Indexes and Benchmarking
This paper provides an explicit estimate of costs applied to a range of strategies and shows the impact of using different implementation rules or stock universes. A reasonable expectation from an investor’s perspective is that providers should disclose the estimated level of transaction costs generated by their strategies so as to allow for information on net returns. However, providers typically fail to make explicit adjustments for transaction costs and satisfy themselves with reporting gross returns, leaving it to other market participants to figure out what exactly the transaction costs amount to. More...
Indexes and Benchmarking
In the last decade, the search for priced non-market equity risk factors, and the
implementation of smart beta strategies for equities have been a major focus of
applied and theoretical research. It is now generally acknowledged that, in the
equity space, these strategies permit the construction of more desirable portfolios
than naive passive allocations (such as equal or market-capitalization weighting
schemes). Recently, this focus has been shifted to other asset classes (see, eg, Asness,
Moskowitz and Pedersen, 2013) and to fixed income in particular. Given the
huge size of the fixed-income market, the natural question is whether smart beta strategies will prove effective for this asset class. More...
Indices & Benchmarks
EDHEC-Risk Institute conducted its 9th survey of European investment professionals about the usage and perceptions of ETFs at the end of 2015. The aim of this study was to analyse the usage of exchange-traded funds (ETFs) in investment management and to give a detailed account of the current perceptions and practices of European investors in ETFs. Responses were provided by 219 European investment decision-makers, 180 of which were ETF users. The survey respondents were from 25 different countries, with 41% of them being from the UK and Switzerland. A vast majority of survey respondents were Institutional managers (76%) and more than half of the respondents (51%) were asset managers.
For the third year running, in view of the considerable development in new forms of indices, as well as the increasing attention smart beta ETFs have received in the media in the recent years, part of the survey was dedicated to investment professionals’ practices and use of products tracking smart beta indices and on the importance of risk factors in alternative equity beta strategies. The present document is a focus on investor perceptions about smart beta ETFs, as reported by the survey.
This paper provides a detailed overview and analysis of the forthcoming new framework to be used by large financial institutions to determine initial margin (IM) and variation margin (VM) payments when trading non-cleared over-the-counter (OTC) derivatives. The Fédération Bancaire Française (FBF) supports the research chair on “Innovations and Regulations in Investment Banking” in which this research was produced. Coming into effect in September 2016, this new framework was set out in 2015 and is based on the recommendations of the BCBS/IOSCO Working Group on Margin Requirements (WGMR). This framework has been in development since 2009, and was a response to the events of September 2008 which saw the bankruptcy of Lehman Brothers, the bailout of AIG and the federal takeover of Fannie Mae and Freddie Mac, all of whom had large exposures to the OTC derivatives market.
Indexes and Benchmarking
In a new research paper published in the latest issue of the Journal of Portfolio Management, entitled “Diversified or Concentrated Factor Tilts?”, EDHEC-Risk Institute and ERI Scientific Beta researchers have highlighted the limitations of purely factor-driven approaches that aim to concentrate portfolios in a small number of stocks that are highly exposed to one or more risk factors, in order to obtain, over the long term, the best possible return associated with these risk factors. Since it neglects diversification of specific risk, this factor concentration approach exposes the investor to high idiosyncratic volatility and ultimately delivers risk-adjusted performance that is inferior to that of well-diversified factor or multi-factor indices. More...
Indexes and Benchmarking
EDHEC-Risk Institute carried out its survey among a representative sample of 128 investment professionals at the beginning of 2014, as part of the Société Générale Prime Services (Newedge) research chair on “Advanced Modelling for Alternative Investments”. The aim of the study is to give an overall view on alternative equity beta strategies, to determine the areas of usage and to analyse the alternative equity beta practices and perceptions of investment professionals.
Alternative equity beta investing has attracted increased attention within the industry recently. Though products in this segment currently represent only a fraction of overall assets, there has been tremendous growth recently in terms of both assets under management and new product development. More...
This paper examines the relative efficiency of standard forms of practical implementation of the factor investing paradigm based on commonly-used factors in the equity, fixed-income and commodity universes. Investment practice has recently witnessed the emergence of a new approach known as factor investing, which recommends that allocation decisions be expressed in terms of risk factors, as opposed to standard asset class decompositions. To answer the question of whether factor investing is truly a welfare-improving new investment paradigm or whether it is merely yet another marketing fad, the paper identifies mathematical conditions under which it is expected to generate welfare gains for asset owners and
provides an empirical measure of such gains.
This paper proposes a valuation framework for privately-held and very illiquid assets such as equity stakes in infrastructure projects. Such a framework is one of the key steps identified by EDHEC-Risk Institute as part of a roadmap to design long-term infrastructure investment benchmarks that can take into account the nature of such assets as well as the paucity of available data. Indeed, the design of an academically validated valuation framework, while necessary to ensure adequate performance measures, is constrained by the practical limitations of collecting private information that is scattered amongst many investors and is often confidential in nature. More...
Indices & Benchmarks
EDHEC-Risk Institute conducted its 8th survey of European investment professionals about the usage and perceptions of ETFs at the end of 2014. The aim of this study is
to analyse the usage of exchange-traded funds (ETFs) in investment management and
to give a detailed account of the current perceptions and practices of European investors in ETFs.
The Background section of our document analyses how different types of ETFs are
designed, which advantages they offer, and which risks they are exposed to. The
second part of the study focuses on the results of a survey of 222 European ETF
users. Responses provide interesting insights into the appreciation of ETFs in general,
with the confirmation of a long term trend established in our past surveys, which shows
satisfaction with products, which is stable at high levels, and increasing appetite to rely
on ETFs for ever more aspects of portfolio management. Moreover, we observe a recent increase in interest in ETFs tracking smart beta indices. When it comes to smart beta ETFs, investment professionals however also have strong quality requirements for the underlying indices, most notably in terms of transparency. More...
In a new paper entitled “Unlisted Infrastructure Debt Valuation and Performance Measurement”, drawn from the Natixis research chair at EDHEC-Risk Institute on the “Investment and Governance Characteristics of Infrastructure Debt Instruments,” we propose the first academically robust, yet operationally implementable valuation and risk measurement framework for illiquid infrastructure debt. More...
Numerous surveys suggest that Australians are not completely satisfied with Superannuation as it exists today. First, fund members tend to think that they will not have enough to retire and second, that investment plan providers are not necessarily acting in their best interest. In this context, we asked in a recent study supported by AXA Investment Managers whether the recent rapid development of self-managed superannuation funds (SMSFs) may be related to the level of dissatisfaction with the more mainstream types of pension funds (retail, industry and non-profit) especially amongst the relatively more financially literate and wealthier segment of the population. More...
A number of profound changes have taken place, which have collectively led to the emergence of a new investment paradigm for pension funds. The standard paradigm
for pension fund investments, which used to be firmly grounded around one overarching
foundational concept of the policy portfolio, is slowly but surely being replaced by a new, more modern, investment paradigm known as the dynamic liability-driven investing (DLDI) paradigm. More...
Indices & Benchmarks
The latest edition of the European ETF Survey has been conducted as part of
the Amundi ETF & Indexing "Core-Satellite and ETF Investment" research chair at EDHEC-Risk Institute. This chair analyses the developments in the use of exchange-traded funds as part of the asset allocation process and looks at advanced forms of risk budgeting within the framework of a core-satellite approach. With the survey, we aim to analyse the current practices and perceptions among ETF users in Europe and by comparing our results with those of our previous surveys, we intend to shed light on trends within the European ETF market. More...
This paper analyses various measures of portfolio diversification, and explores
the implication in terms of advanced risk reporting techniques. We use the minimal linear torsion approach (Meucci et al. (2013)) to turn correlated constituents into uncorrelated factors, and focus on the effective number of (uncorrelated) bets (ENB), the entropy of the distribution of risk factor contribution to portfolio risk, as a meaningful measure of the degree of
diversification in a portfolio. In an attempt to assess whether a relationship exists between the degree of diversification of a portfolio and its performance in various market conditions, we empirically analyse the diversification of various equity indices and pension fund policy portfolios. We find strong evidence of a significantly positive time-series and cross-sectional relationship between the ENB risk diversification measure and performance in bear markets. More...
Industry surveys indicate growing investments in Asian passive investment
equity products commonly motivated by the expected economic growth of the
region relative to the rest of the world and the resulting equity premium. Investors are typically interested more in regional and country cap-weighted indices and ETFs tracking such indices rather than sector or style indices (see Amenc et al. (2012)). More...
According to international accounting standards SFAS 87.44 and IAS19.78, which
recommend that pension obligations be valued on the basis of a discount rate equal to the market yield on AA bonds, the most straightforward way for pension funds to match liability payments is to build a portfolio of long-dated, investment grade corporate bonds. In practice, institutional investors including pension funds, but also insurance companies, sovereign funds, etc., are actually showing an increasing appetite for corporate bonds, not only for their liability hedging benefits, but also for their performance benefits related to the presence of a credit risk premium, which is imperfectly correlated with the equity risk premium. More...
The purpose of this publication, which is drawn from the AXA Investment Managers research chair at EDHEC-Risk Institute on “Regulation and Institutional Investment”, is to examine the role of pension systems in the financing of current and future standards of living in Asia’s ageing nations
and to study the potential contribution of scientific asset management to the
challenges faced by the region’s pension reserve funds and funded pension schemes. More...
Indices & Benchmarks
The EDHEC European ETF Survey 2012 was conducted as part of the Amundi ETF "Core-Satellite and ETF Investment" research chair at EDHEC-Risk
Institute. The objective of this research chair is to provide research insights into
the recent development of exchange-traded funds (ETFs) and the ways they are used in core-satellite asset management. Since indexing and dynamic asset allocation represent a considerable share of our asset management research, it is natural for EDHEC-Risk Institute to devote significant resources to this research topic. More...
Within the framework of the partnership between Princeton University’s Department of Operations Research and Financial Engineering (ORFE) and EDHEC-Risk Institute, the second edition of the EDHEC-Princeton “Academia Meets Practice” conference took place in New York on 3 April 2013. At this conference, speakers from both EDHEC-Risk Institute and Princeton ORFE presented their works before an audience of more than 150 investment professionals, offering them the latest academic insights into institutional money management. Each presentation given by a faculty member from Princeton ORFE or from EDHEC-Risk Institute was followed by a discussion, facilitating an exchange of views between academics and practitioners. More...
This paper has two objectives. First, this paper provides an academic analysis of the main techniques that are currently used by hedge fund managers and that could be transported to the mutual fund and alternative UCITS space in a straightforward manner so as to provide better forms of risk management in a regulated environment. More...
Indices & Benchmarks
There has been increasing demand for equity indices in Asia. This is because
global investors want to benefit from the region’s growth, and consequently
from its financial markets. As a lot of US and Europe based investors do not have the expertise to conduct stock picking in Asia, equity investments are often passive for Asian oriented portfolios. Therefore, the question of index quality in Asia is an important issue. We address the question in this study by focusing on the following three aspects: (i) efficiency; (ii) concentration; and (iii) stability. From the study, it appears that the popular indices used in Asia as reference benchmarks are inefficient, with some of them being more so than others. For all of them, an equal-weighted index constructed from the same components outperforms the corresponding cap-weighted market index. The levels of inefficiency of Asian market indices were found to be quite comparable to those of European and US indices. More...
Indices & Benchmarks
EDHEC-Risk Institute conducted a study on corporate bond indices (cf. Goltz and Campani, 2011) to analyse their construction methodologies, as well as their risk and return properties, and especially the stability of their risk exposures. Empirical analysis was performed on four US and four European indices, including market value-weighted indices, an equally-weighted index with a fixed, low number of bonds (Dow Jones Index), and a highly-liquid
index, created with the specific purpose of offering high liquidity and investability (iBoxx Liquid Euro). From the results of this study, it appeared that all corporate bond indices considered present highly unstable risk exposures over time. Higher duration instability was obtained with the two “investable” indices, i.e. the Dow Jones Index for U.S. and the iBoxx Liquid for eurozone. More...
In a summary document that concludes three years of research on better management of non-financial risks within the European fund management industry – conducted with the support of CACEIS – EDHEC-Risk Institute is putting forward a series of proposals to limit these risks which emerged during the 2007-2008 crisis and undermined the quality of the UCITS label. For EDHEC-Risk Institute, the sophistication of UCITS is one of the principal causes of a rise in non-financial risks. These risks are not the direct result of positions taken by funds on financial markets and for which they receive a reward proportional to their exposure, but rather produced by the operation of the value chain of the collective investment management industry itself. More...
Indices and Benchmarks
New forms of equity indices have proliferated in recent years. These new forms of indices are often presented as sources of outperformance, but there are
two major sources of related risk. First, risks that stem from a more pronounced “structural” exposure to risk factors, which, through their associated premia, lead to outperformance of capweighted indices over the long
term, but which, in certain conditions, can negatively affect the performance of these new indices. Second, every weighting scheme, whether it is qualitative or quantitative, corresponds to a choice of model and therefore contains model risk. More...
The inaugural EDHEC-PRINCETON Institutional Money Management Conference was held on April 27, 2012, at the Princeton Club in New York. In the face of a number of key changes of paradigms that are currently affecting the investment industry, this one-day conference was intended to provide a selected number of invited investment professionals with the latest academic insights related to new frontiers in institutional money management. The format of the conference was designed to facilitate the exchanges of views between academics and practitioners; it involved presentations by members of the faculty of Princeton University and EDHEC-Risk Institute, followed by a discussion with the audience.
In this publication, produced as part of the "Advanced Modelling for Alternative Investments" research chair at EDHEC-Risk Institute supported by Newedge, we evaluate the performance of hedge funds through a new non-linear 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 non-linear risk adjustment goes beyond the usual linear regression methodology used in many hedge fund performance papers, including non-linear exposures based on option-like features.
This publication, produced as part of the BNP Paribas Investment Partners research chair on asset-liability management and institutional investment management at EDHEC-Risk Institute, shows that sophisticated dynamic allocation strategies can usefully be implemented by pension funds. One of the key findings of the paper is to show 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.
In this paper, we analyse a novel approach in the design of attractive equity solutions with managed volatility, based on mixing a well-diversified equity portfolio with volatility derivatives, as opposed to minimising equity volatility through minimum variance approaches. The results we obtain suggest that a long volatility position shows a strongly negative correlation with respect to the underlying equity portfolio and that adding a long volatility exposure to an equity portfolio would result in a substantial improvement of the risk-adjusted performance of the portfolio.
Indices and Benchmarking
The inaugural EDHEC-Risk Asian Index Survey has canvassed 127 Asian investment professionals (asset managers, institutional investors, investment consultants, and private wealth managers) on the subject of indices and passive investment and is the first comprehensive account of investor attitudes to equity and bond indices in the Asia-Pacific region. Respondents are principally from the three asset management hubs in the Asia Pacific region (Australia, Singapore and Hong Kong), but a wide range of other countries are represented, including India, China, Japan and New Zealand.
This study highlights the need to reform retirement systems and pension funds, as well as the need to adopt professional management structures and to considerably improve the product offering of defined-contribution (DC) funds. Among the key prescriptions of the study: in DC plans, primarily in the US and the UK, employees bear all the financial risk and no guarantees are offered by the sponsor or by prudential regulation. However, the lack of guarantees and transparency could lead to a problem of trust – it is thus important that some guarantees are offered in DC funds and that their costs are clearly explained in order to avoid creating a biased risk/return illusion. More...
Sovereign Wealth Funds
In a call for reaction to an EDHEC-Risk Institute study entitled “Asset-Liability Management Decisions for Sovereign Wealth Funds,” which was the foundation paper of the research chair endowed by Deutsche Bank, we asked sovereign
investment practitioners about their views on the use of a dynamic ALM framework for SWF management. This report shows that practitioners appreciate the value of the approach. As far as the inclusion of liabilities is concerned, respondents agree that this is an important aspect as 92% of the practitioners in the survey think that implicit liabilities should be taken into account in an integrated framework.
As part of the CACEIS research chair on “Risk and Regulation in the European
Fund Management Industry,” EDHEC-Risk Institute has produced a study entitled “Shedding Light on Non-Financial Risks – a European Survey.” It follows on from a study conducted last year within the same research chair, entitled “The European Fund Management Industry Needs a Better Grasp of Non-Financial Risks,” which looked at how non-financial risks and failures have
impacted the regulatory agenda in Europe and traced the management
of liquidity, counterparty, compliance, misinformation, and other non-financial
risks in the fund industry.
The Solvency II directive, which should come into force at the beginning of 2013, introduces a prudential framework for the computation of the regulatory capital requirements of insurers. In particular, it defines a standard formula that must be applied by default and serves as a reference point for more advanced approaches, notably partial and full-blown internal models. For the insurance sector, the capital requirements associated with equity investments remain prohibitive using this standard formula, which will be especially prejudicial to firms that are unable to develop an internal risk model. In reaction, a forced shift away from equity has already started so as to prepare for the new regulatory constraints. More...
Indices and Benchmarking
Exchange-traded funds have traditionally been perceived as vehicles combining the diversified exposure of mutual funds with the low-cost, flexibility, ease and liquidity of trading enjoyed by publicly listed stocks, while also offering lower-expense ratios and better tax-efficiency relative to mutual funds. Most ETFs are passive, index-tracking investment vehicles, which as such, have transparent economic exposure and simple payoffs More...
Asset Management Research
This publication presents the results of the latest research on structured forms of investment strategies done at EDHEC-Risk Institute with the support of Societe Generale Corporate & Investment Banking and under the leadership of Stoyan Stoyanov, Head of Research at EDHEC Risk Institute–Asia and Professor of Finance at EDHEC Business School. The current macroeconomic and regulatory environments are extremely challenging for institutional investors. Prudential and accounting standards encourage investors to invest in low risk assets that are highly correlated with liabilities. At the same time, investors operate in a low interest rate environment where attractive risk premia are offered by asset classes that are poorly correlated with liabilities or command high capital charges due to their volatility. The conundrum for long-term institutional investors is how to extract risk premia while limiting exposure to downside risks.
The rise in commodity prices over the last ten years and their recent volatility has generated considerable interest on the part of investors, regulators and policy-makers. Attracted by the prospect of robust returns, diversification benefits, and potential for hedging inflation and macroeconomic risks, investors have increased their allocations to commodities over the period, primarily via passive investment into long-only commodity futures indices. Recent market gyrations have contributed to reviving the debate on the role of commodities in strategic and tactical asset allocation and led to an increasing recognition of the relevance of long-short dynamic strategies to capture the commodities premium in the context of highly volatile markets.
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.
Socially Responsible Investment
Performance measurement of socially responsible investment (SRI) has been the subject of numerous studies in various countries. However, the conclusions of performance assessments always depend on the choice of the reference index one uses. SRI criteria lead to a reduction of the stock universe. Typical SRI indices respect such screenings and then simply weight the acceptable stocks by market cap, or alternatively by sustainability scores. They thus ignore the risk/return properties of stocks and in particular the correlations. Consequently, they do not necessarily reflect the performance available from a
well-diversified portfolio of SRI-compliant stocks.
Sovereign Wealth Funds
Sovereign wealth funds (SWFs) typically have no direct earmarked liabilities. Nor
should they, as the financial asset they represent is only part of total sovereign
assets, which in turn guarantee all sovereign liabilities. The objective of this paper is to incorporate the economic balance sheet of the sovereign sponsor into the optimal asset allocation problem of the SWF. This paper outlines an easy to implement solution that nests well in the literature on SWFs. We show that economic leverage will reduce speculative demand but leave hedging demand (against fluctuations in the net fiscal position of the sovereign state) unchanged. We also show how to extend our one-period methodology to a multi-period context by solving a dynamic stochastic programme. Allowing for optimal dynamic decision making increases the amount of equity risk an SWF can take. The advantage is greatest for large values of economic leverage. Finally, we conclude that narrow tactical asset allocation ranges limit the SWF’s ability to manage its risks. More...
Indices and Benchmarking
Investors are usually willing to take on risk only if they are compensated for it
with greater expected reward. Although such theories as Ross’s (1976) arbitrage
pricing theory (APT) suggest that there may be multiple sources of risk, including both systematic risk factor exposures and idiosyncratic risk (Merton 1987; Malkiel and Xu 2006), that are rewarded in equity markets, both empirical financial research and practical investment strategies rely mainly on a market-wide risk factor represented by a broad portfolio of stocks. This reliance is reflected in the dominance of country and regional indices and ETFs that provide exposure to marketwide equity risk for different regions.
In a climate of increasing inflation uncertainty, EDHEC-Risk Institute has released a new study analysing optimal corporate debt management policies. The study, produced as part of the research chair on “The Case for Inflation-Linked Corporate Bonds: Issuers’ and Investors’ Perspectives,” in partnership with Rothschild & Cie, entitled “Optimal Design of Corporate Market Debt Programmes in the Presence of Interest-Rate and Inflation Risks,” examines the optimal liability structure when the issuer faces such instruments as fixed-rate debt, floating-rate debt, and inflation-linked debt.
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. More...
As part of the AXA Investment Managers research chair on regulation and institutional investment, 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...
The "Structured Products and Derivative Instruments" research chair at EDHEC-Risk Institute, sponsored by the French Banking Federation (FBF), investigates the optimal design of structured products in an ALM context and studies structured products and derivatives on relatively illiquid underlying instruments. This paper, "Option Pricing and Hedging in the Presence of Basis Risk," addresses the problem of option hedging and pricing when a futures contract, written either on the underlying asset or on some imperfectly correlated substitute for the underlying asset, is used in the dynamic replication of the option payoff. In the presence of unspanned basis risk modelled as a Brownian bridge process, which explicitly accounts for the convergence of the basis to zero as the futures contract approaches maturity, we are able to obtain an analytical expression for the optimal hedging strategy and corresponding option price. More...
EDHEC-Risk Institute was pleased to be able to produce a special supplement for Investment & Pensions Europe (IPE) on the occasion of the EDHEC-Risk Institutional Days 2010, which were being held for the first time in Monaco. The event represented a milestone for EDHEC-Risk Institute because it was also the first time that our flagship institutional conference had been organised in conjunction with the IPE Pension Fund Awards, thus providing an exceptional opportunity for the awards ceremony attendees to take advantage of their visit to Monaco in order to bring themselves up-to-date with the latest developments in institutional investment research. This supplement complements the Global Institutional Investment Conference at the EDHEC-Risk Institutional Days 2010 and aims to provide research-based solutions to some of the key challenges facing institutional investors today.
UCITS, the European retail regulated investment funds, were created shortly
after the 1985 passage of the first UCITS directive. Since then, non-financial risks have increased, but European authorities and investment professionals failed to study the impact of these risks when they allowed UCITS funds to evolve. The increase of non-financial risks in investment funds is the result above all of the growing sophistication of the transactions and financial instruments of investment funds, of the pursuit of non-traditional risk premia, as well as of such regulatory actions as the passage of the eligible assets directive (EAD) and the improved possibilities for leverage in sophisticated UCITS. In addition, inappropriate regulatory certification contributed to the sale of bad products, to misrepresentation of these products, and to increasing risk. Country competition in the implementation of EU regulations and possibly in supervisory
practices also had an impact.
"An Integrated Approach to Asset-Liability Management: Capital Structure Choices, Pension Fund Allocation Decisions and the Rational Pricing of Liability Streams" is drawn from the BNP Paribas Investment Partners research chair on “Asset-Liability Management and Institutional Investment Management” at
EDHEC-Risk Institute. 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. This publication is an attempt to fill this gap by analysing the valuation of pension liabilities regarded as defaultable claims issued by the sponsor company to workers and pensioners in the context of an integrated model of capital structure.
Private Wealth Management
The EDHEC-Risk European Private Wealth Management Survey has been completed as part of the second year of the "Private Asset/Liability Management" research chair, a chair endowed by Ortec Finance. The
objective of this research chair is to assess the degree to which asset/liability
management (ALM) practices common in institutional investment management
are likewise effective in private wealth management. The theory behind private
ALM is that, by representing a client’s spending objectives formally as a
liability benchmark and by managing his assets relative to this benchmark, risk
management can be customised, and that portfolio decisions that take into account the client’s specific objectives can then be made.
The rapid growth of sovereign wealth funds and its implications pose a series of challenges for the international financial markets and for sovereign states. In particular, an outstanding challenge is to improve our understanding of optimal investment policy and risk management practices for sovereign wealth funds.
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...
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). More...
Indices and Benchmarking
This survey has been taken as part of the second year of the Amundi ETF
"Core-Satellite and ETF Investment" research chair. In the past decade, ETFs have stood out for their fast growth. Last year’s survey results suggested that ETFs were one of the few financial product innovations to weather the 2008 financial crisis without undue pain, probably because, at the time, investors valued liquidity and transparency above all. This year’s results of our pan-European survey suggest that, as a consequence of strong growth, the industry has entered a phase of increased maturity: ETFs are now very widely used, and investors are embracing innovative ETF products and more advanced ways of trading them. More...
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. ALM involves covering liabilities and generating performance; in addition, pension funds must respect their minimum funding ratios, or, more broadly, achieve their goals. In the end, proper ALM requires three forms of risk management. Covering liabilities requires hedging risks; generating performance in efficient portfolios requires diversifying risks; ensuring that minimum funding ratios and other constraints are respected at all times requires insuring risks away.
The drawing-up of the Solvency II prudential rules has become a major concern for the private equity industry. The capital requirements for private equity risk could turn out to be, from 2012, sufficiently binding to lead many European insurers to reduce appreciably their asset allocation to non-listed stocks. As an example, in the French market, in 2007, the total investments in private equity represented €22bn in the balance sheet of insurance companies (FFSA 2008). Insurance companies finance 21% of the funds raised (AFIC); thus becoming
the leading national investors in non-listed stocks. More...
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. In a new position paper, Professor Abraham Lioui looks at 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 policymakers 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. More...
As part of the CACEIS research chair on non-financial risks in investment funds,
EDHEC Risk Institute 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. More...
Indices and Benchmarking
This paper introduces a novel method for the construction of equity indices that,
unlike their cap-weighted counterparts, offer an efficient risk/return tradeoff. The index construction method goes back to the roots of modern portfolio theory and focuses on the tangency portfolio, the portfolio that weights index constituents so as to obtain the highest possible Sharpe ratio. More...
A new paper drawn from the “Core-Satellite and ETF Investment” research chair at EDHEC-Risk Institute, sponsored by Amundi, examines the ways dynamic
asset allocation techniques can be used to manage portfolios of exchange-traded funds (ETFs). First, dynamic allocation to stock and bond ETFs and traditional static diversification are compared. Second, tactical allocation to stock and bond ETFs and risk-controlled allocation—with both forms of allocation informed by the same return forecasts—are compared. The paper shows that dynamic asset allocation techniques that can be used with frequently traded and broadly diversified instruments such as ETFs make it possible better to address investor concerns over drawdown and intra-horizon risk, whether or not the manager wishes to make return predictions. More...
The final programme has been confirmed for the EDHEC-Risk Alternative Investment Days, which will be taking place at The Brewery in London on February 8 and 9 next. The support of a number of business partners is helping to make this event the flagship conference for alternative investment in Europe. The conference aims to present the applied research conducted by EDHEC-Risk Institute and to discuss the results with the institutional investor and fund manager communities. More...
Sovereign Wealth Funds
Bernhard Scherer The existence of oil stabilization funds as the largest category of sovereign wealth funds relies on oil prices as a main source of macroeconomic risk for oil exporting countries. Given the often contingent spending policies of oil stabilization funds (accumulating wealth when oil prices are rising and spending wealth to support the local economy when GDP is shrinking) it is important to understand the magnitude and relative importance of oil price shocks relative to other sources of macroeconomic risk. A revisited version of this working paper was published in issue nº 109 (December 2010) of Bankers, Markets & Investors. More...
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
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. 93.7% of
respondents (95.3% of those from pension
funds) report that they are somewhat
or very familiar with accounting and/or
prudential constraints for pension funds;
the results of the call for reaction are very
much aligned with EDHEC’s views that
modern ALM techniques are instrumental in
managing minimum funding constraints and
that short-termism is counterproductive for
In addition, the respondents believe that
risk management is more instrumental in
protecting minimum funding ratios than
high initial funding ratios; the implications
are that regulations should provide
incentives to build internal models. More...
Since the turn of the millennium, a profound
shift in the management of insurance
companies has been underway. The main
catalysts of this shift are the growing
complexity of risks, the sophistication of the
means of measuring them, and the demands
made by investors for greater transparency
and for higher-quality management. In
this environment, prudential (Solvency II)
and accounting (IFRS) requirements must
also adapt to create new frameworks
offering a better view of the risks borne
by companies. More...
Private Wealth Management
While the private banking industry is in
general relatively well equipped on the tax
planning side, with tools that can allow
private bankers to analyse the situation
of high net worth individuals operating
offshore or in multiple tax jurisdictions,
the software packages used on the
financial simulation side often suffer from
significant limitations and cannot satisfy
the needs of a sophisticated clientele.
In fact, most financial software packages
used by private bankers to generate
asset allocation recommendations rely
on single-period mean-variance asset portfolio
optimisation, a tactic that, for at
least two reasons, cannot lead to proper
strategic allocation. For one, optimisation
parameters (expected returns, volatilities,
and correlations) are defined as constant
across time, a practice which is contradicted
by empirical observation and does not make
it possible to take into account the length
of the investment horizon. For another,
and most importantly perhaps, liability
constraints and risk factors affecting them,
such as inflation risk on targeted spending,
are neither modelled nor explicitly taken
into account in the portfolio construction
The number of applications for admission to the PhD in Finance offered by EDHEC-Risk Institute rose by more than 60% year-on-year. 2009 admissions proved extremely competitive and the entering class will bring together a group of exceptional individuals from six continents, representing sixteen nationalities. More...
Exchange-traded funds (ETFs), investment
vehicles that track a given index or
benchmark, are perhaps one of the greatest
financial innovations of recent years. Unlike
conventional index funds, however, ETF
units trade on stock exchanges at marketdetermined
prices, thereby combining the
advantages of mutual funds and common
Although the first European ETF came
on the market only in 2000, assets under
management of ETFs amounted to USD 143
billion as of late December 2008 (Fuhr 2009).
In less than ten years, ETFs have become
a serious alternative to other financial
products, such as futures or index funds,
that allow participation in broad market
movements. In addition, ETFs are one of the
few products that seem not to have been
hit by the financial crisis. More...
Tightening accounting standards and
prudential regulations require a clearer
understanding of the risk management
and investment strategies used by
pension funds. Greater attention is being
paid to the volatility of the surplus, and there
is less tolerance of underfunding.
These changes call for an improvement in
ALM strategies and the use of state-ofthe-
art models—such as dynamic liabilitydriven
investments—for the design of
these strategies. The constraints to
which pension funds are subject must be
clearly understood and embedded in the
investment strategies. More...
The recent pension crisis has triggered a
fierce debate in most developed countries
between advocates of a tighter regulation
designed to provide explicit incentives for
pension funds to increase their focus on
risk management, and those arguing that
imposing short-term funding constraints
and solvency requirements on such
long-term investors would only increase
the cost of pension financing.
We analyse this question in the context of a formal
continuous-time dynamic asset allocation
model for an investor facing liability
commitments subject to inflation and
interest rate risks. In an empirical exercise,
we find that the presence of short-term
funding ratio constraints indeed involves
a positive welfare cost, but that cost is
not found to be prohibitive for
reasonable parameter values. More...
Institutional investors allocate considerable shares of their portfolios to real estate, primarily in anticipation of diversification benefits. According to a recent study by the EDHEC Risk and Asset Management Research Centre, institutional investors would like to use index-based products for this purpose; however, real estate indexing has proven challenging. It has been challenging largely because real estate features such characteristics—rarely found in other asset classes—as high unit values and indivisibility, limited liquidity, great heterogeneity; active property management is also required. More...
The current credit crisis, triggered by losses on American subprime mortgages, has gradually turned into a global crisis of confidence. In October 2007, G7 finance ministers and central bank governors asked the Financial Stability Forum (FSF) to examine the causes of the crisis and make recommendations for managing it. Some of these recommendations (FSF 2008) dealt with accounting standards. The FSF recommended that these standards improve the treatment of off-balance-sheet items (for greater transparency), that they offer more guidance on the pricing of financial instruments in inactive markets, and that they require better information on pricing methods and on their sensitivity to the
assumptions and parameters chosen. 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...
CFA Institute and the EDHEC Risk and Asset Management Research Centre have extended their partnership in executive education events to now include an annual course on alternative investment. The newly introduced Alternative Asset Allocation Seminar presents advanced techniques to optimise asset allocation and risk management when alternative assets–such as real estate, commodities, private equity, or hedge funds–are added to institutional portfolios. 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...
With its residential and executive tracks, its organisation into consolidated weeks, and its e-learning tools, the EDHEC PhD in Finance is designed both for recent graduates who elect to join the EDHEC Risk and Asset Management Research Centre as research assistants and for established finance professionals who chose to remain in their full-time jobs. Since presenting the programme in April 2008, EDHEC has fielded more than 800 requests for information, 500 of them for the executive track alone. To respond to the exceptional interest shown by professionals, the opening of the executive track was brought forward one year. On October 13, a select group of 5 recent university graduates and 12 experienced professionals from the world over embarked on the three-year doctoral programme. More...
This fourth edition of the Alpha League Table 2008 looks into asset management in the United Kingdom. It is, once again, confirmation that, when it comes to alpha, UK asset managers outperform their counterparts on the continent.
The year’s results are better than last year’s: average alpha increased (approximately 30 basis points) to 2.9% and the average frequency of alpha (the number of funds, expressed as a percentage, delivering positive
alpha) is 52.2%; it was 46.3% last year. Once again, a specialist is at the top of the UK Alpha League Table. With a substantial increase in average alpha, Jupiter takes the top spot; it was in second place last year. With its average alpha of 4.23% and the frequency with which alpha is delivered coming to 73.75%, the firm posts an impressive performance. 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...
The third edition of the Alpha League Table 2008, following on the heels of studies of French, Italian, and Spanish asset management, is devoted
to Switzerland. This new edition spotlights the firms that were ranked last year: all the firms that met our eligibility requirements in 2007 did so in 2008 as well, indicating the great robustness of the results.
The private bank Sarasin takes the top spot in this 2008 edition of the rankings. Sarasin’s average alpha improves 54 basis points to 3.65%. The
frequency of alpha (62.6%) is also better than it was last year (+190 basis points) and is among the best of the companies in the rankings. 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...
Following the French investment management rankings, the second publication of the Alpha League Table 2008 is devoted to Italy and Spain. This third edition of the rankings of Spanish and Italian asset management firms shows a fall in the alpha generated by the firms in the rankings. Average alpha for Spain fell from 2.38% to 2.08% and for Italy from 1.53% to 1.14%.
For Spain, Bankinter is once again in first place, with a score of 1.49 obtained on the strength of alpha of 3.22% and a very respectable frequency of 46.79%, the highest of any firm in the Spanish rankings. In second place is Ibercaja Gestión. Third place is held by Gesmadrid.
With a score of 0.39, Monte dei Paschi di Siena takes first place in Italy. Second in the rankings, up two places from last year, is Gruppo Ubi Banca. Pioneer Investments, in second place last year, is now in third.
The Alpha League Table compares asset management companies on the basis of their capacity to deliver positive alphas. The table’s leading companies are the best providers of alpha, i.e., those that offer a good compromise between the value and frequency of the alphas produced. The third ranking for France reveals that both the frequency of alpha and the average alpha generated by French asset managers have fallen in comparison with the 2007 edition. All the same, the top ten companies have put up fierce resistance, conceding but a moderate drop in their alpha while improving their frequency. This edition of the Alpha League Table once again gives pride of place—eight of the top ten spots—to asset management firms (either specialised firms affiliated with
banks or independents whose capital is held by management). More...
EDHEC Business School believes that academic research has a vital role to play in promoting innovation and constantly raising professional standards and has spelled out its educational credo as "professional development through research-based excellence." The PhD in Finance it has organised in conjunction with the EDHEC Risk and Asset Management Research Centre is the culmination of this ambition. More...
EDHEC is jointly organising the IPE-EDHEC Institutional Asset Management Awards (IAMA) in 2008 with leading European institutional investment publication Investment & Pensions Europe (IPE). The awards will be presented to winning asset managers at a gala reception on June 12, 2008 in Paris on the occasion of the EDHEC Institutional Days, before an invited audience of investors, asset managers, investment banks, and other industry advisers and suppliers.
The aim of the IAMAs is to use state-of-the-art financial research to reward asset managers on an objective basis. For the first time Europe’s institutional
asset management industry will have an awards programme based on objective
and transparent criteria. 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.
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.
On the one hand, the authors argue that standard implementation efforts of the factor-based approach, arguably the most natural and straightforward way to tackle the hedge fund replication problem, have mostly failed in thorough
empirical tests to produce satisfactory results on an out-of-sample basis. They also argue that the payoff distribution approach, on the other hand, while insightful and found to generate (relatively) satisfying results on an out-of-sample basis, unfortunately cannot be regarded as a method suitable for
performing hedge fund replication, at least not in a sense likely to meet investors' expectations, due to its documented failure to match a number of relevant time-series properties of hedge fund returns. 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...
More than $200bn has flowed into commodity markets over the past five years, fuelling the rapid growth of investable indices and leading to a proliferation of new investment opportunities. Among the options for investors seeking exposure to commodities are: buying into natural resource companies, implementing a commodity futures programme, investing in long-only futures indices and their derivatives or via managed accounts, commodity pools,
mutual funds, hedge funds and funds of funds.
Financial investment in consumable and transformable assets is a very recent phenomenon and one of modest magnitude relative to the size of the underlying commodity markets or in comparison with other alternative classes and strategies. More...
For the fourth edition of the season, the Alpha League Table focuses on the United Kingdom. This ranking of asset management firms confirms the leadership of the biggest names in the City of London.
Aberdeen is at the top of our rankings. Its excellent rankings last year are thus
confirmed. It not only offers substantial average alpha, but is also capable of generating it from a significant portion of its actively managed funds. In second place is Jupiter Asset Management, a subsidiary of one of the largest German banks, Commerzbank AG. Third place belongs to M&G Securities, a
subsidiary of Prudential, the leading British insurance company.
The rankings are dominated by the firms that attract the largest asset inflows in their countries. So it is no surprise to see such firms as Schroders, Fidelity, Invesco, or M&G Securities among the top ten.
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...
Having ranked French, Italian, and Spanish asset management firms this year, the latest edition of the EuroPerformance EDHEC Alpha League Table is devoted to Switzerland. One of Geneva’s most renowned banks—private
bankers Lombard Odier Darier Hentsch—holds the top spot in this year’s ranking
of asset-management firms and this year yet again private banks dominate the rankings, occupying four of the top five spots. The rankings
are dominated by world-renowned firms attracting high levels of asset inflows.
As such, the rankings contain few surprises and—with eight holdovers from last year’s top ten—confirm the results of the previous edition.
The average score of the top ten firms in this ranking is 0.8%, a slight
improvement over last year (0.6%). This improvement is the result of an increase in the frequency of “alpha” funds (from 27.4% last year to 33.6% this year) and of a 16-basis point fall in average alpha (from 2.56% in 2006 to 2.4% in 2007).
A new EDHEC position paper entitled "QIS3: meaningful progress towards
the implementation of Solvency II, but ground remains to be covered", by Samuel Sender, Research Associate with the EDHEC Risk and Asset Management Research Centre, and Philippe Foulquier, Director of the EDHEC Financial Analysis and Accounting Research Centre, contains EDHEC's views on the third Quantitative Impact Study carried out by CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) at the request of the European Commission within the framework of the Solvency II project. This position paper follows a series of EDHEC publications on the new solvency and supervisory standard for European insurance undertakings. "CP20: Significant improvements in the Solvency II framework but grave incoherencies remain" contained EDHEC's answer to CP20, a consultation process initiated by CEIOPS.
Following the French investment management rankings, the second publication of the Alpha League Table 2007 is devoted to Spain and Italy. The Alpha League Table compares asset management companies on the basis of their capacity to deliver positive alphas. The table’s leading companies are the best providers of alpha, i.e., those that offer a good compromise between the value and frequency of the alphas produced.
These second rankings confirm the award winners from the previous edition. In Spain, two companies are ranked joint 1st: Bankinter, which was already crowned in 2006, and Ibercaja Gestion, a subsidiary of the Ibercaja Group. In the top 5 in Italy, we find companies that were already present in the previous rankings: Pioneer, Sella Gestioni and Bipiemme Gestioni. The winner of the 2007 edition for Italy is Banca Intermobiliare di Investimenti e Gestioni, a private bank specialised in personal wealth management.
The Alpha League Table compares asset management companies on the basis of their capacity to deliver positive alphas. The table’s leading companies are the best providers of alpha, i.e., those that offer a good compromise between
the value and frequency of the alphas produced. This second ranking for France
reveals considerable stability in the production of alpha, with 17 of the 25 ranked companies appearing for the second time. This confirms that the alpha
being produced is the result of a management process that is more to do with the talent of the asset managers than with the configuration of the markets. 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...
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 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...
The latest international conference organised by the EDHEC Risk and Asset Management Research Centre proved to be a great success, with 810 delegates attending the two-day EDHEC Institutional Days & ETF Summit 2006 at the CNIT in Paris on November 21st-22nd. 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.
EDHEC and EuroPerformance have released their rankings of the top UK asset management companies: the Alpha League Table. Compared to the results obtained by leading asset managers in France, Italy and Spain, the figures from the UK are truly remarkable, with the top five companies obtaining a score of at least 2.5%. Average alpha for the entire list is 3.11%, with this figure being slightly higher among the insurance companies (3.62%) and asset managers (3.22%). The banking subsidiaries post average alpha of 2.61%.
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...
Asset Management Research
Following on from the success of its Hedge Fund Days in London (800 delegates) and Asset Management Days in Geneva (600 delegates), the EDHEC Risk and Asset Management Research Centre will be organising its inaugural two-day EDHEC Institutional Days 2006 at the CNIT in Paris on 21-22 November next. More...
Asset Management Research
As part of its aspiration to widely disseminate the results of its academic
research programmes, the EDHEC Risk and Asset Management Research Centre
has launched a circuit of three academic conferences allowing industry
practitioners and academic representatives to meet and exchange views on the
themes most relevant to the investment management industry in its largest context. Several attractive partnership opportunities exist for sponsoring these events.
To mark the first anniversary of the EDHEC Hedge Fund Diversifier Benchmarks, the EDHEC Risk and Asset Management Research Centre and Lyxor Finance, jointly organised a breakfast seminar at Le Meurice hotel in Paris on 8th June to present the year’s results. Noël Amenc, PhD, Director of Research at EDHEC Business School and Director of the EDHEC Risk and Asset Management Research Centre, gave a presentation entitled "EDHEC Hedge Fund Diversifier Benchmarks: Concept and Results" to an audience of French institutional investors. 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. More...
In the past few years, the EDHEC Risk and Asset Management Research Centre has enjoyed a very fruitful collaboration with Hedge Funds Review. The monthly publication of our academic articles has provided Hedge Funds Review with an original point of view on numerous hedge fund topics and has been very successful in bringing our research to the attention of alternative
investment professionals. More...
This third edition of the Alpha League Table concerns asset management companies in Switzerland. Out of the 51 companies that were eligible, only the best ten have been distinguished by taking account of the number of funds analysed and the steady creation of alpha. The results are extremely tight, with a score of 0.97% for the top-ranked company and 0.22% for the tenth-placed company in the selection. Even more dramatically, the top three are only separated by a hair’s breadth with a difference of less than one hundredth of a point! After the scores obtained by the French (Financière de l’Echiquier – 4%), Italian (Anima – 1.5%) and even Spanish asset managers (Gesbankinter – 3%), the results from the Swiss asset managers may appear to be slightly lacklustre, with the leader only obtaining a score of around 1%. However, that is not the case at all... More...
Following the success of the recent EDHEC Asset Management Days (April 2005, Geneva) and EDHEC Hedge Fund Days (February 2006, London), the EDHEC Risk and Asset Management Research Centre has decided to organise the first edition of the EDHEC ETF Summit in Paris, on November 21st and 22nd, 2006. More...
The EDHEC Risk and Asset Management Research Centre was invited to participate in the "Forum de la Gestion Institutionnelle" (institutional investment forum), which took place in Paris on March 15th and 16th. More than 1,000 people attended the two-day conference at the Palais des Congrès. More...
EDHEC and EuroPerformance have released their rankings of the top Italian and Spanish asset management companies: the Alpha League Table 2006. The rankings were constructed on the basis of a genuine measure of alpha, using a methodology developed by EDHEC which corresponds to the state-of-the-art in financial research. In terms of alpha creation in both Spain and Italy, internationally invested funds dominate. A possible explanation lies in the low stock market capitalisation of the countries and the need for managers to look for higher levels of liquidity in larger markets. More...
The EDHEC Hedge Fund Days 2006, which were held at The Brewery in London from February 14-16, were a major success, bringing together more than 1,000 people in total, including institutional investors and their advisors, hedge fund and fund of hedge funds managers, and other practitioners with an interest in alternative strategies and institutional investment. From originally being one of the only events in Europe organised by an academic research centre for the benefit of professionals, the EDHEC Hedge Fund Days are now quite simply one of the biggest events on the hedge fund calendar.
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...
Following the launch of the EuroPerformance-EDHEC Style Ratings, the innovative system for rating the performance of European mutual funds, which measures the performance with regard to the risks that were really taken by the managers while at the same time taking the extreme risks being run and the managers’ capacity to generate outperformance into account, the French financial daily "La Tribune" asked EDHEC to apply the same approach to rating funds of hedge funds. The results of the inaugural rankings were published in France on December 13th. More...
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...
The EuroPerformance-EDHEC Alpha League Table was launched in Europe on November 15th. At a time when passive investment offerings are becoming more prevalent, it seems indispensable for both the asset management industry and investors to be able to identify talented active management “producers”, who, over and above the returns procured naturally by the fund’s long-term exposure (beta) to market and style risks, are capable of providing their clients with outperformance (alpha). More...
For the last four years, Edhec and EuroPerformance have been involved in producing the rankings for the Agefi Asset Management Awards. This year’s awards were held at Christie’s in Paris on October 19th. As in previous years, the rankings were established on the basis of the managers’ ability to produce “alpha”, or abnormal returns above and beyond the “normal” rewards due to the risks that the manager had taken. More...
Alternative Investment Education
Explosive growth in the funds flowing into alternative investments, institutional investors’ increased appetite for hedge funds and calls for greater regulation have heightened the need for standards within the industry. With examinees at the July exam session at an all time high and early registrations for the February testing period breaking new records, the Chartered Alternative Investment AnalystSM designation is being confirmed as the global standard of excellence in the alternative investment industry. 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.
Jean-Christophe Meyfredi When risk managers make decisions, they need them to be based upon reliable measures. Strong assumptions are often made to simplify the risk estimation process and there has to be a trade-off between ease of estimate and accuracy. In this paper, “Is there a gain to explicitly modelling extremes? A risk measurement analysis”, Jean-Christophe Meyfredi of the Edhec Risk and Asset Management Research Centre develops a copula-based approach in order to estimate the Value-at-Risk of portfolios containing financial assets. He proposes a survival copula, the Heavy Right Tail copula, which could solve many difficulties that risk managers currently have to face. 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 spite of the recent advances in hedge fund indexing, designing good hedge fund indices remains a particularly challenging task in the face of challenges that are specific to the alternative investment industry. Two distinct purposes have to be distinguished: i) an index can be used as a benchmark for investments in specific styles, instruments or locations; or ii) it can be used as an investment vehicle. Each of these two purposes is associated with some challenging construction requirements. In particular, indices that act as benchmarks have to be representative, i.e., they should accurately reflect the whole universe of hedge funds following a particular style. On the other hand, indices that act as investment vehicles are obviously required to be investable in addition to being representative. More...
Alternative Investment Education
A record number of candidates sat the examinations leading to the Chartered Alternative Investment AnalystSM certification last month. More than 1,700 individuals representing 400 institutions worldwide have received or are seeking the professional designation that is becoming the industry’s hallmark of excellence. Acquiring a sound knowledge of alternative investments or keeping up with the latest advances to better serve investors are key motivations for joining the programme. Obtaining an independent certification of skills to increase credibility and develop a competitive edge is another powerful incentive drawing individuals and firms towards the CAIA designation. More...
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. More...
An increasing number of financial institutions are using interns to inject young blood into their organizations. Interns not only provide companies with short-term assistance but are also a resource pool and breeding ground for future permanent employees. Graduate finance programmes at EDHEC Business School can be tapped as a source of high-potential, well-trained and internationally-minded new recruits for the asset management industry. As most graduate students secure internships and permanent positions during winter, now is the right time to approach them. Learn more about the benefits of internships and find out how leading financial institutions approach future graduates. More...
Increasing competition in the algorithmic trading space and prospective phenomenal growth in Direct Market Access (DMA) have led to several challenges for the buy-side and the sell-side. After analysing the situation from various perspectives, it is interesting to observe the disparity in interests and perceptions of both sides of the industry. Perhaps is it the right time for broker-dealers to take a fresh look at their clients’ needs and re-examine their strategies for order execution and/or business segmentation. More...
Explosive growth in the funds flowing into alternative investments, institutional investors’ increased appetite for hedge funds and calls for greater regulation have heightened the need for standards within the industry.
Founded in 2002 under the auspices of Thomas Schneeweis of CISDM and Florence Lombard of AIMA, the Chartered Alternative Investment Analyst AssociationSM is a vocal advocate of education and professionalism in the field of alternative investments, as well as being the sponsoring body for the CAIASM designation, the educational standard that is quickly becoming the hallmark of excellence in the alternative investment industry.
Recognized globally, the CAIASM charter certifies an individual’s mastery of the concepts, tools and practices essential for managing traditional and modern alternative vehicles such as real estate, private equity, commodities, hedge funds and managed futures.
The Edhec Business School and its research centre focusing on risk and asset management have entered into an agreement to launch Edhec-Risk Advisory, a consultancy firm concentrating on supporting the buy-side industry to meet the numerous challenges that it will have to face over the coming years in the risk management discipline. More...
Alternative Investment Education
EDHEC Business School has entered into a landmark agreement with the Chartered Alternative Investment Analyst AssociationSMand become its exclusive official provider of CAIASM exam preparatory courses for Europe. More...
Following on from the Edhec European Alternative Multimanagement Practices Survey, Edhec Business School has decided to set up a European consultation process for the improvement of fund of hedge fund reporting. This initiative is intended to be a response to criticism of the inappropriate content of the reports that are addressed to European investors, as highlighted by the Edhec European Alternative Multimanagement Practices Survey.
Initial results indicate that investors and FoHF managers agree on the most important issues:
- FoHF activity reports can be published every month. For 67% of the respondents, all major issues in both the performance and risk dimensions could be accounted for in a report issued on a monthly basis.
- FoHF activity reports should contain an in-depth analysis of the risk dimension: respectively 74% and 68% of the respondents consider that a style analysis and factor analysis should be included in the report, on top of traditional risk measures like volatility or drawdown measures.
With the objective of conducting a European survey on Best Execution, Edhec-Risk Advisory has approached more than 150 institutions including the largest European investment managers.
The final results of this initiative were presented on the 9th June to 50 representatives of the largest investment firms and main brokerage houses. The survey enabled the current positioning of European Fund Managers vis-à-vis their new obligation of achieving transaction best execution to be assessed. The survey has revealed a major change in the relationship between asset managers and their intermediaries. More...