Research Programmes
The Choice of Asset Allocation
One of the most significant advances
in asset pricing theory over the last
few decades has perhaps been to
emphasise the intimate relationship
that exists between optimal
allocation issues and derivatives
pricing problems. These recent
advances in academic research have
paved the way for the development
of a new generation of welfareimproving
financial engineering
techniques aimed at designing
optimal investment solutions that
truly take into account the specific
constraints and objectives of the
various types of investors.
Following and paralleling these developments in research, a profound paradigm shift is currently affecting the whole financial industry, with asset allocation and risk management being increasingly recognised as the key ingredients on which to focus in order to design improved investment solutions. Consequently, the asset management and investment banking industries are converging to better meet the needs of investors.
It is against this backdrop that the EDHEC Risk and Asset Management Research Centre has decided to structure all of its work around asset allocation and risk management, thereby putting the collective expertise of its permanent staff and research associates at the service of key needs of financial institutions and investors. This strategic choice is applied to all of the centre’s research programmes, whether they involve putting forward new asset allocation techniques that span traditional and alternative investments; measuring the performance of funds while controlling for their underlying dynamic factor exposures; identifying biases in existing indices and designing superior instruments for benchmarked asset allocation; taking extreme risks into account in the allocation process; using derivatives to implement active portfolio strategies and replicate indices; or improving asset-liability management techniques.
An applied research approach
In a desire to ensure that the research it carries out is truly applicable in practice, EDHEC has implemented a dual validation system for the work of the EDHEC Risk and Asset Management Research Centre. All research work must be part of a research programme, the relevance and goals of which have been validated from both an academic and a business viewpoint by the centre’s advisory board, which is made up of both internationally recognised researchers and the centre’s business partners.
To date, the centre has implemented six research programmes.
The Six Research Programmes
Asset Allocation and Alternative Diversification
The research carried out focuses on the benefits, risks, and integration methods of the alternative classes in asset allocation and makes significant contributions to the field of multi-style/multi-class portfolio construction. In particular, EDHEC research has advanced non-parametric risk estimation methods and extended the Bayesian approach to portfolio construction in the presence of preferences about higher moments of return distributions.The programme includes the “Financial Engineering and Global Alternative Portfolios for Institutional Investors” research chair, sponsored by Morgan Stanley Investment Management, and the “Advanced Modelling for Alternative Investments” research chair sponsored by Newedge.
Performance and Style Analysis
The scientific goal of the research is to adapt the portfolio performance and style analysis models and methods to tactical allocation. The results of the research carried out by EDHEC thereby allow portfolio alphas to be measured not only for stock picking but also for style timing.Indices and Benchmarking
This research programme has given rise to extensive research on the subject of indices and benchmarks in both the hedge fund universe and more traditional investment classes. Its main focus is on analysing the quality of indices and the criteria for choosing indices for institutional investors. EDHEC also proposes an original proprietary style index construction methodology for both the traditional and alternative universes. These indices are intended to be a response to the critiques relating to the lack of representativeness of the style indices that are available on the market. EDHEC was the first to launch composite hedge fund strategy indices as early as 2003.This programme includes the “Core-Satellite and ETF Investment” research chair sponsored by CASAM.
Best Execution and Operational Performance
This research programme deals with two topics: best execution and, more generally, the issue of operational risk. The goal of the research programme is to develop a complete framework for measuring transaction costs: EBEX (“Estimated Best Execution”) but also to develop the existing framework for specific situations (constrained orders, listed derivatives, etc.). Research also focuses on risk-adjusted performance measurement of execution strategies, analysis of market impact and opportunity costs on listed derivatives order books, impact of explicit and implicit transaction costs on portfolio performances and the impact of market fragmentation resulting from MiFID on the quality of execution in European listed securities markets.This programme includes the “MiFID and Best Execution” research chair, sponsored by CACEIS, NYSE Euronext and SunGard.
Asset Allocation and Derivative Instruments
This research programme focuses on the usefulness of employing derivative instruments in the area of portfolio construction, whether it involves implementing active portfolio allocation or replicating indices. “Passive” replication of “active” hedge fund indices through portfolios of derivative instruments is a key area in the research carried out by EDHEC.This programme includes the “Structured Products and Derivatives Instruments” research chair sponsored by the French Banking Federation.
ALM and Asset Management
The ALM and Asset Management research programme concentrates on the application of recent research in the area of asset-liability management for pension plans and insurance companies. The research centre is working on the idea that improving asset management techniques and particularly strategic allocation techniques has a positive impact on the performance of Asset-Liability Management programmes. The programme includes research on the benefits of alternative investments, such as hedge funds, in long-term portfolio management. Particular attention is given to the institutional context of ALM and notably the integration of the impact of the IFRS standards and the Solvency II directive project. It also aims to develop an ALM approach addressing the particular needs, constraints and objectives of the private banking clientele.This programme includes the “Regulation and Institutional Investment” research chair, sponsored by AXA Investment Managers, the “Asset Liability Management and Institutional Investment Management” research chair, sponsored by BNP Paribas Investment Partners, the “Private ALM” research chair, in partnership with ORTEC Finance, the “Asset-Liability Management Techniques for Sovereign Wealth Fund Management” research chair, in partnership with Deutsche Bank, and the “Dynamic Allocation Models and New Forms of Target-Date Funds for Private and Institutional Clients” research chair sponsored by UFG.
