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Asset Allocation and Derivative Instruments
Eurex "The Benefits of Volatility Derivatives in Equity Portfolio Management" Strategic Research Project
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ALM and Asset Allocation Solutions
ALM and Private Wealth Management
AXA Investment Managers "Regulation and Institutional Investment" Research Chair
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Non-Financial Risks, Regulation and Innovations
Risk and Regulation in the European Fund Management Industry
Index Regulation and Transparency
Best Execution: MiFID and TCA
Mitigating Hedge Funds Operational Risks
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ERI Scientific Beta
Reports, Studies, Surveys and Position Papers
Noël Amenc, François Cocquemas, Lionel Martellini, Samuel Sender On February 16th, 2012, the European Commission published a White Paper
entitled “An Agenda for Adequate, Safe and Sustainable Pensions”. It proposes a series of measures related to information and monitoring, European harmonisation and portability, and pension design. The enclosed paper provides a short summary of some of the main challenges facing European pension systems, and then discusses the Commission’s proposals point by point. More...
Indexes and Benchmarking
Felix Goltz, Stoyan Stoyanov Getting volatility exposure has become easier for investors after the relatively recent introduction of volatility ETNs (exchange-traded notes) and volatility ETFs (exchange-traded funds) and some of these products have enjoyed a surge in popularity. This paper uses the recent crisis with TVIX – a volatility ETN – to underline important differences between ETNs and ETFs which appear to be at the source of the observed market distortion. A revisited version of this paper was published in the Fall 2013 issue of the Journal of Index Investing. More...
Asset Allocation and Alternative Diversification
Caio Almeida, René Garcia This paper evaluates the performance of hedge funds through a new nonlinear risk adjustment of returns. The risk adjustment is such that it prices exactly the usual set of risk factors considered in the hedge fund literature. This nonlinear risk adjustment goes beyond the usual linear regression methodology used in many hedge fund performance papers, including nonlinear exposures based on option-like features. The approach proposed in this paper overcomes two important limitations of the linear methodology: it captures the nonlinear exposure of a hedge fund strategy to several risk factors, and it is not limited to nonlinear shapes resembling standard option payoff patterns. 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 main message that emerges from the analysis on the performance of hedge fund strategies is that exposure to higher-moment risks on the various factors matters. Analysing the performance of HFRI indices on primary strategies and sub-classes of primary strategies, the paper reports sizeable differences in performance, between the linear and the nonlinear risk adjustment. More...
ALM and Asset Management
Noël Amenc, Felix Goltz, Vincent Milhau, Masayoshi Mukai EDHEC-Risk Institute has conducted extensive research into advanced debt
management practices, including a study on 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. More...
Hilary Till This EDHEC-Risk position paper specifically 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 spikes and then notes what implications this narrative has for addressing Finance Watch’s regulatory proposals. More...
Indexes and Benchmarking
Noël Amenc, Felix Goltz, Lin Tang, Vijay Vaidyanathan As the choice of an index is a crucial step in both asset allocation and performance measurement, it is useful to investigate index use and perceptions about indices. The EDHEC-Risk North American Index Survey 2011 aims to analyse the current uses of and opinions on stock, bond and equity volatility indices. While information on index vehicles is widely available, particularly in the case of exchange-traded vehicles, the objective of the survey is to provide unique insight into the users’ perspective in the index industry, not only including a description of the current practices, but also user perceptions on different indices and on benefits and drawbacks of index construction methodologies. A paper based on this study was published in the March/April 2013 issue of the Journal of Indexes. More...
Asset Allocation and Derivative Instruments
Renata Guobuzaite, Lionel Martellini The focus of this paper is to provide a formal analysis of the benefits of volatility derivatives in equity portfolio management from the perspective of a European investor. Its main contribution is to compare the risk/return characteristic of equity portfolios combined with long volatility exposure to those of a GMV equity portfolio – the conventional approach to managing equity volatility. This paper is in fact the first to provide an explicit comparison of managed volatility strategies based on GMV portfolios and managed volatility strategies based on volatility derivatives. The results unambiguously suggest that the latter approach is a more efficient way to manage equity volatility, especially in market downturns periods. More...
Indexes and Benchmarking
Noël Amenc, Felix Goltz, Masayoshi Mukai, Padmanaban Narasimhan, Lin Tang This is the first comprehensive survey of Asian investment professionals that identifies the criteria investors use to assess and select stock and bond indices, measures satisfaction of Asian investors with existing indices, and documents their segmentation practices. It includes comparisons with results from sister surveys of European and North-American investors. This new survey-based evidence will be useful to Asian investors who wish to benchmark their indexation practices to research advances as well as to the practices of their peers in the region and globally. It will also provide much-needed information to providers of investment solutions who want to better address the needs of Asian investors. More...
Indexes and Benchmarking
Pierre Schoeffler In the world of institutional investment, the performance of the office property sector has traditionally been valued using indices constructed from appraisal values, rather than values derived from transactions. These indices constructed from appraised values are obtained by gathering in a single database property experts’ valuations of the largest possible number of institutional portfolios invested in office properties. This analysis is carried out in a comprehensive manner so as to diversify away the idiosyncratic risk of each property. Appraisals requiring a lot of information and technical resources can only be performed at long intervals – typically at the end of each year. A considerable amount of time is required to gather and process them, resulting in the indices being released after several months of delay. More...
Samuel Sender This paper examines recent developments and the major risks of retirement systems, from both the sponsor and pension risk perspective, while focusing on European pension schemes. The study looks at plan design and governance, with the aim of moving towards an ideal retirement plan, and analyses the challenges for the financial management of hybrid pension plans. More...
ALM and Asset Management
Frédéric Ducoulombier, Lixia Loh, Stoyan Stoyanov This publication presents the industry reactions to an EDHEC-Risk Institute study entitled “Asset-Liability Management Decisions for Sovereign Wealth Funds”. That study put forward a model to optimise the investment and risk management practices of sovereign wealth funds, which can be regarded as the extension to sovereign wealth funds of the liability-driven investing paradigm recently developed in the pension fund industry. The model suggested that the investment strategy of a sovereign wealth fund should involve a state-dependent allocation to three main building blocks: a performance-seeking
portfolio, an endowment-hedging portfolio, and a liability-hedging portfolio.
The objective of the current publication is to compare these research conclusions
with current perceptions by sovereign investment professionals. More...
Felix Goltz, Lin Tang The EDHEC European ETF Survey 2011 presents the results of a comprehensive survey of 174 institutional investment managers and private wealth managers. In addition to analysing ETF investment, the survey sheds light on the role of ETFs in asset allocation and compares ETFs and other investment products traditionally used as indexing vehicles – namely futures, index funds and total return swaps. More...
ALM and Asset Management
Lionel Martellini, Vincent Milhau, Andrea Tarelli This paper aims to go beyond simple forms of dynamic strategies, and to show that more sophisticated dynamic allocation strategies could usefully be implemented by pension funds. For instance, it shows that 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. The paper also introduces novel forms of dynamic strategies that recognise 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. These 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. More...
Noël Amenc, François Cocquemas, Samuel Sender This survey analyses the views of European fund industry professionals on non-financial risk and performance in a changing regulatory framework. It analyses the risks those in the industry face as a result of regulation and of their practices, assesses their importance and impact in terms of solvency and business models, and proposes methods to attenuate them. The survey is based on replies from 163 high-level professionals of diverse horizons from the European fund management industry. The results show that at the top of the list of concerns are transparency, information and governance, followed by the financial responsibility of the fund management industry. The survey also covers themes such as restitution and depositary liabilities, distribution and judicial powers of investors. A revisited version of this paper was published in the March 2012 issue of Bankers, Markets & Investors. More...
Noël Amenc, François Cocquemas, Romain Deguest, Philippe Foulquier, Lionel Martellini, Samuel Sender This study proposes a methodological framework, based on objective and thoroughly tested academic references, to design dynamic risk management strategies in the form of benchmarks that allow for exposure to equity markets, while maintaining a target solvency capital requirement. More...
Frédéric Blanc-Brude In February 2012, EDHEC-Risk Institute responded to the UK Treasury’s Call for Evidence about the reform of the Private Finance Initiative (PFI) with a particular reference to the opportunity for pension funds to invest in infrastructure assets, which the UK Treasury has earmarked as a priority theme. In this publication, we extend our response to the issues relating to pension fund investment in social infrastructure. More...
Noël Amenc, Frédéric Ducoulombier, Felix Goltz, Lin Tang This paper outlines EDHEC-Risk Institute's positions on the major concerns of counterparty risk, liquidity risk, confusion between ETFs and other ETPs, risks associated with special types of ETFs, and potential impact of ETFs on the underlying markets and systemic risks. The focus is solely on European ETFs, the bulk of which are regulated by UCITS Directives. Prior to looking at the potential risks of ETFs, the paper presents ETFs and sizes-up the European ETF landscape. More...
Asset Allocation and Alternative Diversification
Stoyan Stoyanov This publication show that a structured target-volatility strategy significantly improves both the downside and the upside of the return distribution relative to a fixed-mix strategy and also allows investors to benefit more from the upside potential when a capital guarantee overlay is applied. It shows how the explicit management of volatility reduces the cost of the capital protection. It also documents utility gains for risk-averse investors, with and without capital guarantee overlay, and makes the case for significant allocations to structured equity investment strategies with volatility targeting. More...
Private Wealth Management
Romain Deguest, Lionel Martellini, Vincent Milhau This paper argues that financial innovation is needed to design better target date funds based on stochastic life cycle investing, taking into account the presence of risk factors that impact not only asset returns, but also private investors’ wealth levels. One key element in private wealth management is the presence of income risk, which has a substantial impact on the optimal asset allocation strategy. More...
Joëlle Miffre 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 called for new regulation restricting their participation in commodity markets. Market financialisation has also led investors to worry about higher integration between commodity and traditional financial markets weakening the portfolio benefits of commodity investment. This study, produced with market data and support from CME Group, first examines the performance and risk characteristics of long-only commodity index investments favoured by passive investors and of long/short commodity strategies of the kind implemented by hedge fund managers. More...
Noël Amenc, Samuel Sender Several regulatory initiatives are being taken in Europe and recommendations that will reshape the investment fund industry are being made. Existing regulations, such as UCITS, are being reshaped; the need for a regulation of depositaries has been acknowledged, and since the G20 there has been more focus on the monitoring of hedge funds. Many of these regulatory needs have converged in the alternative investment fund managers’ directive (AIFMD), which means that the AIFMD could become a unique framework that settles most of the questions related to the common framework for funds, fund managers and depositaries. However, it must avoid the risk of the AIFMD not being applicable if it appears as a patchwork of diverging goals that have been grouped into a single directive solely for political reasons. The present position paper addresses the
measures for implementation of the AIFMD. More...
Indexes & Benchmarking
Noël Amenc, Felix Goltz, Lin Tang As the choice of an index is a crucial step in both asset allocation and performance measurements, it is useful to investigate index use and perceptions about indices. The EDHEC-Risk European Index Survey 2011 analyses the current uses of and opinions on stock, bond and equity volatility indices with the aim of providing unique insight into the users’ perspective in the index industry. An article based on this survey was published in the Summer 2012 issue of the Journal of Index Investing. More...
Socially Responsible Investment
Véronique Le Sourd This paper conducts a performance measurement of SRI funds and assesses the impact of changing the reference from a standard SRI index to an efficient SRI index. The analysis of fund performance shows that an efficient SRI index raises the bar for actively managed SRI funds. While about 62% of funds have a positive information ratio when compared to the cap-weighted EuroStoxx Sustainability Index, only about 36% of funds do so with respect to the Efficient SRI Index. It is also interesting to note that the median information ratio across funds is slightly positive (0.04) when using the standard SRI index, but it is more clearly negative (-0.12) when using the Efficient SRI index. A revisited version of this paper was published in the March 2012 issue of Bankers, Markets & Investors. More...
Hilary Till This paper examines food price volatility in the context of the G20 meeting of agriculture ministers. In reviewing the evidence so far regarding the impact of commodity trading, speculation, and index investment on price volatility, the report finds that the evidence for the prosecution does not seem particularly compelling at this point. More...
Raman Uppal Almost each time volatility in equity, debt, or currency markets increases, there are cries to introduce a tax of financial transactions, first proposed in Tobin (1974). This tax is motivated by the view that the excess volatility in financial markets is the result of trading by "speculators"; thus, even a small tax on financial transactions would "throw some sand in the wheels" of financial markets, and hence, by slowing down the trading activity of speculators would reduce volatility. More...
Indexes & Benchmarking
Felix Goltz, Carlos Heitor Campani This paper analyses two sets of four corporate investment-grade bond indices each, one for the US market and the other for the euro-denominated bond market. First, we review the uses of bond indices as well as the challenges involved. We then analyse the risk-return properties and the heterogeneity of the indices in each set. Although the indices in each market resemble each other, there are still some differences. Moreover, an analysis of the stability of the indices’ risk exposures (interest rate and credit risks) reveals very unstable measures over time and, perhaps most importantly, this instability is accentuated in the two indices with the smallest number of bonds: the more investable the index is meant to be, the less reliable it is. Finally, we find great differences between US and euro-denominated indices: US corporate bond indices showed higher credit risk, with longer terms to maturity and hence longer durations. A revisited version of this paper was published in Bankers, Markets & Investors, May-June 2013. More...
ALM and Asset Management
Lionel Martellini, Vincent Milhau This paper provides a joint quantitative analysis of capital structure decisions
and debt structure decisions within a standard continuous-time capital-structure
model. In the presence of interest rate and inflation risks, we are able to obtain quasi-closed form expressions for the price of various forms of indexed- and non-indexed bonds issued by the firm, which allows us to generate computationally efficient estimates for the optimal debt structure. Our analysis shows that debt-structure decisions have a strong impact on capital structure decisions. It also suggests that substantial increases in firm value can be
generated by optimal debt structures. More...
Noël Amenc, Felix Goltz, Stoyan Stoyanov Since the global financial crisis of 2008, improving risk management practices—management of extreme risks, in particular—has been a hot topic. The postmodern quantitative techniques suggested as extensions of mean-variance analysis, however, exploit diversification as a general method. Although diversification is most effective in extracting risk premia over reasonably long investment horizons and is a key component of sound risk management, it is ill-suited for loss control in severe market downturns. Hedging and insurance are better suited for loss control over short horizons. In particular, dynamic asset allocation techniques deal efficiently with general loss constraints because they preserve access to the upside. Diversification is still very useful in these strategies, as the performance of well-diversified building blocks helps finance the cost of insurance strategies. More...
Samuel Sender EDHEC surveyed corporate pension funds, their sponsors, and advisers to assess how sponsors manage pension risk and how pension funds manage sponsor risk. There are 100 respondents to the survey; they manage pension funds assets of more than €730 billion (the assets of sponsoring companies are greater than €5.5 trillion). Sponsors that give their employees pension plans are subject to the risk of having to make additional contributions to make up for shortfalls in pension funds as well as to a more specific accounting risk that arises because of the arbitrary accounting assumptions that differ from those typical of financial economics. More...
Paul Klumpes, Peter Welch This paper reviews the arguments for and against the decoupling of capital ratio calculations based on IFRS from those based on Basel II. We analyse recent trends in both accounting and regulatory supervision after the financial crisis and identify areas where there are still deficiencies in the transparency of IFRS-based financial reports and regulatory-based capital disclosures and calculations. We find that the variation in disclosure practices across IFRS and BIS-based capital estimations is significant for a sample of major European banks. More...
Noël Amenc, Samuel Sender This publication looks at how non-financial
risks and failures have impacted the regulatory agenda in Europe and traces
the management of liquidity, counterparty, compliance, misinformation, and other financial risks in the fund industry. By identifying the distribution of risks and responsibilities in the industry, it examines how convergence between country regulations could be achieved. Finally, it assesses how fund unit-holders can best be protected with appropriate regulations, improved risk management practices, and greater transparency. More...
Lionel Martellini, Vincent Milhau 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 the joint quantitative analysis of capital structure choices, pension fund allocation decisions and their impact on rational pricing of liability streams. More...
Socially Responsible Investment
Noël Amenc, Felix Goltz, Lin Tang This document reviews the concept of green investing and reports the results of a European survey of investment management professionals. The objective is to provide background on industry and academic research into green investing and assess the views and uses of green investing. Our survey shows that green investing is a significant movement in which survey respondents are heavily involved. Nearly 90% of respondents consider environmental protection an investment theme and the same percentage plans to do more green investing in the future. More...
Private Wealth Management
Noël Amenc, Sergio Focardi, Felix Goltz, David Schröder, Lin Tang A survey drawing on responses from 159 European private wealth managers, the three main findings of which are: Private wealth managers see the relationships they forge with their clients as the principle source of the value they add but they fail to exploit this close relationship to customise the services they offer their clients (when portfolios are designed for clients, market factors are taken into account more frequently than are the individual characteristics of the clients); Private wealth managers fail, on the whole, to provide state-of-the art means of horizon-dependent asset allocation. In fact, when human capital, the time and state dependency of investment opportunities, and other causes of horizon effects are not recognised, one can conclude that horizon-based allocations are approximate rather than optimal; Private wealth managers see the great potential of taking into account client-specific spending objectives, but only a small minority actually attempts to realise this potential. More...
Investable indices tend to recursively underperform their non-investable versions. In light of recent events, we can wonder whether the liquidity crisis that occurred in the wake of the Lehman collapse and had a significant impact on the performance of hedge fund strategies (more particularly on the strategies that are exposed to credit risk) has increased this excess return or not. In this respect, it would be interesting to compare the excess returns of non-investable indices and those of their investable counterparts before and after 2008. More...
Lionel Martellini, Vincent Milhau This paper proposes 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. More...
Asmerilda Hitaj, Lionel Martellini, Giovanni Zambruno Since hedge fund returns are not normally distributed, mean-variance optimisation techniques, which would lead to substantial welfare losses from the investor’s perspective, need to be replaced by optimisation procedures incorporating higher-order moments and comoments. In this context, optimal portfolio decisions involving hedge fund style allocation require not only estimates for covariance parameters but also estimates for coskewness and cokurtosis parameters. This is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis. This paper presents an application of the improved estimators for higher-order co-moment parameters, recently introduced by Martellini and Ziemann (2010), in the context of hedge fund portfolio optimisation. A revisited version of this paper was published in the Winter 2012 issue of the Journal of Alternative Investments. More...
Noël Amenc, Lionel Martellini, Felix Goltz, Vincent Milhau Meeting the challenges of modern investment practice involves the design of novel forms of investment solutions, as opposed to investment products, customised to meet investors' long-term objectives while respecting the short-term (regulatory or otherwise) constraints they have to face. This paper argues that such new forms of investment solutions should rely on the use of improved performance-seeking and liability-hedging building-block portfolios, as well as on the use of improved dynamic allocation strategies. More...
Lionel Martellini, Vincent Milhau In an attempt to address the concern over financially illiterate individuals being increasingly responsible for investment decisions related to retirement risk, the financial industry has started to design dedicated mutual fund products known as target date funds. These funds, whose aim is to provide investors with one-stop solutions to their life-cycle investment needs, typically propose a deterministic decrease of equity allocation until a date called the target date of the fund. This approach, however, has been found inconsistent with the prescriptions of standard life-cycle investment models (Viceira and Field 2007). A revisited version of this paper was published in the November-December 2010 issue of Bankers, Markets & Investors.
Indexes and Benchmarking
Noël Amenc, Felix Goltz, Lionel Martellini, Shuyang Ye This paper analyses a set of equity indices whose aim is to improve on capitalisation weighting and thus to provide “improved beta”. Four main weighting schemes are analysed: efficient indices, fundamental indices, minimum-volatility indices, and equal-weighted indices. Empirical results for US and Developed World data on these indices show that the average returns of all four alternative index construction methods are superior to those of cap-weighted equity indices in both universes and that, by several measures of risk-adjusted performance, they are likewise superior. A revisited version of this paper was published in the January/February 2011 issue of the Journal of Indexes. More...
Noël Amenc, Véronique Le Sourd In an initial study done in 2008, EDHEC-Risk Institute established that socially responsible (SRI) funds—those funds made by selecting securities that meet ESG (environmental, social, governance) criteria—distributed in France did not produce both positive and statistically significant alpha. That study, which relied on the Fama-French three-factor model, covered a six-year period ending in December 2007, thus not including the recent financial crisis. The purpose of the present study was to update these results by extending the analysis to the years 2008 and 2009. More...
Samuel Sender EDHEC-Risk Institute took a recent survey of pension funds, their advisers, regulators, and fund managers. One hundred twenty-nine of these asset/liability management (ALM) specialists, representing assets under management (AUM) of around €3 trillion, responded to the survey. Pension funds and their sponsors account for approximately €0.9 trillion. More...
Indices and Benchmarking
Felix Goltz, Véronique Le Sourd Proponents of cap-weighted stock market indices often argue that such indices provide efficient risk/return portfolios. This paper reviews the evidence in the academic literature and concludes that only under very unrealistic assumptions would such indices be efficient investments. In the presence of realistic constraints and frictions, cap-weighted indices cannot, according to the academic literature, be expected to be efficient investments. A revisited version of this working paper was published in the Fall 2011 issue of the Journal of Index Investing. More...
Felix Goltz, Adina Grigoriu, Lin Tang The EDHEC European ETF Survey 2010 presents the results of a comprehensive survey of 192 institutional investors, asset managers and private wealth managers conducted between January and March 2010. It analyses the possible uses of ETFs (exchange-traded funds) in investment management and gives a detailed account of current perceptions and practices of European investors in ETFs. More...
Abraham Lioui The ban on shorting had negative effects on the hedge fund industry. It also had a negative impact on the returns and the market quality of the stocks placed off limits by the ban. This paper examines the impact of the ban on broad market indices in the US and in Europe (the United Kingdom, France, and Germany). Since these indices and their performance are of great concern to the asset management and hedge fund industries, it is important for practitioners and policy-makers to understand the impact of changing the rules of the game (banning short sales) on the return distribution of these indices and to assess the potential spillover effects of a counter-cyclical regulation affecting only one segment of the financial market. The paper shows that the ban had a broad impact on the markets. A revisited version of this paper was published in the Winter 2011 issue of the Journal of Alternative Investments. More...
Noël Amenc, Samuel Sender As part of the CACEIS research chair on non-financial risks in investment funds, EDHEC surveyed UCITS and alternative asset managers, their service providers, external observers, and investors for their views of structuring hedge fund strategies as UCITS. The 437 respondents report assets under management (AUM) of more than €13 trillion. Investment fund managers account for roughly €7 trillion of these assets. In general, the survey suggests that institutional investors bound by quantitative restrictions will ask fund managers and distributors to repackage hedge fund strategies as UCITS. For their part, managers of alternative funds are concerned by the uncertainties surrounding the directive on alternative investment fund managers (AIFMs) and may consider packaging their strategies as UCITS. Most respondents, however, fear that structuring hedge fund strategies as UCITS will distort strategies and diminish returns. A paper based on this study was published in the Journal of Alternative Investments, Fall 2012. More...
Hilary Till Because many facets of the global oil markets have not been sufficiently transparent, it is unclear how much of the oil-price rally that peaked in July 2008 can be put down to speculation. This uncertainty has led to concerns that there was actually excessive speculation in the oil derivatives markets. In an effort to make the oil markets more transparent, the U.S. Commodity Futures Trading Commission has recently launched the “Disaggregated Commitments of Traders” report. This report includes three years of enhanced market-participant data for twenty-two commodity futures contracts. This report makes it possible to examine whether, over the last three years, speculative position-taking in the exchange-traded oil derivatives markets has been excessive relative to commercial hedging needs. More...
Samuel Sender EDHEC surveyed pension funds, their advisers, their regulators, their fiduciary managers, and their asset managers for their reactions to an EDHEC study entitled "Impact of regulations on the ALM of European pension funds. The call for reaction elicited 142 non-blank responses and is the first international survey in which both regulatory constraints and the means of managing them—modern ALM techniques—are assessed jointly. More...
Noël Amenc, Samuel Sender The European Commission is seeking to harmonise the depositary fonction and to strengthen protection mechanisms. EDHEC believes that beforehand there should be an in-depth study of the practices of the parties in the value chain and the regulations to which they are subject and that, beyond a minimum protective threshold, complementary protection should be optional, which supposes clear disclosures of the degree of protection and of its cost. More...
Samuel Sender Financial reporting standards for pension funds are of great topical interest. The
current crisis points to the need for clearer regulations, both accounting and prudential, and for regulations that provide better incentives for pension funds to manage risk and to contribute to a more stable pension system. Poorly
designed regulations will lead to the closure of defined-benefit pension plans.
The International Accounting Standards Board (IASB) has proposed a revision of
IAS 19. In the current paper we show that the immediate recognition of the volatility of pension surpluses and deficits in the profit and loss accounts of the sponsor may lead pension funds to shed risky assets. More...
Jean René Giraud This position paper looks at the changes that have been effected in the European capital markets more than one year after the implementation of MiFID (Markets in Financial Instruments Directive). These changes are hard to quantify, but initial fears of the rise of so-called dark pools of liquidity have proven well founded. In addition, the best execution obligation remains ambiguous. The paper examines other features of the post-MiFID trade execution landscape and recommends that post-trade reporting be standardised, that a single measure of execution quality be adopted, and that the debate on regulating transactions in less liquid asset classes and giant OTC derivatives markets be re-opened. More...
Noël Amenc, Felix Goltz, Adina Grigoriu, David Schröder The EDHEC European ETF Survey 2009 presents the results of a comprehensive survey of 360 institutional investors and private wealth managers conducted in January and February 2009. It also provides an overview of the ETF market and of the mechanisms behind ETFs, and shows how advanced techniques involving dynamic allocation strategies can be carried out with ETFs, in particular to implement the beneficial core-satellite approach to investment. More...
Abraham Lioui An in-depth study of the short-selling market calls into question both the reasons for the decision to ban short selling and the prejudices that weigh on those who short. According to recently published data (for the United States in particular), a large majority of short sellers are market makers who are hedging their bets on the options markets. They were not affected by the ban, which means that those who were using options to take synthetic short positions continued to do so. The others involved in short selling are mainly hedge funds. More...
Greg N. Gregoriou, François-Serge Lhabitant For more than seventeen years, Bernard Madoff operated what was viewed as one of the most successful investment strategies in the world. This strategy ultimately collapsed in December 2008 in what financial experts are calling one of the most detrimental Ponzi schemes in history. Many large and otherwise sophisticated bankers, hedge funds, and funds of funds have been hit by his alleged fraud. In this paper, we review some of the red flags that any operational due diligence and quantitative analysis should have identified as a concern before investing. We highlight some of the salient operational
features common to best-of-breed hedge funds, features that were clearly missing from Madoff’s operations. A revisited version of this paper was published in the Summer 2009 issue of The Journal of Wealth Management. More...
Felix Goltz, David Schröder Like any investors, investors in hedge funds are naturally interested in knowing how hedge fund managers allocate their initial investment, and whether this allocation yields positive returns or not. It is not only information on past investment returns that is of particular interest; prospects for future gains or losses are relevant to investors as well. Yet, unlike mutual funds, hedge funds are reluctant to provide detailed information on their investment portfolios. Since many hedge funds use highly speculative investment strategies, fund managers fear that a thorough disclosure of their portfolio holdings would significantly decrease their chances of winning their bets, and thereby reduce investors' returns. But incomplete disclosure can have some undesirable side effects. A revisited version of this research was published in the Spring 2010 issue of the Journal of Alternative Investments.
Noël Amenc, Samuel Sender The financial crisis has put great pressure on banks and led to a number of emergency measures intended to restore confidence in the banking system: tentative changes to accounting standards, recapitalisation of the banking industry, and higher capital requirements. Each measure targets a specific concern that has arisen during the crisis. Governments and regulators, however, have yet to deal with one of the essential causes of systemic risk: the inflexibility of prudential regulation for banking. As it happens, a single minor change would make it possible to restore much of the confidence in the
banking sector without requiring any capital injections in the short term: acknowledging that banking capital ratios fall during downturns would have made most of the injections of public funds unnecessary. Making this change today would give governments far more room to support the real economy. More...
The results of this EDHEC position paper show that none of the sixty-two funds in the sample, covering various investment zones, manage to produce both positive and significant alpha (outperformance) over a six-year period and that the few significant alpha values are negative. Moreover, most of the funds generate negative, non-significant alpha. The study also shows that alpha values estimated over one year change greatly from one year to the next. The use of a period of various lengths shows that results can vary greatly from one length to another. More...
To analyse the significant variations in oil prices over the past year, EDHEC have produced a new position paper entitled "Oil Prices: the True Role of Speculation," which argues that, despite the appeal of blaming speculators, supply-and-demand imbalances, the fall in the dollar and low spare capacity in the oil-producing countries are the major causes of this sharp rise. More...
Fair Value Accounting
In the context of the measures being taken to put an end to the current financial crisis, the extent to which fair value accounting can be blamed—or whether it can be blamed at all—for the intensification of the slump has been widely debated.
This new EDHEC position paper shows that this debate, which ignores the real issues, has led to accounting changes that are at odds with their objectives. We examine the relevance of the accusations levelled at fair value and of the responses proposed in an attempt to improve the use of fair value accounting and make it more relevant to the economic realities faced by banks as well as
by companies in general. More...
In US dollar terms, crude oil prices increased 525% from the end of 2001 through July 31st, 2008. Was this rally yet another speculative bubble? Specifically, was the oil-price rally based on speculative excess rather than fundamental supply-and-demand factors? In a new position paper, “The Oil Markets: Let the Data Speak for Itself”, we argue that when the oil supply-and-demand balance becomes sufficiently tight and that when effective OPEC spare capacity becomes sufficiently low that it is logical to see very high prices to ration demand and/or encourage additional supply. That is the job and message of price, even if this message is unpopular. More...
If all institutional investors are bound by regulations that force them to sell risky assets during downturns, these assets will ultimately be absorbed by unregulated long-term investors. Additional examination shows that, in the current environment, sovereign wealth funds and governments are the possible buyers of these assets. As public intervention entails moral hazard, it follows that for the stability of the financial system throughout the business cycle regulations must be improved. More...
This paper analyses a set of characteristics-based indices that have recently been launched on the US market and have been said to outperform standard market cap-weighted indices over particular backtest samples.
The EDHEC authors, Noël Amenc, Felix Goltz and Véronique Le Sourd, analyse the performance of an exhaustive list of such indices and show that the outperformance over value-weighted indices may be negative over long time periods and that characteristics-based indices do not significantly outperform simple equal-weighted indices.
Furthermore, an analysis of both the style exposures and the sector exposures of characteristics-based indices reveals a significant value tilt. When properly adjusting for this tilt, these indices do not show any abnormal performance. A revisited version of this paper was published in the March 2009 issue of European Financial Management. More...
The EDHEC European ETF Survey 2008 is part of the EDHEC Risk and Asset
Management Research Centre’s Indices and Benchmarking research programme. This programme has led to extensive research on indices and benchmarks in both the hedge fund universe and the more traditional investment classes. In 2006, EDHEC published a study of the quality
of major stock market indices. Following up on this study, EDHEC is carrying out
work that assesses the advantages and disadvantages of various new forms of
In view of the growth and development of ETFs in Europe, and in view of their
growing popularity as investment media for both index management and
the construction of benchmarks, it is only natural that EDHEC should devote
significant resources to research into ETFs. In 2006, with the support of iShares, we published the first EDHEC European ETF survey. The present survey, an update and extension of the 2006 survey, sheds light on recent developments and trends in ETF investing.
An article based on this survey was published in the Summer 2009 issue of the Journal of Alternative Investments. More...
As part of its ongoing policy of monitoring asset management practices and comparing them with the results of academic research, the EDHEC Risk and Asset Management Research Centre undertook an in-depth survey of the risk management, portfolio construction, strategic allocation, and performance measurement practices of European asset managers and investors.
The EDHEC European Investment Practices Survey is built on a sample of 229 institutional investors and asset managers who, with respect both to the nationality of survey respondents and to the amount of assets under management, are largely representative of the European asset management industry. In all, respondents to the survey have more than €10 trillion of assets under management and include the major European firms in the industry (nearly fifty respondents manage more than €100 billion each).
An article based on some of the findings of this survey was published in the May/June 2011 issue of the Financial Analysts Journal. More...
In its response to the CEIOPS consultation on the preliminary technical specifications for the fourth quantitative impact survey (QIS4), EDHEC argues that the main risk faced by life insurance companies is not taken into account in the standard formula. This risk is that following market (or other significant) losses, a wave of surrenders leaves shareholders bearing the entirety of losses. This is the phenomenon that led to such bankruptcies as that of Executive Life, where losses made public by rating agencies and the media triggered a wave of surrenders and bankruptcy–even though the losses alone were thought bearable for some time. More...
In a context of moderate performance in the stock and bond markets in 2007, Funds of Hedge Funds, which are often taken to give an aggregate view of the industry’s performance, returned 10.07% on average for the year, compared to 3.53% for the S&P 500 and 4.14% for the Lehman Global US Treasury Bond index.
In “Hedge Fund Performance in 2007”, Véronique Le Sourd, Senior Research Engineer with the EDHEC Risk and Asset Management Research Centre provides a strategy-by-strategy account of the performance of each hedge fund strategy included in the EDHEC Alternative Indexes. While all hedge fund strategies posted positive returns, a majority saw a slight fall-off in performance compared to 2006. Only five of the thirteen strategies obtained higher returns than in 2006: CTA Global, Emerging Markets, Equity Market Neutral, Global Macro, and Short Selling.
Noël Amenc, Walter Géhin, Lionel Martellini, Jean-Christophe Meyfredi Following recent initiatives by major investment banks such as Merrill Lynch and Goldman Sachs, EDHEC researchers have undertaken a detailed critical analysis of the various methodologies involved in hedge fund replication offers, examining the benefits and limits of the “factor-based” and “pay-off” distribution approaches. In the study, “The Myths and Limits of Passive Hedge Fund Replication,” co-written by Lionel Martellini with Noël Amenc, Walter Géhin and Jean-Christophe Meyfredi, the authors find that overall, one could only possibly hope to achieve truly satisfying results by combining the best of the two competing approaches. A revisited version of this paper was published in the Fall 2008 issue of the Journal of Alternative Investments. More...
The EDHEC Risk and Asset Management Research Centre has released a new survey that is drawn from its research programme in asset allocation and alternative diversification. This programme has led to extensive research on the benefits, risks, and integration methods of alternative classes and instruments in asset allocation.
Real estate, probably the most traditional of alternative classes, is enjoying renewed favour as institutional investors search for diversification benefits and competitive yields. Institutional demand for real estate exposure has brought about improvements in market transparency and the development of new indirect and synthetic investment tools. With target allocations to real estate
increasing, research into real estate as an asset class must enable industry participants to refine traditional approaches and to consider real estate within the bounds of asset management and asset-liability management. It is in this way that research can help real estate take its place in multistyle, multi-class portfolios, contribute to the design of integration methods that optimise its risk/return trade-off, and, finally, enable the class to deliver on its full potential.
The EDHEC European Real Estate Investment and Risk Management Survey, the first phase of this research, takes stock of developments in the real estate investment market, reviews academic evidence on allocation to and management of real estate, and analyses the results of a large-scale, pan-European survey of institutional practices. More...
A recent publication by the EDHEC Risk and Asset Management Research Centre has drawn conclusions that highlight the shortcomings of well known capitalisation- or price-weighted stock market indices and argues that the choice of benchmark for asset allocation or performance measurement is a task requiring particular care.
In a call for reactions to this publication, EDHEC finds that the answers of the more than eighty respondents (asset management firms, pension funds, insurance companies, private banks, etc.) tend to reinforce the conclusions drawn by the original publication.
Although it would at first appear that the majority of respondents are not, in general, dissatisfied with the indices they use as benchmarks (18.82% of respondents express degrees of dissatisfaction), further examination soon reveals that the shortcomings of these indices, such as inefficiency, lack of stability, and susceptibility to price bubbles, are widely recognised by the
industry professionals responding to EDHEC’s call for reactions. The call for reactions also shows that a considerable majority of respondents plan
to review the indices they use as benchmarks, either immediately or in the future. More...
European leaders, eager for an explanation absolving them of responsibility, have once again laid blame on the seemingly detrimental role played by hedge funds in this summer’s crisis. This crisis is the result of a sudden fall in asset
prices, combined with increased aversion to risk on the part of investors. To suggest that hedge funds are to blame for this crisis is simplistic but tempting, as their speculative, unregulated, and opaque nature make them easy targets - all the while, more delicate market and regulatory issues are avoided. So, as a counterpoint to these accusations that often come from France, it seemed necessary to us to provide a French perspective on the lessons to be learned with respect to financial regulation in France. More...
Within the equity risk sub-module of the third Quantitative Impact Study (QIS3) undertaken by the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), a preamble to the Solvency II supervisory standard, all alternative investments are subject to a capital charge of 45%, nearly 50% higher than the 32% applied to regular equity exposures. In this article, we briefly go over the calculations required for equity risk, and then include a reminder of why hedge funds on average are certainly not the riskiest bet an investor can make. More...
In this study, EDHEC-Risk Institute, while recognising that the directive allows the conditions in which investment companies can operate on the regulated markets or over-the-counter to be harmonised, warns of the eventual adverse effects relating to the obligation of transparency for systematic "internalisers" and the obligation of "best execution". The authors find, in the case of the obligation imposed on systematic “internalisers” to maintain a public spread of prices, that it is prejudicial for this restriction to be removed for the least liquid securities. This provision will lead, in a certain number of cases, (small-caps on markets that are centrally organised at present), to a deterioration in the pre-trade transparency that is currently provided to investors. More...
Working from the observation that the contribution of asset-liability management techniques developed for institutional investors is not yet familiar within private banking, a new study from the EDHEC Risk and Asset Management Research Centre, entitled “Asset-Liability Management Decisions in Private Banking” shows the expected benefits of a transposition of that kind. According to the authors of the study, Noël Amenc, Lionel Martellini and Volker Ziemann, asset-liability management represents a genuine means of adding value to private banking that has not been sufficiently explored to date. Within the framework of private financial management offerings, personal wealth managers tend to confine their clients to mandates that are only differentiated through their level of volatility, without the client’s personal wealth constraints and objectives being genuinely taken into account in order to determine the overall strategic asset allocation. In that sense, private wealth management is not sufficiently different from the management of a diversified or profiled mutual fund. More...
Véronique Le Sourd In a report entitled “Hedge Fund Performance: A Vintage Year for Hedge Funds?”, Véronique Le Sourd, Senior Research Engineer with the EDHEC Risk and Asset Management Research Centre provides a comprehensive account of the performance of each hedge fund strategy included in the EDHEC Alternative Indexes. The author reveals that funds of hedge funds, which are often taken to give an aggregate view of the industry’s performance, yielded a solid return of 11.25% in 2006. More...
A new EDHEC position paper entitled "CP20: Significant improvements in the Solvency II framework but grave incoherencies remain", by Philippe Foulquier, Director of the EDHEC Financial Analysis and Accounting Research Centre, and Samuel Sender, Research Associate with the EDHEC Risk and Asset Management Research Centre, contains EDHEC's answer to CP20, a consultation process initiated by CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) on the "Advice to the European Commission in the Framework of the Solvency II Project on Pillar I Issues". More...
In a working paper entitled ‘Quantification of Hedge Fund Default Risk’, which led to the publication of a full article in the Fall issue of the Journal of Alternative Investments, Jean-René Giraud and Stéphane Daul of the EDHEC Risk and Asset Management Research Centre, together with co-author Corentin Christory, examined numerous cases of hedge fund default in order to find the common factors behind fund failures.
The objective of the paper was to provide an initial framework for quantifying the non-financial extreme risk of hedge funds with the aim of factoring it into the portfolio construction phase. The paper examines the statistical properties of hedge fund failures and attempts to identify essential risk factors that can tentatively explain why certain funds are more likely to default on their investors and creditors than others. A revisited version of this paper was published in the Fall 2006 issue of the Journal of Alternative Investments. More...
In a reply to the CESR Issues Paper on the eligibility of hedge fund indices for the purpose of UCITS, the EDHEC Risk and Asset Management Research Centre argues that hedge fund indices should not be required to offer more controls and more transparency than existing financial indices such as stock market indices. Likewise, their construction should not be subjected to detailed rules for choosing constituents and implementing rebalancing and weighting mechanisms. More...
In a new survey, The EDHEC European ETF Survey 2006, the EDHEC Risk and Asset Management Research Centre has carried out an in-depth study on the use of ETFs (Exchange-Traded Funds) by European investors. The results of the survey show that following rapid growth, ETFs are being widely used by European institutional investors, private bankers and asset managers. The increasing popularity of ETFs is reflected in the responses of survey participants. More than half of the respondents are current or planned users of ETFs in equity investments (61%), and this is the case for more than a quarter of respondents (26%) for bond investments.
More remarkably, among those that use Equity ETFs, 92% were satisfied, which indicates an extremely high level of satisfaction. With 45% of responses, the most distinct reason for satisfaction was the reliability of the tracking error. 23% were satisfied with the good performance of ETFs, while 21% were pleased with the level of liquidity, and only 4% cited the reduced expenses of ETFs. Interestingly, half of the respondents who were not satisfied with Equity ETFs pointed to the poor level of liquidity of ETFs. More...
Transaction Cost Analysis
A new report from EDHEC Risk Advisory, Transaction Cost Analysis in Europe: Current and Best Practices, which was commissioned by HSBC Investment Bank, reviews the conditions in which buy-side firms (traditional and alternative) are currently monitoring transaction costs and investigates the various issues related to transaction cost analysis in the context of the Markets in Financial Instruments Directive due to be enforced in November 2007. This directive contains an important provision related to Best Execution. More...
A new study jointly produced by the EDHEC Risk and Asset Management Research Centre and the EDHEC Financial Analysis and Accounting Research Centre entitled ‘The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies’ reveals the contradictions inherent in the current Solvency II and IFRS provisions for insurance companies. The report shows notably that the numerous provisions proposed by the IFRS are at odds with the good risk management practices put forward by Solvency II. While IFRS and Solvency II should lead to a genuine evolution in the management of insurance companies, by empowering them with respect to their risks (identification, measurement and management), one is forced to observe today that the standards implemented often oppose their initial objectives: the adoption of modern asset management and ALM techniques with a view to reducing the exposure to risks is considerably penalised by the IFRS treatment by leading to additional purely accounting volatility, without any connection to the economic reality.
Walter Géhin This paper, which is being written to provide an overview of the multitude of publications we have seen on hedge fund performance, is the result of a reading and analysis of about 200 studies on this subject. The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. The explanation of this complexity lies in the particular features of alternative funds. More...
In a new position paper by Philippe Foulquier, director of the EDHEC Financial Analysis and Accounting Research Centre, and Samuel Sender, research associate with the EDHEC Risk and Asset Management Research Centre, entitled ‘QIS 2: Modelling that is at odds with the prudential objectives of Solvency II’, EDHEC regrets the approach chosen by the CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) for the European Commission as proposed in the QIS 2 (Quantitative Impact Study 2), which does not favour optimal management of the risks of European insurance companies. In light of the changing face of risks and how they are perceived, the existing prudential rules are totally inadequate and the European Commission has established a vast project to overhaul the methods used for calculating the solvency of insurance companies. More...
At a presentation to the members of the Af2i (French association of institutional investors) in Paris on September 12th, Noël Amenc, Director of the EDHEC Risk and Asset Management Research Centre, warned his institutional audience about the dangers of relying solely on stock market indices as a benchmark for their investment management performance. More...
In a little over a week, Amaranth Advisors, a respected, diversified multi-strategy hedge fund, lost 65% of its $9.2 billion assets. In a paper entitled ‘EDHEC Comments on the Amaranth Case: Early Lessons from the Debacle’, noted commodities expert Hilary Till, Research Associate with the EDHEC Risk and Asset Management Research Centre and Principal of Premia Capital Management, LLC, examines how Amaranth could have suffered such massive losses and draws lessons from this debacle for investors, funds of fund & energy fund risk managers, multi-strategy hedge fund managers, policy makers, and the alternative investment industry as a whole. More...
Noël Amenc and Mathieu Vaissié. Despite institutional investors’ growing interest in funds of hedge funds, little attention has been paid so far to their added value and/or the sources of their added value. This is all the more striking in that funds of funds are far from transparent and are, with their double-fee structure, relatively costly investment vehicles. The objective in this paper is to fill that gap and find out whether funds of funds add value through strategic allocation and active management. A revisited version of this paper was published in the Winter 2006 issue of the Journal of Investing. More...
An article in the June 2006 edition of the European Central Bank’s Financial Stability Review (FSR) claims that hedge fund activities pose considerable risk to the financial system. We disagree with this conclusion, which is based on mere speculation. We outline the fallacies in the reasoning of the FSR article and makes some propositions on how to assess the welfare impacts of hedge funds. In particular, we argue that it would be worthwhile for financial regulators to work towards obtaining data on hedge fund leverage and counterparty credit risk. Such data would allow a reliable assessment of the question of systemic risk. In addition, we argue that besides evaluating potential systemic risk, it should be recognised that hedge funds play an important role as “providers of liquidity and diversification.” More...
The results of the EDHEC European Alternative Diversification Practices Survey, which enabled EDHEC to produce a detailed assessment of current institutional practices in Europe, were presented to a distinguished group of institutional investors at the EDHEC Institutional Investor Summit in London on February 14th. The study generated responses from 151 European institutional investors representing, at 30/09/2005, a total volume of over one trillion euros of assets under management. The survey shows that 51% of European institutional investors are already exposed to hedge fund strategies. These represent, on average, 7% of their global assets. More...
Following its meeting in Sonoma, California on July 10-11, 2005, the Financial Economists Roundtable (FER), an international group of senior financial economists, issued a statement in which it warned about the risks involved in investing in hedge funds. The EDHEC Risk and Asset Management Research Centre, which has carried out a multi-faceted research programme on hedge funds over the past three years, has published a paper by Noël Amenc, PhD, and Mathieu Vaissié in response to the FER statement in which it comments on the FER’s recommendations. More...
Lionel Martellini, Mathieu Vaissié, Volker Ziemann One of the by-products of the bull market of the 90’s has been the consolidation of hedge funds as an important segment of financial markets. It was recently announced that the value of the hedge fund industry worldwide had passed the $1 trillion mark for the first time, with approximately 7,000 hedge funds in the world, around 1,000 of which were launched in 2003. One of the key reasons behind the success of hedge funds in institutional money management is that such alternative investment strategies seem to provide diversification benefits with respect to other existing investment possibilities. In an attempt to fully capitalize on such beta benefits in a top-down approach, investors or (funds of hedge funds) managers must be able to rely on robust techniques for optimization of portfolios including hedge funds. More...
Jean-René Giraud Operational risk is by far the most complex and intriguing issue investors are dealing with when allocating capital to hedge funds. Due to sophisticated trading strategies, potentially high levels of portfolio turnover, investment in illiquid or difficult to price instruments and a moderately regulated environment, hedge funds tend to exhibit high levels of extreme risks related to non-financial events (fraud and misappropriation, misrepresentation, model risk, infrastructure risk, etc.). More...
Lionel Martellini, Volker Ziemann Institutional investors in general and pension funds in particular have been dramatically affected by negative stock market returns at the beginning of the millennium. In the context of a cumulative asset/liability deficit that was estimated at more than £55 billion in 2003 for the companies in the FTSE 100,
institutional investors are seeking new asset classes or forms of investment management that would allow them to broaden their traditional choice of asset allocation. An alternative investment offering has been introduced in the past several years, allowing investors to optimise the risk/return combination of their portfolio. A revisited version of this study was published in the June 2006 issue of The IFCAI Journal of Financial Risk Management. More...
In a major survey of 183 industry players, including institutional investors and hedge fund and fund of hedge fund managers, conducted from May 31st to July 8th 2005, the EDHEC Risk and Asset Management Research Centre has found that alternative investment professionals are upbeat about future prospects for the industry and do not see the so-called “capacity effect” as a major threat to future profitability.
Lionel Martellini, Koray Simsek, Felix Goltz Institutional investors in general and pension funds in particular have been dramatically affected by recent market downturns. This seems to be surprising given that an increasingly thorough range of structured products has been developed over the past few years, which allows investors to tailor the risk-return profile of their portfolio in a more efficient way than simple linear exposure to traditional asset classes. The salient characteristic of structured products is the repackaging of strategies that involve long and short positions in derivatives and the underlying or a risk-free asset into an investment vehicle that is easily accessible by investors. More...
Walter Géhin, Mathieu Vaissié Two studies, by Watson Wyatt and UBS (both from March 2005), give a pessimistic view of the hedge fund industry’s capacity to generate long-term returns, due to its increasing size. Unfortunately, these studies focus almost exclusively on alpha. In the present paper, we show the importance of considering not only the exposure to the market (the traditional beta), but also the other exposures (the alternative betas) to cover all the sources of hedge fund returns. To do so, we examine the real extent to which the variability and level of hedge fund returns are affected by (static) betas, dynamic betas (i.e. factor timing), and pure alpha (i.e. security selection). A revisited version of this study was published in the Summer 2006 issue of The Journal of Alternative Investments.
In 2004, Edhec launched an international consultation process on the implementation of a new framework for Funds of Hedge Funds reporting. This consultation process was based on a series of recommendations proposed by Edhec with regard to the academic state-of-the-art on risk measurement in the alternative universe. The results of this consultation were presented to a panel of journalists on February 17th in London at a meeting hosted by FIMAT. A revisited version of this study was published in The Journal of Risk Finance, 1st Quarter 2006. More...
EDHEC-Risk Institute recently released a research paper that is highly critical of the existing fund rating systems.
Originating in 2002, when EuroPerformance, the leading French firm for the dissemination of mutual fund data, approached EDHEC-Risk Institute to consider the implementation of a value-added offering in the area of external analysis of the performance and risks of European investment funds, the Rating the Ratings document constitutes a detailed summary of the critical study and puts into perspective the responses given to the inadequacies of the existing ratings by the EuroPerformance/EDHEC-Risk Institute Style Ratings.
The method followed to implement the design of these new ratings was to carry out a thorough study of the insufficiencies of the existing rating methods in order to correct them by relying on the state-of-the-art in portfolio risk and performance measurement in a business context.
Noël Amenc, Philippe Malaise, Lionel Martellini, Jean-René Giraud< Recent market difficulties have drawn attention to the risk management practices of institutional investors. Particularly significant was the fact that negative equity market returns were eroding plan assets at the same time as declining interest rates were increasing benefit obligations. These events have spotlighted the weakness of current funding standards for corporate defined benefit pension plans. They have also emphasized the weakness of investment practices. More...
Noël Amenc, Anne Delaunay, Jean-René Giraud, Felix Goltz, Lionel Martellini, Mathieu Vaissié On 11th December 2003 in Paris, Edhec presented the results of its survey on alternative multimanagement in Europe, the Edhec European Alternative Multimanagement Practices survey.
This study, sponsored by FIMAT, is based both on a review of all the professional and academic research on alternative investment and a survey of the practices of European multimanagers, to which 61 firms (investors, advisors and funds of funds) replied, representing a total of 136 billion euros under management. The key findings of this study were published in the March 2004 issue of The Journal of Financial Transformation.
Edhec has conducted a major survey into the practices of the leading 400 European asset management firms which generated responses from 60 companies. The survey is the first study conducted in Europe dealing with the application of the results of academic research within investment management companies. The survey results reveal that in spite of their extensive knowledge of the concepts involved in research into portfolio management and the progress made, the major European asset managers were either not implementing them or not adopting them rapidly as part of their investment management process. More...
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