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Business Analysis - September 30, 2004

Edhec-Risk Advisory: Delivering Expert Consultancy

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.

Run by a team of professional management consultants who together have more than 60 years of experience in the capital markets and asset management industries, Edhec-Risk Advisory provides state-of-the-art solutions in a pragmatic way.

Leveraging the high level of expertise developed within the Edhec Risk and Asset Management Research centre, Edhec-Risk Advisory supports the major industry players in meeting the challenges of risk management and accompanies buy-side firms together with their service providers from strategy inception to system implementation with a unique blend of expertise that can not be found within traditional consultancy firms.

Genesis of the initiative

The creation of Edhec-Risk Advisory directly results from the analysis of the main findings of the first “Edhec European Asset Management Practices Survey”. This survey, conducted in the summer of 2002 and published in March 2003, has depicted a series of core issues that the industry will have to deal with over the coming years.

If it is true and widely recognised that the asset management industry is going through a severe economic crisis due to the diminution of assets under management, pressure on management fees and the absence of efficient management of their cost base, these difficulties are even less well accepted in that the value propositions of the industry are being challenged by investors. On the one hand, the industry is reaching the limits of the commercial offerings that are widely publicised and that favour management objectives too close to indices, where high management fees and high portfolio turnover costs do not find a natural justification in light of the mediocre returns offered. Moreover, the industry has not yet widely embraced the broad possibilities offered by management techniques based on derivatives that enable products to be built with different risk profiles.

On the other hand, the alternative management industry that leads the innovation race has not yet solved the numerous issues that are limiting its generalisation, such as the lack of a recognised regulatory framework, high management costs and high levels of extreme risk such as option risk, volatility risk, liquidity or operational risk.

As a result, more than simply consolidation, the natural consequence of over-fragmentation and tight economic times, the industry is facing a complete reshaping and has to re-invent itself dramatically. Rather than following the traditional active vs. passive segmentation, we believe the industry will converge towards a model closer to the reality of the management process. It seems clear that the consolidation is following the core-satellite model where asset managers might either position themselves on the one hand as providers of tracker funds, products with low margins but very large economies of scale or, on the other hand as producers of extremely actively managed funds for which higher management fees, if not linked to performance, make sense. This model, however, also requires the emergence of a third party, assembling the various components available on the market and in charge of strategic allocation, selecting the providers, as well as conducting risk and performance monitoring on behalf of the final investor. In this context, it becomes clear that these asset managers, and their various service providers, will have to establish clear differentiating capabilities such as the capacity of managing risk on an industrial basis.

Additionally, recent regulatory changes such as UCITS III, the European Capital Adequacy rule and the revision of the European Investment Services Directive, represent major factors that need to be considered by asset managers in the context of a tight economical situation and fierce competition with Investment Banks, who are much more advanced in the art of managing these challenges.

The risk management discipline is moving onto the agenda of investment managers who have very recently started investing in the infrastructure required to support a risk-aware organisation. More commercial offerings are structured around the specific risk profiles of the product ranges (structured products, asymmetric risk profiles, etc).

These structural changes are not minor as they will affect all levels of the organisation, from governance, to organisation and operations, and will require the implementation of more complex information technology. These changes will be even more brutal in that the regulator is closely monitoring the developments happening in the industry and driving the change through new legislation.

But the fundamental question for asset managers will be the strategic choices they will make with regards to implementation. Solutions developed in the risk management discipline are not always mature and the difficult balance between the disciplined mathematical frameworks and pragmatic operational solutions will be hard to achieve.

A straightforward response to challenging debates

Edhec-Risk Advisory has been created to respond to this need and to provide a blend of operational and industry expertise mixed with the appropriate level of academic and research input. We are offering a range of services that covers all types of risk, from market to operational through to liquidity risks, supporting the resolution of regulatory, organisational and operational, as well as technological challenges.

Our offerings are targeted at the asset management industry in its widest definition. This does include pure institutional and retail asset managers, but also hedge funds, pension funds, insurance companies and private banks as well as their main service providers such as brokers, custodians, administrators and transfer agents who wish to transform their service offerings.

Most challenges of the industry happen to be at European level (from regulatory to competition). We are therefore positioning ourselves as service providers on a European basis. With offices in Paris, London and Nice, the Group is building a true European capability that supports this strategy.

The consultancy paradigm shift

Under new economic conditions, financial institutions no longer intend to use advisors in replacement of staff, as an adjustment variable to fixed costs, but simply to call in advisors who will bring and transfer expertise on the very specific questions that pave the risk management discipline.

Our clear differentiation factor lies in the fact that we have combined academic, research and industrial expertise in a discipline that requires high levels of focus. By nature, we are involved in the very early stages of research into the various issues related to risk management and are accompanying our clients in the development and implementation of solutions in a true industrial environment.

The foundations of Edhec-Risk Advisory are built on three founding principles:

  • Pragmatism in the search for solutions to implement adequate changes in the governance, organisation and system.

  • Selection of unique international expertise in the quantitative and qualitative risk management disciplines.

  • Development of synergies between the academic and research expertise of Edhec with the professional experience of industry consultants.

These principles allow Edhec-Risk Advisory to offer a competitive portfolio of services that suits the current needs of investment managers and their service providers.

The path to a successful initiative

In almost one year of operation, Edhec-Risk Advisory has successfully delivered more than twelve projects to leading European financial institutions. These projects range from strategic positioning to system analysis and cover a wide array of high-profile themes. A list of some of the projects carried out so far and the major clients who have accepted to advertise their names is available.

A broad services offering focused on our areas of expertise

Edhec-Risk Advisory specialises in high-profile advisory exclusively to financial institutions, focusing on their clients' needs. The offering ranges from Strategy and Governance to Operations and Technology, while also encompassing traditional and alternative investment activities. Additionally, Edhec-Risk Advisory offers a unique capability with regards to producing market analysis and independent surveys, leveraging its extensive network of buy-side contacts.



A challenging environment

Our services offering is a response to the pressing needs that financial institutions are facing from multiple sources.

With a heavy regulatory agenda (CAD III, Basle II, UCITS III, Hedge Fund Regulation, Sarbane Oxley, etc.), investment firms and their service providers are facing intense regulatory scrutiny. This regulatory pressure is accompanied by similar scrutiny from clients who are reconsidering the interest of the products and offerings developed so far. With the increasing visibility of appealing, sophisticated products such as hedge funds and capital guaranteed products, investors are tending to review their allocation and to reconsider the fees associated with traditional investments.

These new client and regulatory environments are forcing changes in an industry that is also suffering from the fundamental changes that are affecting the overall financial industry. Shrinking margins, outsourcing capabilities and enhanced technology all represent complex situations that financial institutions have to face in order to remain competitive.

Our offering has been designed to create an environment where financial institutions will find the appropriate level of expertise (content and process) to support their major initiatives, from inception to delivery.

Our Clients

In almost one year of operation, Edhec-Risk Advisory has established itself as a leading specialist firm, capable of delivering high-profile expertise in a professional manner.

As of September 1st 2004, our client list encompasses more than 10 European institutions, including:

  • ABN-AMRO (UK)
  • Euronext (FR)
  • Fonds de Réserve pour les Retraites (FR)
  • Misys (FR)
  • Petercam Capital (UK)
  • Reuters (UK)
  • The New Millennium Group (UK)
  • The Alternative Investment Management Association (UK)

High-Profile projects

Projects carried out by the consultants forming the Edhec-Risk Advisory team encompass a wide range of activities. These projects are related to all levels of the organisations that we support, including strategic positioning, operations, organisation and technology strategy, as well as systems design and implementation.

Strategic Positioning

  • Strategic study on the use of Exchange Traded Derivatives in the context of active fixed income portfolio management.
  • Development of a Prime Brokerage blueprint, market and competitive analysis.
  • Strategic positioning of software and data services targeting the hedge fund industry.
  • Definition of the entire service offering of a UK brokerage firm with regards to Direct Market Access and Algorithmic Trading capabilities.

Operations & Organisation

  • Development of an Operational and Technology blueprint for providing administrative services to hedge funds, development of the implementation roadmap.
  • Selection of an independent organisation for controlling execution costs.
  • Development of an Operational and Technology blueprint for servicing hedge funds.
  • Development of a framework for assessing brokerage services and allocating execution flows.

Systems

  • Design and specifications of a system for controlling execution costs post-trade and allowing for automated pre-trade routing decisions.
  • Support for implementing an advance Value at Risk system for pre-trade risk analysis and ex-ante tracking error analysis.
  • Design of an operational dashboard for wholesale services.
  • Development of a set of requirements related to the implementation of a state-of-the-art risk management infrastructure for a fund of hedge funds.
  • Design and implementation of a central Transaction Database aiming at consolidating trades intra-day and providing an instant snapshot of exposures for risk management purposes.

Proprietary market studies

  • European survey on Best Execution.
  • European survey on buy-side attitude towards algorithmic trading.
  • European study of investors' needs with regards to cash and collateral management.

Our People

Our management team provides a blend of highly experienced professional management consultants who have been active in the financial industry, and dedicated experts:

  • Jean-René Giraud, Chief Executive Officer, 10 years of experience in financial technology across Europe.

  • François Bouquet, Partner in charge of our Paris representation, 30+ years of experience in leading financial institutions and management consulting firms.

  • François Champarnaud, Partner, 20+ years of experience as an economist, compliance manager in leading financial institutions and head of department with the French regulator COB (now AMF).
The management team is supported by permanent consultants providing incontestable expertise in the following areas:
  • Risk management systems (Algorithmics, Apollo, Kondor+, Sophis, etc.)
  • Front office and trading
  • Compliance and regulation
  • Alternative investments
  • Brokerage and custody
When necessary, Edhec-Risk Advisory consultants are supported by academic experts and financial engineers allocated to the Edhec Risk and Asset Management Research Centre. Access to this level of expertise provides a unique blend of skills that traditional management consultancy firms are not in a position to offer.

Jean-René Giraud

Jean-René Giraud is C.E.O. of Edhec-Risk Advisory, the consulting arm of the Edhec Risk and Asset Management Research centre where he also focuses on operational and extreme risks for investment managers and hedge funds.

Prior to joining Edhec, Jean-René worked with the management consultancy firm Capco, focusing on operational issues related to investment management companies. As such, Jean-René was in charge of several risk-related initiatives within major European investment banks in London.

Jean-René joined Capco after three years of experience with Barclays Capital Technology where he was in charge of the implementation of a transaction database collecting real time trades for risk monitoring and management purposes. Jean-René has a technical background and he spent over 7 years with SIP Software, in charge of the implementation and integration of an institutional portfolio management system.

Jean-René graduated from ESSI (French grande école for Computer Sciences) in Nice-Sophia Antipolis.


François Bouquet

François joined Edhec-Risk Advisory in January 2004 as a Partner in charge of the Paris office. With an impressive thirty year career in the banking industry, François was successively Partner with Arthur Andersen (now Accenture), Head of Back & Middle offices at BFCE and President of Diagram before finally joining Deloitte Consulting as a Partner. During his career in management consultancy, François has gained a solid experience with more than 30 European financial institutions.

Francois focuses on large-scale change management initiatives impacting the entire organisation and requiring leading management capabilities.

François graduated from ESSEC and holds a DECS.


Francois Champarnaud

François joined Edhec-Risk Advisory in April 2004 following a successful twenty year career with leading institutions such as Deutsche Bank, where he was responsible for Compliance for the Group in France. François started his career in the French Ministry of Finance as an economist, followed by several positions within the French Regulator (Commission des Opérations de Bourse) where he headed the market regulation and planning department.

François holds a Masters in economics and graduated from the Ecole Nationale d’Administration (ENA).

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