EDHEC-Risk Institute is striving to become an academic institution of reference for the investment industry by maintaining a strategic focus on issues that correspond to major industry needs, validating research projects and output from both academic and professional viewpoints, and highlighting research results and applications towards asset owners, asset managers, and regulators.

As we have had occasion to remark in the past, the raison d’être of the investment industry is not to generate alpha (asset management) or to design complex structured products (investment banking), but to serve private, retail and institutional investors’ needs by helping them find solutions to their problems. More often than not, their problems involve meeting long-term objectives in the presence of short-term (regulatory or otherwise) constraints.

To meet investors’ needs, two main sources of added-value are expected from the investment management industry: the design of improved performance and hedging building blocks, and the design of allocation strategies based on these building blocks. Broadly speaking, this investment paradigm is known in the industry as the liability-driven investing (LDI) paradigm.

Risk (and performance) measurement has received substantial attention, but it should not be confused with risk management. Financial risk management is a key source of added-value in investment management through diversification (achieving efficient access to risk premia), hedging (neutralising risk factors (wealth or productivity of wealth)), and insurance (maximising the upside subject to short-term constraints).

Diversification is appropriate as a device that allows investors to extract risk premia out of performance-seeking assets. There are two dimensions in the design of the performance-seeking portfolio: broad asset allocation decisions, and benchmark (building block) construction within a given asset class. Another challenge is improving the articulation between asset allocation decisions by a centralised investor and benchmark construction decisions by decentralised and specialised asset managers.

On the other hand, diversification will not allow investors to obtain protection against 2008-like events. One should recognise that diversification is simply not the appropriate tool when it comes to protecting long-term liability needs, especially in the presence of short-term performance constraints. One does not diversify away liability risk, one hedges away liability risk. When long-horizon are considered, the optimal strategies exhibit time-dependencies, and also time-horizon dependencies; this is the life-cycle investing (LCI) paradigm.

Investors are endowed with liability/consumption objectives, typically expressed over long-horizons, but they also face short-term constraints. Examples of short-term floor constraints include minimum funding ratios; accounting impact constraints; capital guarantee constraints; max drawdown constraints; rolling performance constraints; peer/competition benchmark constraints; etc. These constraints are not managed through diversification (performance-seeking portfolio) or hedging (LDI/LCI) strategies, but through insurance strategies. This is the risk-controlled investing (RCI) paradigm.

Furthermore, portfolios (and financial institutions) face a number of non-financial risks that must be identified, measured and monitored. Beyond the management and measurement of financial risk, EDHEC-Risk Institute’s research programmes therefore also focus on operational risk, business risk and regulatory risk.

To allow for in-depth research into all of the abovementioned topics, there are currently several research chairs open at EDHEC-Risk Institute. The EDHEC-Risk Institute research chairs involve a close partnership with a sponsor and a commitment from the Institute over three years leading to international academic publications and documents aimed at asset owners, asset managers, and regulators. Ten research chairs have been endowed to date, more details on which can be found here, and research chairs that are open to partnerships include Commodities and Institutional Investment, Real Assets for Institutional Investors, Advanced Investment Solutions for Inflation Hedging, Hedge Fund Selection and Allocation, Derivatives in Portfolio Management, and Asset Manager Risk.

The aim of the Commodities and Institutional Investment research chair is to develop research on the risk premium of commodity futures, the benefits of commodities in the context of diversification and inflation hedging, and time and regime dependent asset allocation. We feel that while commodities attract much interest from investors, it requires academically sound and practically feasible advice to transform interest into well-informed decision making.

More generally, recent market turbulence has enhanced the appetite that investors show for asset classes such as commodities, precious metals, real estate and infrastructure, which can be regarded as real assets. The renewed interest in real assets derives from their promise to preserve real wealth in times of large macroeconomic and legal uncertainty. To the degree investors believe in a breakdown of markets and institutions real assets become part of an investors “non-normal” portfolio. In the context of rising inflation concerns, high volatility and low return in traditional asset markets, real assets are increasingly treated as natural components of the asset mix of investors, who seek new diversification vehicles. The purpose of the Real Assets for Institutional Investors research chair is to support research undertaken by EDHEC-Risk on the benefits of real assets in the context of inflation hedging, asset allocation and alpha extraction.

Inflation hedging is a concern of particularly critical importance for pension funds, in situations when pension payments are indexed with respect to consumer price or wage level indexes. The implementation of inflation-hedging portfolios has become relatively straightforward in specific contexts where either cash instruments (Treasury inflation protected securities, or TIPS) or dedicated OTC derivatives (such as inflation swaps) can be used to achieve perfect hedging. More generally, however, the lack of capacity for inflation-linked cash instruments and the increasing concern over counterparty risk for derivatives-based solutions leaves most investors with the presence of non-hedgeable inflation risk. Another outstanding problem, even when perfect inflation hedging is possible, is that such solutions generate very modest performance given that real returns on inflation-protected securities, negatively impacted by the presence of a significant inflation risk premium, are typically very low. In this context, we propose to analyse the design of novel forms of inflation-hedging portfolios that do not solely rely on inflation-linked securities but instead involve substantial investment in traditional asset classes. Overall these novel forms of inflation hedging solutions will be engineered to generate higher expected performance for a given inflation hedging level, which in turn will allow for a decrease in the cost of inflation hedging.

The Hedge Fund Selection and Allocation research chair follows on from a long-running research programme on asset allocation and alternative diversification, a programme that includes the Advanced Modelling for Alternative Investments research chair in partnership with Newedge Prime Brokerage. This new chair will examine such topics as integrating hedge funds into Bayesian portfolio choice, hedge fund selection and hedge fund return predictability.

The Derivatives in Portfolio Management research chair relates to three different but related asset management contexts: the variance risk premium, its importance for investors and the role of variance products in investor portfolios; optimal static allocation to option strategies in a world where investors cannot trade dynamically because of limited market access, credit and leverage constraints or transaction costs; and the inclusion of structured products in wider portfolios of equities and bonds rather than placing them in a separate category.

Finally, the Asset Manager Risk research chair concerns key topics for the investment management industry such as measuring and managing operational risk and hedging asset managers’ fees in a context of uncertainty on assets under management. The research chair would also involve a survey of practices: how do asset managers cope with operational and business risks?

For further information on any of the above research chairs, please contact Peter O’Kelly on +33 493 187 823 or by email to peter.okelly@edhec-risk.com.