ETF providers and regulators to help investors understand that one character change in the acronym creates a huge difference, thereby enabling them to take the potential risk exposures into account when investing in ETPs other than ETFs," it said. (...)"
    Copyright Reuters [Full text]


  • FTfm (26/03/2012)
    Appetite grows for ETFs based on new indices
    "(...) Growing numbers of investors want exchange traded fund managers to offer products based on new indices instead of conventional market cap benchmarks, according to EDHEC-Risk Institute, part of EDHEC Business School. In its European ETF survey 2011, released on Monday, EDHEC reported 39 per cent of survey respondents saying that they would like to see ETFs based on new indices, up from 29 per cent in the previous year’s survey. More than three-quarters (77 per cent) of those surveyed by EDHEC thought that ETFs should remain as beta producing products while 39 per cent said ETFs could be more widely used to track niche markets. But EDHEC found only limited interest among investors in the development of active ETFs. “Actively managed ETFs are not important to our respondents – only 11 per cent think that ETFs should shift from passive to active”. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • FTfm (26/03/2012)
    Synthetic ETFs get thumbs down
    "(...) Synthetic exchange traded funds are rated as poor quality by almost a third of European investment managers, according to a survey by EDHEC-Risk Institute. Physical ETFs were much less likely to be viewed as poor quality. EDHEC's 2011 European ETF survey found just 1 per cent of those surveyed rated ETFs that hold all the constituents of an index as poor quality, a proportion that rose to 11 per cent for ETFs that hold a representative sample of stocks. “It appears the recent debate about synthetic replication and, in particular, the communication on supposed advantages of physical replication had an impact on respondents’ overall perception,” EDHEC said. EDHEC found synthetic ETFs rated badly for counterparty risk but more highly for costs and reliability, in terms of having low tracking errors. However it said the results were “rather surprising” as physical ETFs also exposed investors to counterparty risk if they engaged in securities lending. “The view that full replication has the lowest exposure to the counterparty and synthetic replication has the highest implies that there might be confusion about how these products are constructed,” EDHEC said.(...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Pensions & Investments (20/03/2012)
    Emerging markets hedge funds post highest returns through February but trailed the equity index by a wide margin
    "(...) February EDHEC-Risk Alternative indexes returns, released March 20, show that emerging markets hedge fund managers led all strategies through the first two months of the year. Despite the 7.4% YTD return, managers trailed the MSCI Emerging Markets index by more than 10 percentage points, which was up 17.9%. All strategies trailed the S&P 500, which posted a YTD gain of 9% through February. (...)"
    Copyright Pensions & Investments [Full text - Registration required]


  • Les Echos (20/03/2012)  
    Les CDS, un outil de spéculation efficace sur la dette des Etats
    "(...) En comparant la taille des deux marchés - quelques milliards de dollars pour les CDS, plusieurs centaines de milliards pour les obligations souveraines -, on doute naturellement de l'influence des CDS. Un document de travail qui vient d'être publié par l'EDHEC Risk Institute assure d'ailleurs qu'il n'y a pas de preuve d'un lien de causalité entre le prix des CDS et celui des emprunts d'Etat. L'auteur, Dominic O'Kane, affirme dès lors que « l'interdiction des CDS à nu (sans détenir l'obligation sous-jacente) risque d'avoir comme effet pervers d'augmenter le coût de financement des Etats ». Cette interdiction entrera en vigueur en novembre prochain dans la zone euro. (...)"
    Copyright Les Echos [Full text - French - Registration required]


  • Le Figaro Economie (20/03/2012)  
    Actions : le palmarès des meilleurs gestionnaires
    "(...) Quelles sont les meilleures sociétés de gestion françaises ? Chaque année, Europerformance et l'EDHEC tentent de répondre à cette question, en établissant un classement, l'Alpha League Table. Il récompense les gestionnaires dont les fonds « actions » réussissent avec le plus de régularité à « battre » le marché. C' est-à-dire à amortir les chocs boursiers et / ou à grimper encore plus vite que les indices quand l'optimisme revient en Bourse. (...)"
    Copyright Le Figaro [www.lefigaro.fr - French]


  • FTfm (19/03/2012)
    Risks worry for sponsors
    Article by Noël Amenc, director at EDHEC-Risk Institute, and Samuel Sender, applied research manager
    "(...) Corporate sponsors of pension funds are concerned primarily about the economic risk of facing higher-than-expected pension costs, according to a survey by EDHEC-Risk Institute, with 95 per cent of the managers responding mentioning this risk. With the evolution of the international accounting rules for corporate pensions (IAS 19), this economic risk has also become an accounting risk for more than 93 per cent of the respondents. (...) Overall, the survey, which was drawn from the Axa Investment Managers regulation and institutional investment research chair at EDHEC-Risk Institute, finds that adequate pension plan contracts and governance are needed. It is curious to observe that, on the one hand, corporate sponsors consider poor management of the pension fund to be a real risk for their financial health. On the other hand, pension fund managers consider that the poor financial health of the sponsor is the main risk. Neither side has implemented solutions that take these risks into account. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Pensions & Investments (19/03/2012)
    Equal-weighted portfolio research nets S&P award
    "(...) Academics Yuliya Plyakha, Raman Uppal and Grigory Vilkov were named co-winners of the inaugural Standard & Poor's awards recognizing excellence in research in innovative applications of financial market indexes in investment management. The three will share the $50,000 SPIVA Award, named for the S&P index vs. active methodology, for their research paper, “Why Does an Equal-Weighted Portfolio Outperform Value- and Price-Weighted Portfolios?” Ms. Plyakha is professor of economics, derivatives and financial engineering, and Mr. Vilkov is EUREX assistant professor of derivatives, both at Goethe University in Frankfurt. Mr. Uppal is professor of finance at EDHEC Business School in London. In their paper, the authors conclude that even taking into account transaction costs, an “equal-weighted portfolio with monthly rebalancing outperforms the value- and price-weighted portfolios in terms of total mean return” and outperforms measures of risk such as the Sharpe ratio, “even though the equal-weighted portfolio has greater portfolio risk. The total return of the equal-weighted portfolio exceeds that of the value- and price-weighted because the equal-weighted portfolio has both a higher return for bearing systematic risk and a higher alpha” as measured by a model they use. (...)"
    Copyright Pensions & Investments [Full text - Registration required]


  • FTfm (18/03/2012)
    Award for contrarian strategists
    "(...) An exposé of why equally weighted equity portfolios appear capable of consistently outperforming other passive strategies has won S&P Indices’ first annual award for excellence in research on index-related topics. Yuliya Plyakha, Raman Uppal and Grigory Vilkov of Goethe University in Frankfurt and the EDHEC Business School in London won the $50,000 Spiva (S&P Index Versus Active) Award for their paper “Why does an equal-weighted portfolio outperform value- and price-weighted portfolios?”. (...) The paper concluded that 58 per cent of the outperformance vis a vis the value-weighted portfolio stemmed from an “excess systematic component” driven by the equally weighted portfolio’s greater exposure to smaller and value stocks, factors long shown to lead to outperformance over a cycle. The remaining 42 per cent stems from “alpha”, or excess returns generated by the monthly rebalancing required to maintain equal weights, which is a contrarian strategy involving buying the losers and selling the winners. The paper found 96 per cent of the outperformance against the price-weighted portfolio was due to this alpha element. “Theoretically, the market value-weighted portfolios should do the best, but it turns out they do the worst,” said Prof Uppal of EDHEC Business School. “The contrarian strategy exploits the tendency of stocks that have risen to come down, and those that have gone down to rise, and this reversal is the sole reason for the alpha.” (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Les Echos (18/03/2012)  
    Comment des sociétés de gestion ont réussi à battre les indices en pleine tourmente
    "(...) La sixième édition de l'Alpha League Table, développée par EuroPerformance et l'EDHEC Risk Institute, montre que les meilleures sociétés de gestion ont encore amélioré leur score. Mais le classement des acteurs les mieux notés a connu quelques chamboulements. (...)"
    Copyright Les Echos [Full text - French - Registration required]


  • L'Agefi Hebdo (15/03/2012)  
    Les indices de marché, des outils de référence mis à mal
    "(...) « En cas de changement significatif de règles de calcul qui peut, par exemple, entraîner de fortes variations sectorielles, on devrait parler d'une nouvelle série d'indices ou, au moins, publier et mentionner en annexe le changement de règles, indique Noël Amenc, directeur d'EDHEC-Risk Institute à Londres. De plus, les calculs ex post de performances doivent s'appuyer sur des règles de rebalancement (changement du panier, NDLR) systématiques, non ambiguës et librement disponibles. (...) A côté de ces grandes séries d'indices de marché, des problèmes se posent sur les indices plus complexes dits intelligents. « Fondés sur des approches fondamentales ou quantitatives, ils appliquent des règles de gestion pas toujours exhaustives et systématiques, précise Noël Amenc. Il est souvent impossible d'accéder à leurs compositions historiques, ce qui rend difficile toute analyse sérieuse de leurs risques et de leurs performances. » (...) Mais en rendant assez coûteux l'accès aux informations nécessaires à la recherche, les grands fournisseurs d'indices privent le marché des informations et analyses qui concoururent à son efficience, argue Noël Amenc. Et rendent finalement plus risqué le choix d'un `benchmark’ par les investisseurs. » (...)"
    Copyright L'Agefi Hebdo [Full text - French - Registration required]


  • L'Agefi Hebdo (15/03/2012)  
    De la difficulté d'encadrer les ventes à découvert
    "(...) En retenant une approche plus moyen/long terme, Abraham Lioui, professeur de finance à l'EDHEC Business School, a mis en évidence un effet plutôt négatif sur la volatilité de l'interdiction de ventes (« à nu » à l'époque) sur dix financières françaises (The impact of the 2008 short sale ban on stock returns). Même si cette étude ne permettait pas de tirer de conclusions « unanimes » sur les valeurs étudiées quant à d'autres dimensions du risque, démontrant que le sujet ne peut pas être tranché de façon univoque. Par ailleurs, bien que l'interdiction concernait un groupe de valeurs financières bien particulières, le chercheur estime « probable qu'elle ait eu des effets collatéraux sur d'autres actifs pour au moins deux raisons : d'abord, des réallocations de portefeuille ; et surtout l'aversion au risque des agents face à un signal négatif pour le prix de tous les actifs. Par conséquent, nous avons fait le choix d'étudier l'impact sur la volatilité au sens large, sans distinction sectorielle ou par valeur ». (...)"
    Copyright L'Agefi Hebdo [Full text - French - Registration required]


  • GT News (14/03/2012)
    No Evidence of Causal Link Between CDS and Sovereign Debt Prices, Reports EDHEC-Risk
    "(...) The results are in line with those of a recent report from the French regulatory authority, the AMF, entitled "Price Formation on the CDS Market: Lessons of the Sovereign Debt Crisis (2010- )". EDHEC-Risk is keen to stress that certain conclusions in the AMF report should be analysed with care. A causal link between rising CDS spreads and their decision-making character has not been established or proven in the report, which moreover does not include a formal test on the subject. According to the author of the EDHEC-Risk report, affiliated professor of finance at EDHEC Business School, Dominic O'Kane: "CDS spreads are a cleaner and more transparent measure of market-perceived credit than bonds since CDS are not limited by supply, are as easy to buy as to sell, and have a lower cost of entry. It would be wrong to suggest that the 200bp level highlighted by the AMF report is the level at which the CDS market "causes" the bond market spreads to increase. A more valid explanation would be that the CDS market establishes a truer estimate of forward-looking sovereign risk, which is not reflected in the bond market where some market participants are required to hold high-quality eurozone debt. (...)"
    Copyright Association for Financial Professionals [www.thehedgefundjournal.com]


  • The Hedgefund Journal (13/03/2012)
    EDHEC-Risk research: CDS prices
    "(...) In newly-released research by Dominic O’Kane, Affiliated Professor of Finance at EDHEC Business School, EDHEC-Risk Institute has performed a theoretical and empirical analysis of the relationship between the price of eurozone sovereign-linked credit default swaps (CDS) and the same sovereign bond markets during the eurozone debt crisis of 2009-2011. The working paper, entitled “The Link between Eurozone Sovereign Debt and CDS Prices,” tests the claim that speculative use of CDS by market participants had caused or accelerated the rapid decline in 2010-11 bond prices in eurozone periphery countries, a claim that led to the decision by the European Parliament and member states on October 18, 2011, to make the ban on so-called “naked” CDS permanent. The EDHEC-Risk research shows that CDS spreads do not drive the sovereign bond spread in all circumstances, and that in various countries and at various times, the opposite effect is present. (...)"
    Copyright The Hedgefund Journal [www.thehedgefundjournal.com]


  • Les Echos Markets (13/03/2012)  
    CDS : coupables ou non-coupables ?
    "(...) Coupables ou non-coupables ? Les CDS ("credit default swaps") font l’objet de débats depuis des années. Les dirigeants européens ont vivement critiqué ces outils qui fonctionnent comme des contrats d’assurance sur la dette d’un pays et qui, selon eux, ont permis à des fonds spéculatifs de déstabiliser la Grèce. (...) Un document de travail qui vient d’être publié par l’EDHEC Risk Institute assure d’ailleurs qu’il n’y a pas de preuve d’un lien de causalité entre le prix des CDS et celui des emprunts d’Etat. L’auteur, Dominic O’Kane, affirme dès lors que "l’interdiction des CDS à nu (sans détenir l’obligation sous-jacente) risque d’avoir comme effet pervers d’augmenter le coût de financement des Etats." Cette interdiction entrera en vigueur en novembre prochain dans la zone euro. (...)"
    Copyright Les Echos [Full text - French]


  • Investment Europe (13/03/2012)
    CDS does not trigger sovereign debt price fluctuations, says EDHEC
    "(...) There is no causal link between credit default swaps (CDS) and sovereign debt prices, new research published by the French EDHEC-Risk Research Institute indicates. (...) EDHEC-Risk said by banning naked CDS, the market is removing one sovereign risk mitigation tool from the toolkit of banks. It said would lead to "the negative and unintended consequence of increasing average sovereign funding costs." According to EDHEC, the ban will make the market less liquid and will prevent many participants from easily hedging the sovereign risk that they wish to avoid. These participants include investors in infrastructure projects as part of public-private partnerships, equity investors who wish to avoid the sovereign risk included in certain stocks, banks who wish to hedge the sovereign risk of their commercial loans, and trading desks buying protection in order to hedge their credit value adjustment (CVA) risk. (...)"
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  • Financial News (12/03/2012)
    Thanks George. We’ll give it some serious thought
    "(...) Over in France, business school EDHEC has published a paper challenging the rationale for pension schemes putting their money into social infrastructure like schools, hospitals and street lighting. It argues that these “may be politically unsustainable” and investors may find themselves facing deal terms adjusted retrospectively. EDHEC said: “Even in the UK, retroactive renegotiations are always possible, as the windfall tax imposed by (the) Labour (government) to privatised utilities in the late 1990s demonstrates.” (...)"
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  • FTfm (12/03/2012)
    Low or no returns send investors chasing ‘smart beta’
    "(...) Investing for market returns via index tracking strategies is standard for many investors. But given the current low level of market returns, or beta, interest is increasingly turning to more sophisticated index-style approaches often labelled “smart beta” by the investment industry. (...) Indicative pricing confirms that smart beta sits between passive and active. Strategy indices managed under licence cost between 10 and 15 basis points for a €100m mandate. Direct from the quant house itself, the strategy would be 30-35 basis points. Providers such as EDHEC-Risk Indices & Benchmarks do the former only. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Commodities Now (March 2012)
    A Long Look at Long-Short Commodity Investing
    Article by Joëlle Miffre, Professor of Finance at EDHEC Business School and a member of the EDHEC Risk Institute
    "(...) Reports of the death of commodity futures as an asset class are greatly exaggerated. However, taking a long-short approach is required for superior risk-adjusted performance and stable diversification benefits. (...)"
    Copyright Commodities Now [www.commodities-now.com]

  • IPE (08/03/2012)
    Social infrastructure market ‘too small, risky’ for pension funds
    "(…) Pension funds have been put off of investing in so-called ‘social infrastructure’ by political risk and the relatively limited size of the asset pool, according to a study by EDHEC-Risk Institute. In its study – entitled ‘The Pension Fund Investment in Social Infrastructure Report’ – EDHEC differentiates between social infrastructure investments – which deliver public assets and services in exchange for a revenue stream paid directly by the public sector – and economic infrastructure – which collects revenues from end users and can include toll roads. The institute said social infrastructure could be a "highly attractive" asset for pension funds as a means of matching liabilities with long-term projects, but two main issues made the investment unattractive. Frédéric Blanc-Brude, research director and author of the report, said: "The uncertainty created by political risk through a transparent and independent regulatory framework for long-term buy-and-hold investors like pension funds would make individual social infrastructure assets much more desirable investments in an asset-liability management context."(…)"
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  • Financial Standard (07/03/2012)
    Social infrastructure not suited to pension funds: study
    "(...) Pension funds should avoid investing in social infrastructure because of its inherent political risk and its small illiquid asset pool, according to a just released study by the UK EDHEC Risk Institute. In their report entitled "Pension Fund Investment in Social Infrastructure: Insights from the 2012 reform of the private finance initiative in the United Kingdom," the EDHEC-Risk Institute identifies two core issues that they argue make social infrastructure potentially unsuited to pension funds: in-built political risk and limited asset pool size. Political risk refers to legislative and sovereign risk, while limited asset pool size, which in the UK is estimated at about $A200 billion, refers to the market for social infrastructure assets being too thin and thus illiquid. The Institute defines social infrastructure as public assets such as schools and hospital buildings that are structured to deliver a revenue stream. Frédéric Blanc-Brude, the study's author and research director at EDHEC Risk Institute—Asia, said these uncertainties can, however, be addressed if a transparent and independent regulatory framework for long-term buy-and-hold investors like pension funds is established. But these regulatory structures won't address the limited asset pool aspect, he noted. (...)"
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  • Financial News (06/03/2012)
    Politicians could scare pension schemes out of hospitals
    "(...) Responding to a "call for evidence" on infrastructure published late last year by the UK Treasury, which referred to "encouraging a stronger role to be played by pension fund investments”, French business school EDHEC has just published a paper challenging the rationale for pension schemes to put their money into social infrastructure investments, which include schools, hospitals and street lighting. Osborne said in November that he was targeting £20bn to come from UK pension schemes to support infrastructure projects. Some of these will be "economic" projects, that is, opportunities for which a commercial demand exists, such as a toll road. Others, however, will be social infrastructure projects. EDHEC's paper argues that social infrastructure investments "may be politically unsustainable". Social projects are only ever put together as the result of political will and with public subsidies, because the commercial case has too many uncertainties to be viable. But it often happens, EDHEC said, that once investments have been made and the attractive risk-adjusted returns become more apparent, and therefore politically difficult to justify, politicians come under pressure to renegotiate the rules regulating the initial contracts. (...)"
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  • Pensions Age (06/03/2012)
    ‘Social infrastructure too small and risky for pension funds’
    "(...) In-built political risk and limited asset pool size are two fundamental issues that make social infrastructure potentially unattractive to pension funds, according to EDHEC-Risk Institute. In its new study Pension Fund Investment in Social Infrastructure: Insights from the 2012 reform of the private finance initiative in the United Kingdom, the research institute looks at earlier industry proposals to have pension funds investing in social infrastructure. Social infrastructure investments deliver public assets and services, such as schools and hospital buildings, with a revenue stream paid directly by the public sector, unlike economic infrastructure, which can include toll roads, airports or power generation and collects revenues from end users. Research director and author of the research Frédéric Blanc-Brude said that a transparent and independent regulatory framework for long-term investors like pension funds could address the uncertainty created by political risk. This would make individual social infrastructure assets much more desirable investments in an asset-liability management context. (...)"
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  • Asia Asset Management (March 2012)
    Reading into the risks: A brief look at long/short commodity investing
    Article by Joëlle Miffre, Professor of Finance at EDHEC Business School and a member of the EDHEC Risk Institute
    "(...) Attracted by the prospect of robust returns, diversification benefits, and potential for hedging inflation and macroeconomic risks, investors have increased their allocations to commodities over the last ten years, primarily via passive investment into long-only commodity futures indices. This market financialisation has led investors to worry about higher integration between commodity and traditional markets weakening the portfolio benefits of commodity investment. Along with the disappointing performance of long-only commodity index funds, this has revived the debate on the role of commodities in strategic and tactical asset allocation. We shed new light on these issues in a study entitled “Long/Short Commodity Investing: Implications for Portfolio Risk and Market Regulation,” produced with market data and support from CME Group. (...)"
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  • The Actuary (March 2012)
    Counting the cost of enterprise risk management
    Paul Klumpes looks at the accountant's perspective of managing risk
    "(...) The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework has recently been endorsed as the basis for reporting and managing risks for most industrial firms. But there remains some ambiguity as to what constitutes an appropriate basis for analysing enterprise risk management (ERM) within insurance firms. Should performance measurement or long-term planning be the primary basis for reporting ERM? For instance, the UK actuarial profession is keen to endorse international standards on this issue. However, there is evidence that UK insurance firms focusing on accounting rates of return (such as return on equity or ROE) tend to use different approaches to managing risk for performance reporting than for management planning and control. (...)"
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  • Hedge Funds Review (March 2012)
    Systemic risk and ETFs
    Article by Noël Amenc, professor of finance, EDHEC Business School and director of the EDHEC-Risk Institute, and Frédéric Ducoulombier, director of EDHEC Risk Institute, Asia
    "(...) In terms of exchange traded funds (ETFs), systemic risk refers to the possibility of an ETF-specific crisis spilling over to the wider financial system. A few key concerns have been voiced. One is based on the assumption that parties to collateralised transactions post hard-to-fund illiquid assets as collateral and that massive ETF redemptions could cause a funding liquidity shock to these swap or securities lending counterparties (FSB, 2011 and BIS, 2011a). Another concern centres on whether the collateral composition could trigger a run on ETFs in periods of heightened counterparty risk (BIS, 2011a); the idea that large-scale ETF redemptions could create a squeeze on the underlying market as ETFs recall on-loan securities (FSB, 2011). The idea that increased complexity might result in an overestimation of market liquidity by investors and that subsequent downward revisions could wreak havoc on the financial system (BIS, 2011a) is also a point being discussed. (...)"
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  • FT Adviser (05/03/2012)
    Should hedge funds be in your clients’ portfolios?
    "(...) Furthermore, the EDHEC-Risk Institute says that the annual average return for hedge fund vehicles since 2001 has been roughly 6.1 per cent. (...) Short-term momentum is also behind hedge funds at the moment. In January, equity-focused strategies exhibited strong performance and reached a five-month high. Long/short equity returned 3.36 per cent. Event-driven strategies, which exploit specific corporate events such as activist shareholder campaigns, gained 2.95 per cent. Equity market neutral, or long/short equity funds that react neutrally to movements in benchmark indices, increased 1.01 per cent. In contrast, short equity funds recorded a loss of 6.45 per cent. All segments in the fixed-income space showed significant gains, with high-grade bonds (0.97 per cent) advancing to a one-year high, and credit (1.53 per cent) and convertible bonds (5.07 per cent) almost reproducing last October’s stellar performance, according to the EDHEC-Risk Institute. (...)"
    Copyright FT Investment Adviser [Full text]


  • Financial News (05/03/2012)
    Hedge funds discover Solvency II lifeline
    "(...) Investment professionals believe that managed accounts will give investors a greater degree of control than traditional fund structures and this will, in turn, allow them to avoid the higher capital charges under Solvency II. In a paper written for French business school EDHEC, Mathieu Vaissié, senior portfolio manager at Lyxor, said: “New forms of investment vehicles such as managed accounts make it possible for insurance companies to gain exposure to hedge fund strategies with sufficient transparency and liquidity to perform a reliable risk/return analysis.” (...)"
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  • FTfm (03/03/2012)
    Spotlight shines on new stars in ETP universe
    "(...) If the popularity of the Pimco Total Return fund is anything to go by, assets in fixed income exchange traded products could be about to reach new highs. (...) Noël Amenc, director of EDHEC-Risk Institute, says there are big problems with transparency, especially as fixed income issuance mostly takes place over the counter and investors have no visibility on the construction of the ETFs. “We don’t know where prices come from,” Mr Amenc says. (...)"
    Copyright Financial Times Fund Management [Full text - Registration required]


  • Risk.net (02/03/2012)
    Theam puts the stress on customisation
    "(...) The regulatory changes set to affect the institutional space have made capital protection increasingly popular among insurance companies and pension funds. Gilles Guerin and Denis Panel at Theam tell Sarah Nowakowska about the importance of providing customised solutions. (...) Following an optimised version of the product that was based on the Euro Stoxx 50 index, Theam created a US version based on the S&P 500 and a then a Swiss version, and the full range of Covered Equity funds now totals roughly €500 million in AUM. The latest version of the product, launched at the end of last year, is based on the FTSE EDHEC Risk Efficient Eurobloc Index, which is a non-capital-weighted index. "A lot of institutional investors use these strategies to bring some protection to the equity exposure," says Panel. (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Responsible Investor (02/03/2012)
    Farsight Award for ESG research and Sustainable Finance winners announced
    "(...) The 2012 Farsight Award for the best investment analysis that integrates longer-term environmental, social and governance (ESG) issues has been awarded to Responsible Research, the Singapore- and London-based ESG research firm for their report titled: “The Future of Fish.” The Farsight Award is supported by the City of London Corporation, the University Superannuation Scheme (USS), Gresham College and Z/Yen Group. The judging panel looked at 117 reports this year before settling on a shortlist of ten. (...) Top 10 shortlisted reports for the Farsight Award: (...) EDHEC-Risk Institute – Performance Of Socially Responsible Investment Funds Against An Efficient SRI Index: The Impact Of Benchmark Choice. (...)"
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February 2012

  • Citywire (29/02/2012)
    Tools of the Trade: three top reads from Newscape's Bonnor-Moris
    "(…) Richard Bonnor-Moris is head of multi-asset solutions at Newscape Capital Group. Prior to this he was senior adviser at Nemesis Asset Management, and was a vice president at both Lehman Brothers and JPMorgan Private Bank. (...) French academics EDHEC-Risk have a range of risk-weighted benchmarks that Newscape has used for years, and Bonnor-Moris describes them as ‘tough to beat’. He says: ‘They are an academic house and I value their perspective. They are not going to fall for market sentiment.’ (…)"
    Copyright Citywire [Full text]


  • Le Temps (29/02/2012)  
    Le modèle industriel français imaginé par un «grand patron»
    "(...) La crise européenne rapproche la France de l’Allemagne. Ce n’est donc pas une surprise si un grand patron français, Jean-Louis Beffa, président d’honneur de Saint-Gobain, exige dans un ouvrage intéressant l’abandon du modèle «libéral-financier». (...) Pour Jean-Louis Beffa, le succès d’un modèle économique dépend en premier lieu de l’action de l’Etat. Il en veut pour preuve que les «champions» français ont été l’objet d’une politique active, du nucléaire à l’agroalimentaire. A l’évidence, le patronat français ignore les errements passés de la politique des filières industrielles résultant de l’incapacité à prévoir les innovations. Ils ont pourtant été admirablement analysés par Noël Amenc et Benoît Mafféï dans L’impuissance publique. (...)"
    Copyright Le Temps [Full text - French - Registration required]


  • Financial Times (27/02/2012)
    Claim of short-selling ban victory in Europe
    "(...) It came in with a bang and departed with more of a whimper. Imposed with fanfare in the dead of night, the first attempt by European countries at a co-ordinated ban on short selling of financial stocks turned out to be less momentous than either its proponents had hoped or its critics had feared. That is the verdict of market participants, academics and regulators. (...) Abraham Lioui of EDHEC business school in Lille tentatively agrees: “The ban had a problem to stop the selling trend that was already in place,” he said. One thing the ban failed to counteract: European banking shares’ propensity to be in the list of either the biggest gainers or losers each day. Prof Lioui said: “It didn’t have an impact on the volatility of the shares at all.” (...)"
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  • Index Universe (24/02/2012)
    ETF Risks Overblown, Say Academics
    "(...) Despite the recent regulatory criticism and the marketing efforts of some ETF issuers, the distinction between physical and synthetic ETFs is largely irrelevant, according to a new academic report. In a paper released in January, the EDHEC-Risk Institute said all ETFs, not just those using derivatives, are exposed to counterparty risks, and that putting too fine a point on the benefits of physical replication conveyed a false sense of “comparative” safety. “Securities lending is widely practiced by physical replication ETFs and leads to counterparty risk, just as surely as the reliance on over-the-counter derivatives by synthetic replication ETFs,” said the authors of a position paper entitled ‘What are the Risks of European ETFs?’ Synthetic funds bore the brunt of regulatory criticism last year, and investors took heed of the warnings by moving increasingly away from such funds in favour of those using physical replication. However, EDHEC said investors should “pay more attention to first-order issues that determine the effective mitigation of counterparty risk: the level of collateralisation, the quality of the assets performing the economic role of collateral and the ability of the fund to enforce its rights against collateral in the case of default by the counterparty.” The academic institution, which specialises in the area of risk in asset management, also suggested that ETFs had attracted an unwarranted amount of negative attention considering that most were operating as UCITS funds. (...)"
    Copyright Index Universe [Full text]


  • Investment Week (20/02/2012)
    The Contrarian: And in the red corner... exchange-traded funds
    "(…) The first and most cogent report is from the EDHEC-Risk Institute and is snappily entitled “What are the risks of European ETFs?” To its absolute credit, the report’s academic authors succinctly dispatch nearly every one of the major criticisms levelled at the index-tracking industry. (...) The EDHEC paper nails two key additional arguments that are central to a much wider debate about the suitability of investment products for retail investors. The report’s authors strongly back the idea investments should not be labelled ‘complex’ because of their investment tools or portfolio management techniques. If we are to label products and funds as complex it should be as a result of their pay-off. (…)"
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  • Institutional Asset Manager (17/02/2012)
    EDHEC-Risk Institute research provides insights into optimal hedge fund allocation
    "(…) In a research paper published in the Winter 2012 issue of the Journal of Alternative Investments, entitled “Optimal Hedge Fund Allocation with Improved Estimates for Coskewness and Cokurtosis Parameters,” EDHEC-Risk Institute has provided insights into optimal portfolio decisions involving hedge funds. Drawn from 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, the paper presents an application of the improved estimators for higher-order co-moment parameters, in the context of hedge fund portfolio optimisation. The authors find that the use of these enhanced estimates generates a significant improvement for investors in hedge funds. It is only when improved estimators are used and the sample size is sufficiently large that portfolio selection with higher-order moments consistently dominates mean–variance analysis from an out-of-sample perspective. The results have important potential implications for hedge fund investors and hedge fund of funds managers who routinely use portfolio optimisation procedures incorporating higher moments. (…)"
    Copyright GFM Ltd. [Full text]


  • L'Agefi (16/02/2012)  
    « Une trop forte liquidité du "collateral" réduira la performance du prêt de titres »
    L'avis de Noël Amenc, directeur de l'EDHEC-Risk Institute à Londres
    "(...) Les conclusions de la consultation de l'Esma relative aux ETF (exchange-traded funds, NDLR) sont une bonne chose. Elles ne proposent pas de modifier le cadre réglementaire applicable à l'utilisation des produits dérivés par les OPCVM. Les ETF sont donc des fonds Ucits comme les autres. L'autorité européenne s'est posé les bonnes questions, notamment en s'interrogeant sur le manque de réglementation du prêt-emprunt de titres, bien moins encadré que l'utilisation des dérivés OTC (de gré à gré). Ainsi, parler d'absence de risque de contrepartie pour les ETF à réplication physique qui pratiquent tous le prêt de titres (voir la communication de certains promoteurs, NDLR) est une réelle désinformation du marché. Il faut néanmoins comprendre qu'une trop forte liquidité du collateral (actifs nantis) viendra écorner la performance du prêt de titres et que, in fine, les frais acquittés par les investisseurs pourront être majorés, afin de compenser ce manque à gagner pour les promoteurs de trackers.(...)"
    Copyright L'Agefi [Full text - French]


  • Les Echos (16/02/2012)  
    Ces gérants de « hedge funds » qui ont défié les lois de la gravité en 2011
    "(...) Lancé en 2008 grâce à l'aide d'un parrain de choix, Paul Tudor Jones, ce fonds de Denny Yong, un ancien de Goldman Sachs, a déclaré à « Bloomberg » qu'il n'accepterait plus d'argent des investisseurs s'il ne peut leur assurer 15 % à 20 % de performance annuelle... Des performances rares dans une industrie où les grandes stratégies ont enregistré des rendements compris entre 6,7 % (vente à découvert) et -11,3 % (marchés émergents) en 2011 d'après les indices EDHEC-Risk alternatives. (...)"
    Copyright Les Echos [Full text - French - Registration required]


  • Asset International (15/02/2012)
    Paper: High Correlation Between Equities, Commodities Is Unsustainable
    "(…) The paper by Morgan Stanley Investment Management follows an October study -- titled “Long-Short Commodity Investing: Implications for Portfolio Risk and Market Regulation” -- by the EDHEC-Risk Institute, which shed light on the future of commodity investments. A number of policy-makers have blamed the decade-long rise in commodity prices and recent market volatility on the growing influence of financial investors and have called for new regulation restricting their participation in commodity markets, wrote the author, Jolle Miffre, EDHEC-Risk Institute Professor, with market data and support from CME Group. In addition, market financialisation has also led investors to worry about higher integration between commodity and traditional financial markets weakening the portfolio benefits of commodity investment, EDHEC noted. The study aimed to provide clarity on whether greater use of commodities as investment tools has resulted in such investments consequently losing their traditional strength of non-correlation with financial investments. (…)"
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  • L'Agefi (14/02/2012)  
    L'EDHEC juge que Solvabilité II pénalise trop les hedge funds
    "(...) Dans l'étude "Solvency II : A unique opportunity for hedge fund strategies" publiée courant janvier, Mathieu Vaissié, research associate de l'EDHEC-Risk Institute et gérant de portefeuille senior chez Lyxor Asset Management estime sur la base d'un échantillon de 14 indices stratégiques de hedge funds Lyxor qu'il suffirait de couvrir à 21,86 % en fonds propres les risques des investissements sur la période de 5 ans et demi (début 2006-mi 2011). Cela est de plus de moitié inférieur au ratio de 49 % que Solvabilité II réclame des assureurs pour les placements en hedge funds, un ratio qui est même supérieur à celui de 39 % exigé pour les investissements en actions. Dès lors, l'EDHEC est d'avis qu'un taux prudentiel de 25 % pour les placements en hedge funds serait largement suffisant.(...)"
    Copyright L'Agefi [Full text - French]


  • Investment Magazine (February 2012)
    Structured equity investing for long-term Asian investors
    Article by Stoyan Stoyanov, Head of Research, EDHEC Risk Institute—Asia
    "(...) In recent research supported by Societe Generale Corporate & Investment Banking, we explore the characteristics of Asian equity markets and document significant departures from normality for all markets, whether developed or emerging. This means that returns on Asian equity indexes do not conform to a normal distribution with stable mean and volatility. We also find that the volatility of Asian markets, excluding Australia and New Zealand, is higher than that of the European and US markets. Since the volatility of Asian equity markets is generally higher and volatility risk is difficult to hedge for Asian investors in the absence of volatility derivatives, it makes sense to consider structured equity investment strategies with a target-volatility feature. (...)"
    Copyright Investment Magazine [investmentmagazine.com.au]


  • Citywire (09/02/2012)
    ETF strategy: beware the overlooked risks of tracking error
    "(…) Although counterparty risk has been at the fore of the debate surrounding exchange traded funds (ETFs), regulators have ‘overlooked’ a range of issues including tracking error that wealth managers should take into account. According to Noël Amenc, director of the EDHEC-Risk Institute, regulators focusing on the improvement of counterparty risk mitigation in ETFs, or the possible systemic risk implications of these products, are not paying enough attention to other performance issues. ‘By directing their thoughts and attention to the regulatory improvement of counterparty risk mitigation in ETFs, we believe regulators have overlooked a first-order issue, the comparability of performance among ETFs,’ he said. ‘In particular, Amenc said it is crucial that key investors are given information on the total return generated through the risks assumed on their behalf by funds, such as the benefits from securities lending. The institute also regards it ‘essential’ that indexing vehicles are required to disclose tracking error targets and results. (…)"
    Copyright Citywire [Full text]


  • L'Agefi (09/02/2012)  
    Hedge Funds : En quête d'un second souffle
    "(...) Après une année 2011 mitigée, l’industrie doit convaincre qu’elle peut rebondir. Les investisseurs institutionnels sont confiants. (...) A y regarder de plus près, on constate une grande disparité dans les performances, non seulement des stratégies mais aussi des acteurs. Au total, sur douze stratégies traquées par l'EDHEC-Risk (hors fonds de fonds), quatre sont positives : equity market neutral, fixed income arbitrage, merger arbitrage et short selling.(...)"
    Copyright L'Agefi [Full text - French]


  • Risk.net (08/02/2012)
    ETFs: moving beyond the synthetic-versus-physical debate
    "(...) In a January position paper, What are the risks of European ETFs?, the EDHEC-Risk Institute makes a similar case. "Should European authorities decide to name some Ucits complex... we strongly feel this should be on the basis of the complexity of the payout rather than that of the portfolio management techniques or investment tools employed. "Creating an artificial distinction between physical and synthetic replication ETFs would introduce confusion.... When it comes to categorising funds, the focus needs to be on the economic exposure achieved or the payoff generated, not the methods or instruments used to engineer this exposure or payoff.... When drawing distinctions between products, a focus on the tools and techniques may create a false sense of security and exacerbate adverse selection and moral hazard." (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Financial News (08/02/2012)
    European pensions oppose Tobin tax
    "(...) A trade association representing the entirety of Europe’s pension schemes has called on the European Parliament and Council of Ministers to dismiss the proposal for a Financial Transaction Tax. (...) French business school EDHEC, the trade associations of the French, German, Dutch and UK asset management industries, the trade association of the global hedge fund industry and the Global Financial Markets Association have all called for the idea to be abandoned. (...)"
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  • Index Universe (06/02/2012)
    ETFs May Avoid Complex Label Under MiFID
    "(...) The European Securities and Markets Authority (ESMA) last week released a consultation paper with proposed new regulatory guidelines for Europe’s exchange-traded fund market. Following the release, Paul Amery, editor of IndexUniverse.eu, asked ESMA’s Richard Stobo, Clément Boidard and Antonio Barattelli about the thinking behind the draft rules. (...)
    IU.eu: EDHEC-Risk has already responded to your CP, saying that “it is almost impossible, at reasonable cost, to procure the historical composition of indices and to check both the accuracy of the implementation of the ground rules and the index performance”. So have you gone far enough?
    ESMA: A firm providing strategy indices should provide information on its indices’ historical performance and composition, and many providers already do this. In our guidelines we’ve suggested that index firms should publish this information after each rebalancing, on a retrospective basis.
    (...)"
    Copyright Index Universe [Full text]


  • Pensions & Investments (06/02/2012)
    Institutional investors turn to customized indexes for government bonds
    "(...) Industrywide data for assets invested in custom fixed-income indexes are not available, but several of the largest passive fixed-income managers said they are seeing an uptick in the number and size of such mandates. According to an EDHEC-Risk European Index Survey published in October, about 17% of the respondents said they used alternative-weighted government indexes. (...)"
    Copyright Pensions & Investments [Full text - Registration required]


  • Financial Times (03/02/2012)
    War of words mars year of contrasting fortunes
    "(...) BlackRock was also accused last month by EDHEC Risk Institute, part of EDHEC business school, of “doubletalk” and “Orwellian doublethink” in showing different attitudes regarding the use of derivatives to US and European regulators. In a report, EDHEC quoted a letter from BlackRock to the US Securities and Exchange Commission in which the group backs the naming of funds based on their economic exposure. The position, says EDHEC, clashes with BlackRock’s response to European regulators in which the firm demands a clear distinction between physical and synthetic ETFs. (...)"
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  • Ignites Europe (02/02/2012)
    BlackRock wants more from draft ETF rules
    "(...) The latest comments from BlackRock come after it was criticised earlier this month by EDHEC of “doubletalk” and “Orwellian doublethink” in showing different attitudes regarding the use of derivatives in response to US and European regulators. In a report, EDHEC quoted a letter from BlackRock to the US Securities and Exchange Commission in which the group backs the naming of funds based on their economic exposure. The position, says EDHEC, clashes with BlackRock’s response to European regulators, in which the firm demands a clear distinction between physical and synthetic ETFs. EDHEC academics said in the report that ETF marketing campaigns promoting distinctions between physical and synthetic ETFs are “misleading”, adding it makes “little sense” to categorise these products according to whether they invest in derivatives or not. The EDHEC-Risk Institute claims these distinctions are not relevant in practice and lead investors to believe that physical ETFs are comparatively safe products. (...)"
    Copyright Ignites Europe (a Financial Times service) [Full text - Registration required]


  • Risk.net (01/02/2012)
    Esma aims for the middle ground with draft ETF guidelines
    "(...) The broadened focus of the new Esma consultation "approaches important issues in a horizontal way across all Ucits rather than in a vertical way limited to Ucits ETFs," states the EDHEC-Risk Institute in its formal response to Esma's latest recommendations. "The regulator has avoided the error of recommending the application of identifiers that would have created artificial and misleading distinctions between funds on the basis of the tools or techniques they use, including to replicate indexes," states the institute. "Continued adherence to a silo approach would have increased the risks of adverse selection by investors and regulatory arbitrage by issuers." (...)"
    Copyright Incisive Media Investments Limited [Full text - Registration required]


  • Asia Asset Management (February 2012)
    The true risks of ETFs
    Article by Frédéric Ducoulombier, director of EDHEC Risk Institute–Asia
    "(...) In the light of issues raised by financial regulators and international organisations, new research at EDHEC-Risk Institute has addressed the question of the risks of UCITS Exchange-Traded Funds (ETFs). In our view, any discussion of the risks inherent in ETFs should go beyond merely hypothesising about potential risks, and should also take into account the empirical evidence provided by the existing academic research on ETFs, which has documented various benefits in terms of liquidity and price efficiency. (...)"
    Copyright Asia Asset Management [www.asiaasset.com]


  • Hedge Funds Review (February 2012)
    Case for long/short commodity indexes
    Article by Joëlle Miffre, professor of finance at EDHEC Business School
    "(...) Joëlle Miffre explains how EDHEC has constructed a long/short commodity strategy capturing the risk premium in commodity futures markets and that can be used to design a third-generation commodity index. (...) There are many reasons why commodity indexes are useful tools for strategic asset allocation. First, their risk-return trade-off has been shown to be comparable to that of equity indexes (Erb and Harvey, 2006; Gordon and ­Rouwenhorst, 2006). Second, they have low return correlation with traditional asset classes and so are useful tools for risk diversification (Erb and Harvey, 2006; Gordon and Rouwenhorst, 2006). Third, unlike stocks and bonds, commodity prices rise in inflationary periods, making commodity indexes natural hedges against inflation (Bodie and Rosansky, 1980; Bodie, 1983). Fourth, unlike commodity trading advisers (CTAs), commodity indexes are completely transparent, cheap to trade and liquid (at least when nearby contracts are traded). (...)"
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January 2012

  • Financial News (31/01/2012)
    Esma ETF rules bring mixed response
    "(...) Business school and think tank EDHEC said the consultation paper was "inline" with EDHEC's own position that both physical and synthetic ETFs can be subject to counterparty risk, and was in "total agreement" with Esma regarding the risks associated with securities lending. In a statement, EDHEC said: "Esma recognises that securities lending allows a fund to take more unmitigated counterparty risk exposure than OTC derivatives and that it is subject to fewer constraints in the area of risk management; it notably does not benefit from European guidelines on collateralisation of the type mandated for the management of counterparty risk arising from the use of OTC derivatives." (...)"
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  • FTfm (30/01/2012)
    Mr Romney and the equity privateers
    "(...) In another survey covering 7,500 investments over 40 years, economists at EDHEC-Risk Institute have found that a large proportion of high-return deals are indeed quick flips – investments held for less than two years. This frenetic activity resulted in far too many companies being left with overstretched balance sheets. Their vulnerability has been cruelly exposed since 2008. (...)"
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  • Investors Chronicle (30/01/2012)
    ETFs no worse than other funds
    "(…) Last year, exchange-traded funds (ETFs) received a bashing from the active management industry along with regulators, including the Financial Services Authority (FSA) and the Bank of England, voicing concerns. But a recent body of research shows many of the risks highlighted are also present in active-managed funds such as unit trusts, Oeics and even investment trusts. (...) Business school EDHEC challenges many of the issues raised with regards to ETFs in Europe. (...) Business school EDHEC says the real concern investors should be burdening themselves with is that of tracking error, calling for more information on the type of index ETFs track and how effectively they do it. In its research, EDHEC highlights that there is no legal definition of what it means to be a tracker, no standardised measure of tracking error and no mandated disclosure of the quality of index replication. Long overdue, it says, are a definition of what constitutes an index-tracking instrument, higher levels of disclosure on the indices tracked, a standardised measure of tracking error and tracking error limits to funds replicating indices, and mandatory disclosures on the quality of replication. (…)"
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  • Hedge Funds Review (27/01/2012)
    Solvency II directive could end hedge fund investment by European insurance companies
    "(...) Proposed European Union Solvency II capital requirements could mean insurance companies might not be able to invest in hedge funds. At present the draft directive allocates a 49% capital requirement for investment into hedge funds. New research, however, argues the weighting does not reflect the real risks inherent in hedge fund strategies. Instead a capital charge of no more than 25% is more appropriate for a diversified hedge fund allocation, concludes a research paper* by Mathieu Vaissié, a senior portfolio manager at Lyxor Asset Management. (...)"
    *Solvency II: a unique opportunity for hedge fund strategies, January 2012. Mathieu Vaissié, research associate at EDHEC-Risk Institute and a senior portfolio manager at Lyxor Asset Management.
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  • Hedge Funds Review (27/01/2012)
    Hedge fund investors warned of pitfalls of share class restrictions
    "(...) Share class restrictions in the hedge fund industry may have unintended consequences, disadvantaging some investors who are not aware of future fund flows, concludes research by Ronnie Sadka of Boston College’s Carroll School of Management in the US and Gideon Ozik of the EDHEC Business School. Managers and significant investors who know in advance about money exiting a fund because of the advanced notice required in a restricted share class fund could take advantage of that knowledge. This may disadvantage shareholders remaining in the fund who are not aware of the outflows in advance, say Sadka and Ozik. Their findings* were presented at a research conference in Paris sponsored by Lyxor and NYSE Euronext. (...)"
    *Skin in the Game versus Skimming the Game: Governance, Share Restrictions, and Insider Flows by Gideon Ozik, EDHEC Business School, and Ronnie Sadka, Boston College, Carroll School of Management.
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  • Ignites Europe (26/01/2012)
    Industry looks on the bright side of Esma clampdown
    "(...) The comments come after a recent paper issued by EDHEC, which suggested European regulators should avoid making artificial distinctions between physical and synthetic. With physical providers extolling the virtues of their products in the wake of concerns, EDHEC says there is “no reason to attach stigma” to the use of swaps by regulated funds. All European ETFs, says EDHEC, are managed within the Ucits framework and as such have the same levels of security and the same risks as any Ucits fund. The views from EDHEC appear to have split opinion, with 49 per cent of respondents to an Ignites Europe poll saying attaching ‘synthetic’ or ‘physical’ labels to ETFs should be avoided. Commenting on the EDHEC paper, SSgA’s Ms Hope-Bell says: “At SPDR ETFs, we have always maintained that Ucits ETFs are well-regulated funds. (...)"
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  • Index Universe (26/01/2012)
    Less Risk, More Return?
    "(...) However, Felix Goltz, head of applied research at France’s EDHEC-Risk institute, has downplayed the low-volatility anomaly. The widespread use of capitalisation-weighted benchmarks may indeed increase the likelihood of short-term reversals in return from high-momentum stocks, Goltz concedes, but the apparent outperformance of low-volatility stocks may be reduced if you look at it on a different timeframe, for example by conducting risk measurements every two years rather than every month. And, given that volatility is only one measure of risk (and a rather crude one, since it doesn’t tell us about the likelihood of extreme movements), the positive “skewness” of many volatile stocks’ returns may be missed by those talking of a low volatility effect, says Goltz. In other words, investors may gain from an additional, option-like payoff when owning high-performing stocks like Apple or Google, while this inbuilt “optionality” is not measured by standard risk measures, like those for volatility or beta. (...)"
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  • IPE (26/01/2012)
    Hedge fund performance for 2011 almost as bad as 2008 – EDHEC-Risk
    "(…) The broad hedge fund industry had a very poor year in 2011, according to figures just in from the EDHEC-Risk Institute. Only one of the five strategy groups that it tracks recorded positive performance over the year: equity market neutral, which managed to finish up 0.88%. That comes over 12 months in which the S&P 500 returned 2.11%, thanks to a late spurt in December, while bonds, in the form of the Lehman Global index, finished up almost 10%. The most popular hedge fund strategy, long/short equity, was also the worst performer, according to EDHEC-Risk. It finished the year down 5.97% – underperforming US equities by more than 8 percentage points. (…)"
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  • Hedge Funds Review (January 2012)
    Positive results for long/short
    Article by Joëlle Miffre, professor of finance at EDHEC Business School
    "(...) The increased participation of financial investors in commodity markets has also led to concerns about their possible increased integration with traditional financial markets, which could have resulted in the weakening of the diversification benefits from commodity investments. Recent research by EDHEC-Risk Institute with the support of CME Group has shed new academic evidence on these concerns with particular emphasis on long/short commodities futures investing. The first contribution is a study of the performance and risk characteristics of long-only commodity portfolios and of long/short commodity strategies implemented by managers with a focus on commodities, such as commodity trading advisers (CTAs) and commodity pool operators (CPOs). The research investigates the conditional volatility of commodity futures investments and their conditional correlations with traditional assets. (...)"
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  • FT Adviser (25/01/2012)
    Forget ETFs, index funds are best, says Terry Smith
    "(...) Last week Financial Adviser reported on a 70-page academic paper, published by the EDHEC-Risk Institute, which pointed out there was a significant lack of understanding, transparency and disclosure regarding ETF investment. The report called for regulators to ensure there was greater disclosure on the risks associated with ETFs so that investors could perform due diligence. (...)"
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  • Securities Lending Times (25/01/2012)
    Solvency II an opportunity for hedge funds?
    "(...) Solvency II could be a unique opportunity for hedge fund strategies to find their way into insurers’ core portfolios according to recent research from EDHEC Risk Institute. Upon implementation of the regulation, insurance firms will have to maintain underlying capital equivalent to 49 per cent of their total hedge fund investments, which analysts cited by HFMWeek said could lead to redemptions. However, hedge funds can avoid these capital charges if the insurance firm which invests builds an internal model to demonstrate that the risks present do not necessitate a 49 per cent capital holding. According to the EDHEC Risk Institute, that is a distinct possibility. Applying a pragmatic and robust internal model approach to a series of investable hedge fund indices over an observation period covering the recent crisis, the researchers found that a stress test of no more than 25 per cent is appropriate for a well-diversified hedge fund allocation. (...)"
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  • Pensions & Investments (23/01/2012)
    Hedge funds in 2011: short sellers and fixed-income arbitrage lead, emerging markets managers lag
    "(...) According to EDHEC-Risk Alternative indexes' December data, short selling and fixed-income arbitrage hedge funds posted the strongest performance in 2011. Hedge funds with a short bias posted returns of 6.5%, likely driven by the plunge in equity markets between May and October when the S&P 500 slumped nearly 20%. Emerging markets managers were down almost 11%, as the MSCI Emerging Markets index lost more than 18% of its value in 2011. (...)"
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  • Business Times (23/01/2012)
    ETFs: A false sense of comparative safety
    "(...) Risks of exchange-traded funds (ETFs) have been overblown by recent regulatory scrutiny, though this has prompted more disclosure from providers that should continue, a detailed study of European ETFs by EDHEC-Risk Institute said. Attempts to put distance between ETFs that replicate an index's performance using physical assets and those using swaps have unfairly labelled the latter as riskier products when, in fact, the common practice of securities lending by physically backed ETFs is less regulated, added the research centre. (...)"
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  • Financial News (23/01/2012)
    Hedge fund skills have evaporated, fees are next
    "(...) Hedge funds are not exactly going through the pain experienced by the banks but they look set to become hungrier, as the pressure grows on them to cut their charges. (...) Research by the French EDHEC-Risk Institute shows the majority of fund styles suffered a negative return. Even global macro managers, supposedly tooled up for risk-on/risk-off trades, suffered a fall in value of 1.7%. Managed futures funds like AHL are supposed to profit from both falling and rising trends but they dropped by 3.5%. (...)"
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  • Global Custodian (19/01/2012)
    Emerging Markets Strategy Worst for Hedge Funds in 2011, Data Show
    "(...) The emerging markets hedge fund strategy posted the worst returns of any strategy in 2011, with a yearly cumulative return of -10.8%, according to EDHEC-Risk Alternative Indexes. The MSCI Emerging Markets Index dropped nearly 20% last year. But that does not signal the end of the emerging markets boom. (...) Still, most hedge fund strategies were down last year. Long/short equity (-6.0%) and funds of funds (-5.9%) were the second and third worst performers, respectively, according to EDHEC-Risk. Short selling recorded the greatest returns at 6.5%, followed by fixed income arbitrage (3.9%) and merger arbitrage (2.0%). (...)"
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  • FT Adviser (18/01/2012)
    ETFs need disclosure and transparency: EDHEC-Risk
    "(...) Regulators focus their attention on the risks posed by exchange-traded funds as there is a significant lack of understanding, transparency and disclosure, an academic report has found. The 70-page report, What are the Risks of European ETFs, published by the EDHEC-Risk Institute, said more disclosure on risk was required to allow investors to perform due diligence. The report said more transparency and consistency on revenues and costs were also needed for cost-benefit analyses. It highlighted that there was a risk of confusion between different sorts of exchange-traded products and specifically a risk that retail investors could assume that all ETPs provide the same protections as Ucits ETFs. The report claimed addressing the risks should be a priority for regulators. (...)"
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  • Responsible Investor (18/01/2012)
    RI Briefing
    "(...) EDHEC-Risk Institute has presented the findings of its report titled, Performance of Socially Responsible Investment Funds against an Efficient SRI Index: The Impact of Benchmark Choice when Evaluating Active Managers, which was published at the end of 2011. (...)"
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  • IPE (17/01/2012)
    Efficiently weighted indices can lead to SRI outperformance – EDHEC
    "(…) Investors can achieve outperformance with socially responsible investment (SRI) indices if they use efficient weights, says financial research centre EDHEC-Risk Institute, despite its earlier studies suggesting SRI funds produced little alpha. Speaking at the recent "Towards efficient and socially responsible indices" presentation in London, Eric Shirbini, business development director at EDHEC-Risk Indices and Benchmarks, said: "You can create SRI outperforming indices using efficient weights. The main issue, really, is the weights used in the index." (...) But Shirbini said cap-weighting in a reduced universe made even less sense than in a broad market portfolio, compounding the inherent problem of concentration in cap-weighted indices. He said the ESG score neglected basic risk management information in correlations and volatilities before adding that state-of-the-art portfolio construction techniques, such as efficient portfolios, could be used to control risks and create better-diversified portfolios. "We know cap-weighted portfolios are inefficient due to their concentration and poor diversification," he said. "Therefore, SRI investment should be about generating alpha using security selection – such as the SRI screen used by French civil servants pension fund ERAFP – and risk management." The ERAFP developed the FTSE EDHEC Risk Efficient Eurobloc ERAFP SRI index, which can be replicated passively, in 2011. The pension fund runs a 100% SRI strategy. (…)"
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  • Financial News (17/01/2012)
    Risk institute calls for new ETF designations
    "(...) The financial research arm of the EDHEC Business School calls physical and synthetic ETFs “economically equivalent operations” and said that with proper counterparty risk management, it made "little sense" to pit the two against each other. The group warned regulators that creating an “artificial distinction” between physical and synthetic funds could lead to misselling. Published just weeks before the European Securities and Markets Authority releases new guidelines for ETFs, the study came as a boon to synthetic funds, which are generally characterised as riskier because, unlike physical ETFs, they do not invest in the underlying assets. EDHEC sought in its report to calm the hype surrounding the ETF industry as a whole, which it said represents just a fraction of the overall fund management industry and is highly regulated under the Ucits, or Undertakings for Collective Investment in Transferable Securities, directive. (...)"
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  • Citywire (17/01/2012)
    BlackRock criticised for ‘Orwellian doublethink’ over ETFs
    "(…) The EDHEC-Risk Institute has criticised BlackRock, the parent firm of iShares, for ‘Orwellian doublethink’ or ‘double-talk’ over its stance on labelling exchange traded funds. EDHEC has hit out at the ETF issuer for its seemingly contradictory views over how best to label ETFs, in response to the European and US regulators. EDHEC said: ‘Differences in naming conventions or markers, if any, should result from differences in economic exposures and payoff structures at the overall fund level. ‘An interesting little known fact is that this is the position defended by BlackRock vis-à-vis the SEC [Securities and Exchange Commission].’ EDHEC added that BlackRock suggested to the SEC ‘confusion may exist regarding the appropriate naming convention for mutual funds employing derivatives as a primary investment strategy.…We therefore suggest that the Commission clarify that actual economic exposure through reference assets be used.’ However, although EDHEC said naming an ETF based on its actual economic exposure is ‘perfectly sensible,’ it said ‘this is hard to reconcile with BlackRock’s European position’ as documented in its contribution to the ESMA consultation. In this, BlackRock said: ‘It would be appropriate in our view for the ETF-identifier to clearly identify whether it is a synthetic or physical ETF, which can easily be established through the principal investment policy of the fund.’ EDHEC said: ‘This may be a case of Orwellian doublethink, unless it is simply double-talk dictated by differences in competitive landscapes on each side of the Atlantic.’ (…)"
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  • Funds Europe (January 2012)
    EDHEC Research: The satisfaction index
    "(…) With more money going into index strategies, Felix Goltz and Lin Tang from the EDHEC-Risk Institute look at index usage and satisfaction levels – which are low – as well as key issues with current indices for equity, bonds and volatility. Indexation continues to play an important role in global asset allocation. Total worldwide assets under internal indexed management rose to $5.99 trillion (€4.48 trillion) as of 30 June, 2011, a 25% increase over $4.78 trillion the year earlier. In view of the growing volumes in assets under management in passive indexing strategies, a great many index providers have emerged worldwide, not only the organisations specialising in the index service but also stock exchanges and investment banks. Each provider has created or is creating a host of indices representing a full complement of asset classes, as well as asset class sub-segments. Country-based capitalisation-weighted indices are often used as a bellwether for the economy as they are supposed to represent market trends. Nowadays, a growing demand for indices as investment vehicles has led to innovations including new weighting schemes and alternative definitions of sub-segments. (...)"
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  • FTfm (16/01/2012)
    EDHEC warns against ETF labels
    "(...) European regulators should steer clear of creating artificial distinctions between “physical” and “synthetic” exchange traded funds, according to the EDHEC-Risk Institute, part of EDHEC Business School. In a paper published on Monday on the risks of European ETFs, EDHEC said there was “no reason to attach stigma” to the use of derivatives by regulated investment funds. EDHEC also criticised BlackRock, owner of iShares, the biggest provider of physical ETFs, for “Orwellian doublethink” and “double-talk” in adopting different positions on the use of derivatives in responses to European and US regulators. EDHEC cited a recent letter from BlackRock to the US Securities and Exchange Commission that supported naming funds based on their economic exposure, and contrasted it with a response to European regulators in which the manager called for a clear identifier to establish if an ETF was a physical or synthetic fund. (...)"
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  • FTfm (16/01/2012)
    Research shows ‘new balanced’ style fails
    "(...) Academics have been pointing out the pitfalls of this approach for some time, according to Noël Amenc, director of the EDHEC-risk Institute. Focusing on the “financial factors” such as equity or interest rate risk rather than the “economic or legal characteristics of the assets” is more meaningful for risk analysis, he says, adding that “this line of thinking, which has been popular in the academic literature for 50 years, has been gaining in popularity with institutional investors”. (...) EDHEC’s Mr Amenc proposes risk factor analysis as a basis for portfolio construction. “By focusing on risk factors rather than asset classes, they better capture the reality of diversification.” (...)"
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  • La Tribune (16/01/2012)  
    Les sociétés de gestion s'opposent à la taxe Tobin
    "(...) D'ailleurs, dans une lettre adressée au Premier ministre français François Fillon, Noël Amenc, directeur de l'EDHEC Risk Insitute, ne recommande pas cette taxe indiquant qu'elle serait néfaste pour la zone euro en général. (...)"
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  • Funds Europe (16/01/2012)
    Europe's exchange-traded products shrink 5%
    "(…) But a new report by the EDHEC-Risk Institute says the distinction between physical and synthetic ETPs is misleading and conveys “a false sense of comparative safety”. Both types of ETP are exposed to counterparty risk, especially as physical ETP providers frequently engage in securities lending, says the report. The EDHEC report adds that counterparty risk should be measured according to the collateralisation and quality of collateral used by ETP providers, not by the type of ETP. EDHEC's report also says that the vast majority of European ETPs are managed within the Ucits framework and have the same levels of security and risk as any Ucits fund. (...)"
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  • L'Agefi (16/01/2011)  
    Les ETFs ne seraient pas plus risqués que les fonds UCITS traditionnels, selon l'EDHEC-Risk Institute
    "(...) L'EDHEC-Risk institute vient de publier les résultats d'une étude sur le risque supporté par les ETF (Exchange traded funds ou trackers) selon laquelle « la très grande majorité des ETFs Européens sont gérés dans un cadre UCITS et en ce sens offrent un niveau de sécurité et sont potentiellement exposés aux mêmes risques que n'importe quel fonds UCITS ». Par ailleurs, les chercheurs concluent aussi « qu'il n'est pas logique d'opposer d'une part les produits de réplication physique et de réplication synthétique, et d'autre part, de faire la différence entre les swaps financés et non-financés. Ces deux distinctions sont peu pertinentes dans la pratique et donne un faux sentiment de sécurité comparative ». (...)"
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  • Financial News (13/01/2012)
    Eurozone financial industry turns guns on "catastrophic" Tobin tax
    "(...) The comments come in the same week that Noël Amenc, the head of the prestigious French-based EDHEC Business School, also attacked the proposals in an open letter to French prime minister, François Fillon. He said such a tax “either fails to reduce the volatility of returns, or leads to an increase in volatility”. He said it would also reduce the price of financial securities, undermining eurozone leaders’ hopes of reducing the debt burden of their most vulnerable economies. (...)"
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  • IPE (12/01/2012)
    Resistance mounts to "Tobin tax" as cost estimated at €116bn
    "(…) France's EDHEC Risk Institute meanwhile predicted that the Tobin Tax, named after Nobel laureate James Tobin, was unlikely to reduce overall volatility. Outlining EDHEC Business School professor Raman Uppal's view on the tax, it said: "The Tobin tax reduces speculative activity in financial markets, but this tax also drives away investors who provide liquidity and stabilise prices." It concluded that, while the tax had its advantages and disadvantages, the net effect on volatility would be small. (…)"
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  • Financial News (11/01/2012)
    Tobin tax attracts German and French objections
    "(...) Two leading institutions from Germany and France have made what is thought to be the first public appeals from their respective countries to abandon attempts to push through a financial transaction tax, saying it would impose a heavy burden on ordinary citizens and damage their financial services industries. Separately, in a letter to France’s Prime Minister, François Fillon, Noël Amenc, Professor of Finance at EDHEC Business School, wrote: “The President of the Republic (Nicolas Sarkozy) has announced his intention to establish a tax on financial transactions by this spring. "The introduction of a Tobin tax, either in France alone or across Europe, is a proposal we do not recommend. This could not only have negative effects for the French financial industry, but more generally, it could also have repercussions for the entire eurozone. "Unless all major financial centres introduced it, the Tobin tax would appear easy to circumvent by routing transactions through countries where the tax is not imposed. Within this context, if France alone were to push forward without its European partners, this would only lead to further isolation and ultimately render the initiative ineffective. (...)"
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  • L'Agefi (10/01/2012)  
    Economie : EDHEC-Risk Institute interpelle le gouvernement sur l'inopportunité d'imposer une taxe Tobin en France
    "(...) Dans une lettre ouverte du 10 janvier 2012 adressée au premier ministre français, qui fait elle-même référence à un précédent courrier envoyé en juillet 2012 au commissaire en charge du marché intérieur et des services européen, Michel Barnier, EDHEC-Risk Institute souligne les difficultés et les risques liés à la mise en oeuvre d'une taxation des transactions financières en France. Les recommandations d'EDHEC-Risk Institute s'appuient sur une étude réalisée par le professeur Raman Uppal. Cette étude présente des résultats théoriques sur la taxation des transactions financières, mais aussi des résultats empiriques sur ses effets, ainsi qu'une mise au point sur les difficultés de sa mise en oeuvre. (...)"
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  • Institutional Asset Manager (10/01/2012)
    AXA Investment Managers extends support of EDHEC-Risk Institute research into impact of regulation and institutional investment
    "(...) AXA Investment Managers (AXA IM) has renewed its partnership with EDHEC-Risk Institute for its research chair on “Regulation and Institutional Investment”. The next study to be produced as part of the 3-year extension will examine Defined Benefit and Defined Contribution arrangements, including the adequacy of risk-sharing mechanisms, and the appeal of hybrid solutions given the regulatory, social and economic environment. As pension funds continue to face multiple challenges from lengthening life expectancy to extreme market volatility, and as regulatory initiatives evolve at an accelerated pace, the interaction between regulation and institutional investment has become a key issue. As a significant partner to institutional investors, AXA IM has therefore committed to a further three-year research partnership with the EDHEC-Risk Institute to raise awareness and propose solutions that address such regulatory driven challenges. (...)"
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  • Risk.net (03/01/2012)
    EDHEC and SocGen release rationale for structured products in Asia
    "(...) Brisk development of the equity derivatives market in Asia is opening the door to further developments in structured products, according to a research report released in the last quarter of 2011 by EDHEC-Risk Institute and Société Générale. Making up for a dearth of research covering Asia's investment markets, the EDHEC-Risk Institute and Société Générale Corporate & Investment Banking (SG CIB) have clubbed together to create Structured equity investment strategies for long-term Asian investors, a 92-page document released in the final quarter of 2011 that reveals the natural attraction to structured investments in the region. Asian equity investing is particularly attractive given the region's growth story and the shifting balance of economic power, according to Frédéric Ducoulombier, director, EDHEC Risk Institute-Asia. (...)"
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  • La Tribune (02/01/2012)  
    La gestion d'actifs en alerte
    "(...) Les défis seront aussi d'ordre réglementaire en 2012. « Avec Bâle III et Solvabilité II, l'industrie de la gestion d'actifs subit une double peine réglementaire », indiquait récemment Noël Amenc, directeur de l'EDHEC Risk Institute, dans un entretien accordé à « La Tribune ». (...)"
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  • France Info (01/01/2012)  
    Le grand retour de la TVA sociale
    Interview de Noël Amenc, directeur de l'EDHEC-Risk Institute
    "(...) Lors de ses voeux, le Président de la république a annoncé vouloir mettre en place cette TVA sociale. Une proposition qu'il avait déjà formulée lors de la précédente campagne électorale en 2007. (...) Si son intérêt est évident pour réduire le coût du travail, la TVA sociale risque de faire augmenter les prix et donc de diminuer d'autant le pouvoir d'achat des consommateurs. Pour le PS c'est un handicap majeur et cela reviendrait à faire payer par les ménages la baisse des charges des entreprises. Et surtout ainsi calibrée, elle risque de plomber la consommation et donc la croissance. Mais il existe une façon de contourner ce risque de récession, selon l'EDHEC. Noël Amenc est professeur de finance et directeur de l'EDHEC Risk Intitute. Il a signé une étude dans ce sens. (...)"
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