Research Programmes
The Choice of Asset Allocation
In the brave new world of asset management, astute investors dynamically allocate their funds between a core of index-linked
vehicles and actively managed satellites encompassing alternative investments. While the core of the portfolio closely tracks a benchmark
representative of the investor’s strategic asset allocation, satellite funds are given leeway to extract non-traditional betas and work as alpha-factories.
Formerly centre stage, stock picking survives at the periphery as an activity entrusted to an elite cadre of managers who consistently beat the market on a risk-adjusted basis. In this new environment, hard numbers rather than relationships dictate how investors allocate funds across multiple managers and thorough reports on risks and performance have accordingly become a must.
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, 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 methods of strategic allocation that span traditional and alternative investments; measuring the performance of funds while controlling for the tactical allocation dimension of the alphas; 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 class in asset allocation. From that perspective, EDHEC is making a significant contribution to the research conducted in the area of multi-style/multi-class portfolio construction.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.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 will also focus 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.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.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.
