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‘Companies are owned by their shareholders’ is considered an unassailable truth. In fact, it is wrong. Another related myth is that shareholder value should be paramount. This is not correct, either. The former is refuted by eminent legal authorities on both sides of the Atlantic, while the latter is increasingly debunked by industry leaders. More...
20/03/17

Risk and Asset Management Research
In the Spring 2017 issue of the Research Insights supplement to Investment & Pensions Europe we aim as ever to provide European institutional investors with an academic research perspective on the most relevant issues in the industry today. Multi-factor models are standard tools for analysing the performance and the risk of equity portfolios. In addition to analysing the impact of common factors, equity portfolio managers are also interested in analysing the role of stock-specific attributes in explaining differences in risk and performance across assets and portfolios. In our article, produced as part of the CACEIS "New Frontiers in Risk Assessment and Performance Reporting" research chair at EDHECRisk Institute, we explore a novel approach to address the challenge raised by the standard investment practice of treating attributes as factors, with respect to how to perform a consistent risk and performance analysis for equity portfolios across multiple dimensions that incorporate micro attributes. More...
09/03/17

Over recent years, a number of concerns have been expressed about the (ir)relevance of existing forms of corporate and sovereign bond indices offered by index providers. One of the major problems with bond indices which simply weight the debt issues by their market value is the so-called “bums’ problem” (Siegel, 2003). Given the large share of the total debt market accounted for by issuers with large amounts of outstanding debt, market-value-weighted corporate bond indices will have a tendency to overweight bonds with large amounts of outstanding debt. It is often argued that such indices will thus give too much weight to riskier assets. While it is debatable whether debt-weighting really leads to the most risky securities being over-weighted, it is clear that market-value debt weighted indices lead to concentrated portfolios that are in opposition with investors’ needs for efficient risk premia harvesting, which involves holding well-diversified portfolios. More...
05/12/16

Fixed Income Securities
Fixed-income investing is a strategic area of development for EDHEC-Risk Institute, with an increasing number of relevant questions for investors, including the smart harvesting of interest rate and credit risk premia, the impact of a zero-interest rate environment on bond portfolio management, or efficient interest rate risk management in retirement investing solutions. In this context, EDHEC-Risk Institute enjoys the privilege of being able to rely on the expertise of some of the world’s very best experts in the area of fixed-income Securities. More...
05/12/16

Risk and Asset Management Research
In the Autumn 2016 Scientific Beta special issue of the Research Insights supplement to Investment & Pensions Europe, we first clarify the conceptual underpinnings and the need for diversification in factor investing, discuss the benefits of combining various factor strategies, the evolution of multi-factor allocation in recent times and the key features that distinguish the various multi-factor offerings. We show that it is possible to reconcile environmental and financial objectives using low carbon indices. While these indices achieve an environmental objective by excluding high carbon stocks, and thus putting pressure on high polluting companies to reform, they achieve a financial objective by retaining exposure to rewarded risk factors and by maintaining a high level of diversification. More...
21/09/16

Commodities
This column was excerpted from Hilary Till’s prepared remarks at the commodity panel during the New York Society of Security Analysts (NYSSA) event on June 30th, 2016, “A Global View of Commodity Markets.” Hilary Till is a Research Associate with EDHEC-Risk Institute. More...
30/06/16

Commodities
Examining whether a futures curve is in contango or backwardation can be useful in three circumstances. Over sufficiently long time horizons, a clear relationship between a futures market’s returns and its futures curve shape is clearly observable. And further, in choosing amongst commodity futures contracts for long-term investing, the curve shape has been found to be a key differentiator amongst commodity markets. Lastly, in the crude oil futures markets, over sufficiently long time horizons, the curve shape is a very useful toggle for determining whether one should continue with structural positions in crude oil futures contracts, especially when combined with examining the oil market’s spare capacity situation. More...
03/06/16

Risk and Asset Management Research
In the May 2016 issue of the Research for Institutional Money Management supplement to Pensions & Investments, the first article addresses the issue of combining several smart beta strategies, clarifies the conceptual underpinnings and relevant questions arising when considering smart beta index combinations and introduces the Scientific Beta six factor multi-smart factor indexes. More...
11/05/16

Commodities
Can U.S. shale producers be regarded as the new swing producers in the crude oil markets? This brief article will address this question from both a physical-oil-market standpoint and from an energy-financing standpoint. The article will conclude that basically the answer is no unless one adopts a very flexible definition of “swing producer.” More...
25/04/16

Indices & Benchmarks
Professor Lionel Martellini outlined, in a presentation at the EDHEC-Risk Days 2016 conference, how pension funds could increase their liability hedging without sacrificing investment performance. Normally, there is a trade-off between these two different objectives. These are catered for by the establishment of two separate portfolios, the liability hedging portfolio (LHP) and the performance-seeking portfolio (PSP), as prescribed by academic theory and are respectively designed to achieve the aims of liability hedging and optimal investment performance. More...
21/03/16

Risk and Asset Management Research
The spring 2016 issue of the Research Insights supplement to Investment & Pensions Europe is an ‘EDHEC-Risk Days Special’ that ties in with the flagship conference presented by EDHEC-Risk Institute in London in March 2016. We compare different approaches to the design of factor indices in the equity space, notably concentrated indices and more diversified indices. We analyse broader and more narrow stock selections, as well as two different weighting schemes – equal-weighting and cap-weighting. Overall, it appears that concentrated factor tilts lead to implementation challenges that are not compensated by better risk-adjusted returns. More...
29/02/16

Risk and Asset Management Research
The February 2016 issue of EDHEC-Risk Institute's Institutional Money Management supplement to Pensions & Investments is a “smart factor investing special” in which we first look at the performance of smart factor indexes that are constructed based on combining a stock selection that targets a factor tilt with a diversified weighting scheme known as Diversified Multi-Strategy. We focus on assessments which take into account long-term evidence and on the performance observed after the commercial launch of the index. Every smart factor index outperforms the corresponding concentrated cap-weighted factor index over both the long term and the live period, providing very strong evidence of the robust benefits of diversification. More...
03/02/16

Indices & Benchmarks
The lack of benchmarks in infrastructure investment is holding back institutional investors. In studies spearheaded by Professor Blanc-Brude, EDHEC has come up with a feasible and practical program for the way forward but the challenges facing the industry for its implementation are formidable. More...
10/12/15

Risk and Asset Management Research
The November 2015 issue of EDHEC-Risk Institute's Institutional Money Management supplement to Pensions & Investments is an “infrastructure investing special” in which our first article argues that a number of characteristics associated with the structuring of capital projects constitute a much more powerful framework to understand, benchmark and predict long-term returns in infrastructure debt or equity. Thus, infrastructure investment can be construed as a way to buy claims on future cash flows created by long-term contractual arrangements between parties. In numerous cases, infrastructure investors do not actually own any steel or concrete. When they do, the value of their investment is conditioned not by the tangible nature of the asset, but in a license to operate a natural but regulated monopoly. More...
02/12/15

Risk and Asset Management Research
In the autumn 2015 Scientific Beta special issue of the Research Insights supplement to Investment & Pensions Europe we begin by looking at ‘quality’ investing and more specifically the role of two separate equity risk factors related to balance sheet characteristics: low investment and high profitability. These factors rely on straightforward, parsimonious indicators, and can be expected to provide more robust performance benefits than ad-hoc stock picking indicators of quality used in the industry. Further value can be added by allocating across these two factors to exploit the low correlation across factor returns. Such combinations of the smart factor indices for high profitability and low investment have led to improved performance compared to various commercial indices which are based on ad-hoc definitions of quality. More...
30/09/15

Risk and Asset Management Research
In the August 2015 issue of the EDHEC-Risk Institute's Institutional Money Management supplement to Pensions & Investments, we look first at the consequences for investors of the development of passive equity investment and “smart beta” indexes. A key issue with these indexes that has not yet been resolved, and is not being attended to properly by regulators, is their level of transparency and the provision of detailed information on the indexes to investors. Even though the historical performances of these indexes are simulated for the most part, it is not possible to check the accuracy and the quality of these track records because the market does not have sufficiently detailed historical compositions and construction methodologies to be able to replicate the performances. EDHEC-Risk Institute has responded to this situation by setting up Scientific Beta, a platform that provides free access to the most detailed information possible on the risks, compositions and methodologies of thousands of smart beta indexes that are representative of the rewarded factors documented in the academic literature. More...
24/09/15

Indices & Benchmarks
Lionel Martellini, director of the EDHEC-Risk Institute, summed up in a presentation at the EDHEC conference in London in March this year the difficult challenges involved in the emergence of meaningful smart beta solutions in fixed-income. He pointed out that the smart beta concept in fixed-income was still relatively immature compared with its firm grounding in equity investment practices. He went on to say that the motivation for smart beta inevitably arises from the shortcomings of current bond benchmarks, which are mainly the lack of investability, poor diversification and wrong risk exposures. Accordingly, a successful smart beta bond benchmark must avoid problems in each of these three areas. More...
08/09/15

Risk and Asset Management Research
In the May 2015 issue of the P&I EDHEC-Risk Institute Research for Institutional Money Management supplement, we begin by examining the role of two separate equity risk factors related to balance sheet characteristics: Low Investment and High Profitability. These factors rely on straightforward and parsimonious indicators, and can be expected to provide more robust performance benefits than ad-hoc stock picking indicators of “quality” used in the industry. Further value can be added by allocating across these two factors to exploit the low correlation across factor returns. Such combinations of the smart factor indexes for high profitability and low investment have led to improved performance compared to various commercial indexes which are based on ad-hoc definitions of “quality.” More...
09/07/15

Indices & Benchmarks
Smart beta products are catching on fast with investors, justifiably so as it is a powerful tool in their armoury of techniques for risk management and control. The strong appeal of this concept lies in what it stands for, index replication. The flaws of the traditional cap-weighted indices are well-documented and smart beta products are meant to provide superior alternatives. More...
26/06/15

Human Capital
Human capital is the most valuable asset of an individual but it is still neglected and ill-understood despite having been studied since the early 70’s. “Human capital, that colossal collection of assets, is also the most mysterious: illiquid, trading in no market, unverifiable in value, yet surely it has an immense influence on all investment decisions and the macro economy”. For example, in the United States, human capital represents an overwhelming majority (nearly 90%) of the assets (including home equity and private business) of young investors (under 30), and still a sizeable proportion (nearly 50%) for people aged between 51 and 60. Human capital is estimated to constitute 82% of Norway's wealth per capita, far greater than its petroleum wealth. More...
10/06/15

Risk and Asset Management Research
The spring 2015 issue of the Research Insights supplement to Investment & Pensions Europe is an ‘EDHEC-Risk Days Special’ that ties in with the flagship conference presented by EDHEC-Risk Institute in London in March 2015. We begin by exploring the economic rationale behind the various "factors" in the equity space. Rather than accepting new factors based on back-tested performance improvements, investors may be better advised to assess the theoretical groundings behind a factor. Having a convincing explanation should be a key requirement for investors when they decide to gain exposure to a given factor, as a theoretical justification of an observed effect provides some safeguard against data-mining. More...
13/04/15

Risk and Asset Management Research
The February 2015 issue of EDHEC-Risk Institute's Institutional Money Management supplement to Pensions & Investments is a “Liability-Driven Investing Special” in which we first examine the evolution of pension fund investment management from asset management to asset-liability management and risk and asset-liability management, and from liability-driven investing to dynamic liability-driven investing, concluding with a survey of institutional investors who provide insights on current practices in these areas and how those practices compare to those prescribed in the academic literature. More...
13/04/15

Indexes and Benchmarking
Index providers and asset managers have been prolific at creating equity strategies which tilt towards various “factors.” While early attempts at factor investing concentrated on the small cap and value factors, we have seen a proliferation of factors that are supposed to be captured by investment products, including momentum, carry, “quality,” and earnings revisions, to name but a few. Rather than accepting new factors based on the back-tested performance improvements they bring, investors may be well advised to assess the theoretical groundings, i.e. the economic rationale, underlying a factor. More...
17/02/15

Institutional Investment
A long-term concern over possible enhanced inflation uncertainty has increased the need for investors to hedge against changes in price levels, a problem of particularly critical importance for pension funds that have pension payments explicitly indexed with respect to changes in consumer price levels. More...
13/02/15

Institutional Investment
The first and most important dimension to take into account when dealing with pension fund investment problems is the impact of the presence of pension liabilities on the allocation strategy. This question has naturally raised substantial attention in academic research, where it has given rise to the emergence of two separate strands of the literature. A first strand of the literature, mostly from the field of operations research, has focused on developing early comprehensive models of uncertainty in an asset-liability management (ALM) context, which have served a formal basis for the development of surplus optimisation methodologies. More...
13/02/15

Performance
Clients of asset management firms need to have more information than merely whether or not a portfolio manager outperformed a benchmark and by how much. They need to know the reasons why a portfolio manager realized the performance relative to the benchmark which can be either a bond index, smart beta, or a customized index More...
12/12/14

Regulation
Whenever there is a crisis in financial markets, there is a call for greater regulation of these markets and the financial institutions that operate in these markets. It is not clear, however, whether more tightly regulated markets would also be more stable, or whether they would function better than those that are less tightly regulated. In fact, Lo (2012) reviews twenty-one books on the crisis, of which eleven are written by academics and ten by journalists and a former Treasury Secretary, and finds that there is little agreement across these books, with the books disagreeing about the events characterizing the financial crises, the factors explaining the cause of the crisis, and hence, the appropriate measures to deal with the crisis. More...
12/12/14

Asset Management
Multi-asset funds, also referred to as mixed-asset funds, are taking off. While strong tail winds drive their growth, some players are beset by problems. The demand for these funds comes from both retail and institutional investors. The retail public know them as “absolute-return” funds. For the smaller institutions lacking the resources for internal asset allocation, typically pension funds with less than €460m, multi-asset funds are an appealing medium. More...
23/09/14

Investment Management
Catastrophe bonds (CAT bonds) are a major category in the class of securities known as insurance-linked securities or ILS. Their purpose is to crowd-source reinsurance coverage, in order to reduce reinsurers’, insurers’, and self-insurers’ reserve requirements and reduce their cost of coverage. At the same time they are attractive to investors, because the risks they cover are virtually uncorrelated with other risks such as equity market risk, interest rate risk, and credit risk. More...
09/09/14

Indexes & Benchmarking
Sophisticated institutional investors have started to review factor-based investment strategies. For example, the Parliament of Norway, which acts as a trustee for the Norwegian Oil Fund, commissioned a report on the investment returns of the fund. This report was requested after the fund’s performance fell short of the performance of popular equity market benchmarks. The resulting report (Ang, Goetzmann and Schaefer 2009) showed that the returns relative to a cap-weighted benchmark of the fund’s actively-managed portfolio can be explained by exposure to a set of well-documented alternative risk factors. After taking into account such exposures, active management did not have any meaningful impact on the risk and return of the portfolio. More...
08/07/14

Asset Management
Big data has become big business for companies hoping to exploit it. But financial services groups and in particular, asset management houses, now have compelling reasons to treat the topic much more seriously. The task of crunching the ubiquitous data overload has become magnified in recent years. The average company in 15 of the 17 US commercial sectors has more data in its systems than the Library of Congress, according to the consultants McKinsey. More...
03/07/14

Risk and Asset Management Research
In the summer 2014 issue of the Research Insights supplement to Investment & Pensions Europe we aim as ever to provide European institutional investors with an academic research perspective on the most relevant issues in the industry today. We report on the results of a survey of European institutional investors conducted by EDHEC-Risk Institute on their perceptions and expectations with respect to the governance and transparency of indices. The survey shows that institutional investors are not particularly impressed by the current level of transparency in the indexing industry and reveals that end-users strongly support higher standards of index transparency. More...
03/07/14

Asset Management
US hedge funds have been allowed a new freedom to market themselves to the public at large, against the intense opposition of the mutual fund industry. Even top hedge funds are not enthusiastic. The Jumpstart Our Business Start-ups Act, signed in 2012, made it easy for small fledging companies to be more accessible to investors. It was widely believed at the time that the act was not intended to give hedge funds greater freedom, as opposed to facilitating wider industry start-ups. But in fact it did so. More...
02/05/14

Portfolio Management
Alpha has had a remarkably long run as the Holy Grail of investment. Many investment managers claim to have alpha, and all desire it. A top investment web site is called Seeking Alpha. The Financial Times’s daily news commentary on financial markets is named Alphaville. Journalist Sebastian Mallaby, in his 2010 paean to hedge funds, “More Money Than God,” rests his case for the superiority of hedge funds in general on one academic study’s conclusion that although the average hedge fund trailed the S&P 500, it earned three percentage points of alpha. The persistence of the impression that small company stocks are superior to large company stocks is due chiefly to a finding of positive small-cap stock alpha in a 30-year-old paper. It is no coincidence that “alpha” is to investment machismo what “alpha male” is to manhood. Yet arguments for the value of alpha are tenuous. More...
16/04/14

Asset Management
The proposed Financial Transaction Tax (FTT) that is being driven by 11 countries in the EU, and is widely referred to as the “Tobin Tax” or “Robin Hood” tax, has been ruled illegal by the European Union’s own lawyers. But, rather than aborting the tax, this could lead to something much worse. The legal service of the European Council that represents member states has pointed out that a central aspect of the plan would exceed member states’ tax powers under international law, would infringe on the rights of member states that had not agreed to the tax, and could breach competition rules. More...
03/03/14

Alternative Investments
Measuring hedge fund performance is a very difficult and challenging task, not only because of the very specific nature of alternative strategies and their risk factors, but also because of the way they report their performance to databases. Contrary to traditional mutual funds, hedge funds are generally not allowed to advertise their performance, although this is slowly changing with the introduction of the JOBS Act in the United States which allows small hedge funds to advertise. Thus, listing their funds in the various hedge fund databases (HFR, TASS, CISDM, etc.) is the most common way to get assets and recognition from investors. However, hedge fund databases are notoriously flawed with some well-known biases (survivorship, backfill, etc.). More...
13/02/14

Risk and Asset Management Research
The winter 2014 edition of EDHEC-Risk Institute’s Research Insights supplement in co-operation with Investment & Pensions Europe addresses what we consider to be some of the key topics of importance for institutional investors today. Our first article, drawn from the Russell Investments research chair at EDHEC-Risk Institute on Solvency II, looks at the treatment of bond investment within the framework of the Solvency II Directive. More...
16/01/14

Behavioural Finance
In addition to their ancestry, individuals also inherit financial genes, which have a significant and long-lasting effect on their approach to investing throughout their careers. A significant portion (30%) of the variation in risk taking of individuals is explained by their genetic makeup. This “financial DNA” is an important factor alongside characteristics such as education, age, gender or level of wealth. Recent studies have shed new light on the value/growth debate by virtue of the nature versus nurture debate. More...
07/01/14

Institutional Investment
The recent and spectacular bankruptcy of the city of Detroit has not only resulted in a heightened concern amongst workers and retirees that their pension claims may never be honoured; it has also revived the long-lasting debate over the proper approach to the valuation of pension liabilities, as the official value for the pension liabilities was found to have been severely underestimated, with a $3.5 billion hole that suddenly appeared in Detroit's pension system. A similar debate is currently raging in Europe, in particular in the Netherlands, where the government is seeking to keep the retirement system viable through the use of an appropriately adjusted discount rate that would lead to a lower reported value for Dutch pension fund liabilities. More...
12/12/13

Infrastructure Investment
A recent research quandary with respect to infrastructure equity investment has also been a source of interrogation for final investors: while the economics of underlying infrastructure investment suggests a low and potentially attractive risk profile, the experience of investors and available research evidence have been different and rather mixed. This article, based on recent research we have conducted, attempts to explain why this has been the case and what new research and benchmarking efforts are necessary to create investment solutions that realign expectation and observed investment performance as well as to inform the regulatory debate in relation to institutional investing in long-term assets like infrastructure equity. More...
20/09/13

Indexes and Benchmarking
Investors are willing to gain exposure to market volatility for a variety of reasons, such as diversifying equity risk, hedging an existing short volatility exposure, or simply taking directional bets. Over-the-counter (OTC) or exchange-traded volatility derivatives using volatility indices as underlyings to alleviate losses during market downturns are increasingly being relied on, based on the negative correlation between equity returns and volatility which has been well-documented in the academic literature. More...
20/09/13

Regulation
Irrespective of the choices made in Europe, regulators in Asia can develop domestic or multilateral regulatory overlays on the UCITS foundation to improve the management of non-financial risks, or draw on these ideas to update domestic fund regulation or define the contours of a regional fund passport. The last decade has been marked by the materialisation of non-financial risks on an unprecedented scale. More...
20/09/13

Indexes and Benchmarking
A number of quantitative weighting schemes have been shown to produce robust outperformance with respect to standard cap-weighted equity indices over long time periods. Over periods ranging from a few months to a few years, however, such alternative weighting schemes can generate substantial downside risk relative to cap-weighted indices, which would be a source of concern for most investment managers or chief investment officers. Drawing on results in a recently published research article, this article discusses the issues with relative risk of alternative weighting schemes and potential ways to address them through applying basic risk management principles (diversification and hedging) to design portfolios of alternative weighted strategies. More...
05/09/13

Alternative Investments
Unlike the older parts of the financial industry that grew up adjacent to, or in ready walking distance from, a stock exchange or a central bank, private equity and hedge funds have found their footing and taken their rightful place in the current financial hierarchy at a time when technology has freed them from both physical locations and the need for “safety in numbers.” Perhaps that is part of the reason why a growing number of people in positions of influence and power have begun to express concerns about these new financial entrepreneurs. More...
05/09/13

Sovereign Credit Risk
This article discusses results from recent EDHEC-Risk Institute research on whether it is possible to reliably categorise stocks by their exposure to sovereign risk in order to create equity portfolios with low sovereign risk exposure. It uses robust estimation techniques to measure stock return sensitivities to changes in sovereign credit default swap spreads. The main finding is that such a measurement of sovereign risk exposure of stocks is reliable out-of-sample: in bad times where negative news occurs on sovereign risk conditions, our low sovereign beta portfolios indeed outperform high sovereign beta portfolios. Our approach thus provides a way of identifying which stock portfolios will allow an investor who is already exposed to sovereign risk to avoid loading up on exposure to the same risk factor in his equity investments. More...
04/07/13

Asset Management
Resurgent shareholder activism has been terrorising boardrooms in North America. In Europe too, activism is on the rise, though more muted. In 2012, investment funds aiming at profiting by instigating change in companies on the whole had a marvellous year, with many of them producing performances well exceeding that of the US stock market and most active mainstream funds. More...
07/06/13

Asset Pricing
There is an interesting discrepancy that exists in the academic literature between the theoretical predictions from standard asset pricing models regarding the risk-return relationship and the results obtained by researchers who have analysed this relationship in equity markets from a purely empirical perspective. On the one hand, theory suggests a positive relationship between risk and return. This relationship should be strictly positive for systematic risk measures, and positive or zero for specific risk measures. Standard asset pricing models first suggest that systematic risk should be (positively) rewarded, that is stocks with higher betas should earn a higher expected return. More...
22/05/13

Asset Management
The impact of the shift to fees from commissions in the UK and USA has long been expected to cause upheavals in the adviser community. What is perhaps less appreciated is that it might reshape the asset management industry in a way that reduces its traditional dynamism. The philosophy in the US that advisers act in their clients’ long-term interests is on the surface heavily backed by leading brokers. The biggest of them have been enhancing their training back-up and infrastructure in the transformation of their top salesmen into much better counsellors looking after clients’ needs. More...
15/05/13

Risk and Asset Management Research
The latest issue of EDHEC-Risk Institute’s Research Insights supplement in partnership with Investment & Pensions Europe (IPE) was published concurrently with the EDHEC-Risk Days Europe conference in London, which was held on 26–27 March, 2013. Some of the pages in the supplement address topics presented at EDHEC-Risk’s flagship European conference. More...
15/05/13

Indices & Benchmarks
EDHEC-Risk Institute is seeking to draw the attention of investors to the risks of traditional smart beta equity indices and propose a new approach to smart beta investing to take account of these risks. This new approach, referred to as “Smart Beta 2.0,” enables investors to measure and control the risks of their benchmark and revolutionises the offerings of advanced equity benchmarks. Smart Beta 1.0 indices present systematic and specific risks that are neither documented nor explicitly controlled by their promoters. This inadequate level of information and of risk management calls into question the robustness of the performance presented and implies considerable risk-taking that is not controlled by investors when they choose new equity benchmarks. More...
18/03/13

Indexes and Benchmarking
Narasimhan Padmanaban, Masayoshi Mukai, Lin Tang, Véronique Le Sourd There has been increasing demand for equity indices in Asia. This is because global investors wish to benefit from the region’s growth, and consequently from its financial markets. As many 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. This study addresses that question by focusing on three aspects: efficiency, concentration and stability. More...
05/03/13

Alternative Investments
Commodities have become an important asset class. But investors moving into physical commodities has intensified political opposition that was already strong when commodity investment was mainly channelled through financial instruments. The technical merits and social implications of the physical versus financial routes to commodity investments are analysed in this article. More...
12/02/13

Risk and Asset Management Research
In 2004, EDHEC-Risk Institute introduced a new type of conference aiming to bring research insights to investment professionals. These events present the research done by EDHEC-Risk Institute and discuss it with the investment community. In 2012, the institute exported its conference concept to Asia in order to give Asia-based finance professionals easier access to state-of-the-art research in investment and risk management and to establish a dialogue around research results with particular relevance to investors and institutions in Asia. More...
05/02/13

Commodities
The rising interest of institutional investors for commodities since the early 2000s prompted remarkable financial engineering in the commodity index space which is now in its third generation. Broadly speaking, the first generation commodity indices are long-only and do not pay much attention to the fundamentals of backwardation and contango; the second generation indices are also long-only but attempt to lessen the negative blow on performance of contango while exploiting backwardation; and the third generation indices are long-short and capitalise on both the price appreciation associated with backwardation and the price depreciation relating to contango. More...
07/12/12

Asset Management
The post-mortem on the much-publicised Libor rate rigging scandal is well underway in the world’s financial capitals. What is important to fund managers is how the false rates might have affected investors in the past, and what their future options are in terms of Libor or a possible alternative for contracts based on short-term interest rates. More...
05/12/12

Institutional Investment
This short paper highlights the key conclusions of Amenc et al. (2012) regarding the best practices for managing risks in defined-contribution (DC) and hybrid plans. Pension funds can be described, according to Sender (2012), based on their degree of hybridity between the pure defined-contribution (DC) and pure defined-benefit (DB) systems. In a DC scheme, each member owns a certain number of units in a fund; for a given member, the market value of his or her pension is the number of units times the net asset value per unit. More...
26/11/12

Alternative Investments
Infrastructure has been recognised as a potential solution to the world’s economic difficulties since the credit crisis and holds the promise of providing a bonanza for the private sector worldwide. Though bedevilled by politics and hampered by other obstacles, the signs are that the sector is beginning to take off. More...
09/11/12

Private Wealth Management
Wealth management was the fastest-growing segment of the asset management industry before the credit crisis. It had a serious setback during the crunch, as many of the rich suffered from burnt fingers, partly due to bad advice. It now seems to be bouncing back, in terms of the wealthy both increasing in number and beginning to take more risk. Asia in particular is a magnet for global wealth managers, given the relatively static nature of the sector in the West. More...
24/10/12

Regulation
EDHEC-Risk Institute strongly welcomed the ETF guidelines released by the European Securities and Markets Authority (ESMA) on July 25, 2012, which are consistent with the conclusions of EDHEC-Risk Institute’s research on ETF risks and ESMA's consultation paper, which were both published earlier this year. These guidelines go further than the consultation document in two notable areas: the first is securities lending, where ESMA indicates clearly that all profits from securities lending should be returned to the fund. It is clear that this subject comes as a surprise to industry participants. More...
25/09/12

Regulation
The International Organization of Securities Commissions (IOSCO) Consultation Report titled “Principles for the Regulation of Exchange Traded Funds” (CR05/12, March 2012) was prepared by IOSCO Technical Committee Standing Committee on Investment Management (TCSC5). The report presents what it describes as “proposed common investor-protection principles or guidelines on Exchange Traded Funds (ETFs)” and “touches on certain market structure and financial stability issues.” TCSC5 requests comments on these principles and guidelines, as well as comments on a number of specific concerns. More...
05/07/12

Risk and Asset Management Research
At the EDHEC-Risk Days Europe conference, which was held at The Brewery in London from 27–29 March, topics ranged from the risks and benefits of exchange-traded fund investments, the performance of equal-weighted portfolios, the new forms of equity indices and the benefits of inflation-linked corporate bonds to the protection afforded by the AIFM Directive, management of portfolio volatility, skewness as an asset class and the determinants of private equity investments’ returns. More...
18/06/12

Investment Management
Stock markets developed centuries ago to channel savings into growth and development. Recent disturbing trends suggest that western stock markets are failing on the two fronts of primary capital-raising and providing reasonable secondary market liquidity for the most important and dynamic small company sector of the economy. More...
15/06/12

Academic Research
It has become fashionable to blame the financial industry for its alleged role in the current crisis. It is certainly true that high-flying bankers, who often arrogantly flaunt their large bonuses, are the perfect scapegoats. However, with the facts at hand, this search for an ideal culprit is perhaps a bit too simple to be fair. In the present article, we review several issues over the past five years in which political expedience seems to have taken precedence over scientific facts. More...
22/05/12

Indices and Benchmarking
A year ago Russell launched its defensive and dynamic indexes - together known as the Russell Stability Index Series - initially for the US market but now extended to include both Global and European versions. These are based on the work of Russell U.S. manager research analysts who recognised that some managers’ returns within each of the broad value and growth styles were less correlated with the cyclical sectors of the market than other managers’ returns. More...
25/04/12

Investment Management
In recent years, hedge funds have attacked the business of traditional asset managers, targeting their customers, both the institutions and the retail public. But the signs are that the mainstream is successfully fighting back. Hedge funds going into these new territories have been driven by two important developments. Firstly, the UCITS III directive, which came into force a few years ago, allowed a version of hedge funds to be sold to retail investors under the much-prized UCITS label. Secondly, a large element of the hedge funds’ customer base, high-net-worth individuals, were put off in 2008 by their inability to withdraw funds from the hedge fund sector. More...
13/04/12

Performance
In the world of institutional investment, the performance of the office property sector has traditionally been valued using indices constructed from appraisal values, rather than values derived from transactions. This is a direct result of the following: (i) low transaction volume of office properties compared to the value of the stock (typically 3-5% on an annual basis); (ii) the OTC organisation of the market, which limits any centralisation of data; and (iii) the heterogeneity of traded goods. More...
04/04/12

Asset Management
Developments across several fronts do not add up to a pretty picture for the asset management industry. The fact that the trends have been clear for some time does not make the pain any less for asset managers. Many groups have been in denial, hoping for the best, and that has probably made matters worse, catching many players unprepared. In a further development, US asset managers are grabbing market shares and, on a number of fronts, are posing a serious threat to the European fund management industry on its home ground. This comprises yet another worry for the latter, beset as they are by poor demand from their domestic investors. More...
21/03/12

Commodities
Public scrutiny of, and skepticism about, commodity futures markets has had a long tradition in both the United States and in Continental Europe, dating back to (at least) the last great era of globalization in the 1890’s. Over the past 120 years, two determinations have historically prevented futures trading from generally being heavily restricted. The first supportive determination has been a general (although not unanimous) recognition by policymakers that futures markets serve a legitimate economic purpose. More...
15/03/12

Commodities
In recent research produced as part of a project on “Exploring the Commodity Futures Risk Premium: Implications for Asset Allocation and Regulation” at EDHEC-Risk Institute conducted with support from CME Group, we looked at three aspects of long-short dynamic strategies for commodity portfolios: the performance characteristics of long only portfolios and long-short portfolios; the volatility of long only portfolios and long-short portfolios; and the correlation between traditional asset classes (equities and bonds) and commodity investments when traditional asset classes are experiencing high volatility. More...
14/03/12

Alternative Investments
In February 2012, EDHEC-Risk Institute responded to the UK Treasury’s Call for Evidence about the reform of the Private Finance Initiative (PFI) with a particular reference to the opportunity for pension funds to invest in infrastructure assets, which the UK Treasury has earmarked as a priority theme. In a new publication, we extend our response to the issues relating to pension fund investment in social infrastructure. Social infrastructure investments have by design the characteristics that pension funds find attractive in a liability-driven investment context: long-term contracts with steady and predictable inflation-linked income, high operating margins and high risk-adjusted return. Social infrastructure also corresponds to the bulk of the assets procured under the PFI and a model that has successfully been exported to the rest of Europe, and beyond to Asia and the Americas. More...
23/02/12

Commodities
The CFTC has rescinded the exemption from registration that Rule 4.13(a)(4) provided to commodity pool operators and commodity trading advisors whose investors are qualified purchasers or accredited investors. As the exemption from registration was widely relied upon, the amendment imposes significant new compliance requirements for many funds. More...
21/02/12

Executive Education
Unemployment among young people is rife both in the developed countries and many other areas of the world. A major reason is a skills mismatch, whereby many of the unemployed have skills and education that employers do not want or need. On the other hand, the qualifications, training and experience that employers are looking for are lacking in this vast pool of unemployed, and companies are therefore short of the people they need. This problem has ramifications for many industries, including financial services and fund management. More...
20/02/12

Indexes and Benchmarking
When the FTSE EDHEC-Risk Efficient Index Series was launched in 2009, the only information available on the performance of these indices was based on their back-history. While a related academic research paper has shown that efficient indexation achieves robust risk-adjusted outperformance compared to cap-weighted indices over different market conditions in the past fifty years, there was no real-life test of the strategy. This test is now available, since the five indices launched initially, covering the main international markets, have now been live for two years, from November 2009 through November 2011. More...
20/01/12

Asset Management
Investment in real estate is largely in the commercial sector worldwide, with institutions not hugely interested in houses. Things are different in Switzerland, where pension fund exposure to property amounts to 19%, with a strong preference for residential property, which is regarded as more stable than commercial property, according to the asset management firm Swisscanto. This is in sharp contrast to the UK. More...
20/01/12

Asset Management
The expansion of the middle classes in emerging countries is supposed to be good for the investment management industry. But a prospective scenario for middle-income earners worldwide could be calamitous instead. The growth of the middle classes in the late 19th and early 20th centuries established the foundations of modern fund management. In previous centuries, wealth was largely inherited or entrepreneurial, and out of reach of the middle classes. More...
20/12/11

Alternative Investments
Infrastructure is a potential way out of the world’s economic difficulties, but it seems to be bogged down in partisan political arguments, particularly in the USA. The politics, risks and opportunities of this new asset class are examined, along with developments that will bring heart to the retail public, who are badly looking for inflation protection. More...
15/11/11

Portfolio Management
Since minimum variance portfolios have only the objective of lowering risk, rather than aiming to optimise the risk/reward ratio, minimum variance portfolio optimisation leads to a pronounced concentration in low volatility stocks at the expense of exploiting correlation properties. While minimum variance portfolios are not optimal portfolios, they may be suitable for investors who wish to load up on low-risk or ‘defensive’ stocks. More...
15/11/11

Risk and Asset Management Research
The latest edition of the EDHEC-Risk Institute Research Insights supplement in IPE is a special issue to celebrate the 10th anniversary of EDHEC-Risk Institute. Since it was founded in 2001, the institute has endeavoured to remain faithful to its “research for business” approach, by providing research that is both academically excellent and relevant and useful for the industry. In the latest supplement, we look at the industry-sponsored research that has been developed at EDHEC-Risk Institute over the past ten years. More...
24/10/11

Investment Management
The Retail Distribution Review (RDR) has come under fierce attack from authoritative European sources, and how retail investors receive advice is also in the melting pot in Europe, the UK and the USA. The UK Parliament is additionally exerting pressure on the Financial Services Authority (FSA). The problems are compounded by disagreements about the way forward among the various nation states of the European Union (EU). Other European regulatory proposals designed to protect the retail public add to the potential confusion. There is, however, some comfort for the FSA from across the Atlantic. More...
24/10/11

Investment Management
Rising inflation is a fact of life worldwide. More ominously, some authorities in the developed world are signalling that some inflation would help to get their economies out of the public debt hole, as happened after the Second World War. US commentators in particular are pointing to the anchoring of inflation expectations as a reason for not worrying. Many are not convinced. More tellingly, the all-important issue of accounting in the presence of inflation is being resurrected. It was debated in the ‘70s, but has been largely dormant since. More...
22/09/11

Regulation
Since the beginning of the financial crisis, the practice of short selling has come under heightened scrutiny with regulatory reactions differing across countries. Investors short stocks for many reasons, some betting on the fall of a share’s price due to overvaluation, others as part of convertible arbitrage or long/short strategies, and many for hedging purposes. However, the practice is contentious and during sharp market declines short sellers are often cited as putting undue downward pressure on prices, thereby exacerbating negative price moves. Much of the recent activity in regulation is aimed at reducing this potential harmful effect of shorting. More...
20/09/11

Risk and Asset Management Research
Following the Spring 2011 issue earlier in the year, the Summer 2011 edition of the EDHEC-Risk Institute Research Insights supplement to Investment & Pensions Europe has now been released. In the first article in the new supplement, "Is there a risk/return trade-off across stocks? An answer from a long-horizon perspective," Felix Goltz and Dev Sahoo address one of the key questions in modern finance from both an academic and practitioner perspective: are investors rewarded for investing in high-risk stocks by enjoying higher expected returns? More...
25/08/11

Investment Management
The already substantial evidence against the paradigm that “equities are a good bet for the long term” has been reinforced by recent academic studies. However, there are escape routes, which unfortunately may be available to only a few. The reports also add a fresh slant on the topic of passive investment vehicles. Currently there is a heavy commitment by the asset management industry as a whole to: passive investment in traditional equity indices, through ETFs and index funds; exposure to mainstream equity funds dedicated to active investment; and emerging market equities. More...
01/08/11

Indices and Benchmarking
Investors have always considered bonds a safe haven in which to park a share of their wealth. And in recent years passive investment has become increasingly popular with investors looking for easy, straightforward options. But mixing bonds and passive investment turns out to be more complex than it first appears. Fixed-income indices are rather more difficult to pin down than their equity equivalents, for reasons we explore in the enclosed publication. And although corporate bond indices have been around for some time, it is only recently that practitioners and academics have begun to discuss them. In the last decade, debate has swirled around bond indices, and questions such as how a bond index should be built, what its objectives should be, for whom a particular bond index is suitable, and so on have been examined in the literature. More...
30/06/11

Investment Management
UCITS have become a highly respected global brand, attracting customers from all over the world in the last few years. Their reputation is now in danger from two directions: from Asia in the long term and possibly, more immediately, from within Europe itself. More...
27/06/11

Regulation
On May 25, 2011, the Securities and Exchange Commission (SEC) adopted rules under Section 922 of the Dodd-Frank Act to create a whistleblower programme that rewards individuals who provide the agency with tips that lead to successful enforcement actions. The new programme will enable the SEC to attempt to overcome its limited staffing and financial resources. More...
26/05/11

Socially Responsible Investment
Impact investment has in common with socially responsible investment (SRI) the motivation to take note of the social impact of business activities. But it is the antithesis of the latter in another sense. SRI focuses on avoiding harm, whereas impact investment is to do with positively and proactively doing good while still earning a return. SRI is a controversial issue. It is argued that investors should not be obliged to contribute to the avoidance of socially harmful activities any more than anyone else. Furthermore, whether portfolios focusing on SRI actually earn better returns than other investments is a matter for doubt, based on evidence to date. The fund managers concerned might be violating their fiduciary obligation to their clients, unless they had a specific mandate from the latter to follow SRI policies. More...
16/05/11

Risk and Asset Management Research
The EDHEC-Risk Institute supplement to Investment & Pensions Europe for the first quarter of 2011 was recently released. We are delighted to be teaming up with IPE to provide information on research-based solutions to some of the key challenges facing institutional investors today. One of these challenges is the evolution in the asset management industry whereby passive investment is becoming increasingly important. In such a context, the selection of the right benchmarks will totally condition the risk-adjusted return of investors’ core allocation. Being an informed passive investor thus assumes being attentive to the choice of benchmark. In the first article in the supplement, "Alternative Weighting Schemes: Conditions for Optimality?" Felix Goltz and Lionel Martellini look at what alternative equity weighting schemes could be used by investors in the light of the shortcomings of cap-weighted indices. More...
27/04/11

Alternative Investments
Much has been written about the low correlation between managed futures strategies and the S&P 500. However, over certain periods, the correlation between the two can be quite high. Previous research has shown that the distribution of estimated pairwise correlations is broad and symmetrical when the true correlation is low (i.e. large sampling error). More...
27/04/11

Investment Management
Facebook has become in recent months, one of the hottest shares traded on a market. Yet given that it is unlisted and an initial public offering (IPO) is not expected until 2012 at the earliest, how is this managed? The answer is that there is an exciting, and unregulated market. A pioneering approach to share dealing is taking off in the US, with the prospect of it expanding worldwide by plugging a significant hole in currently available facilities. More...
26/04/11

Investment Management
A 30-day taxable money market fund offers an average yield of 0.04%. Why do investors bother with this minuscule, effectively zero, return, although clearly many do? Their reasons, and an analysis of the underlying background and future prospects, do not concern just the ‘boring’ world of money market funds, but are important on a wider scale. There are huge ramifications for the asset management industry, as well as a serious systemic risk to the financial system. More...
10/03/11

Alternative Investments
After the boom and bust of the past few years, infrastructure investments are regaining their image as safe and sound, in addition to being looked upon as a solution to the world’s economic woes, as outlined in the first of the two-part article published last month. In this second part, recent developments underlining the short-term positives, negatives and uncertainties are highlighted. Events in two disparate countries emphasise the importance of politics in assessing infrastructure, a factor many investors overlook when carried away by short-term enthusiasm. A major controversy has followed the hiving off of the operation of Chicago parking meters to a Morgan Stanley consortium in 2008, referred to in the first part of this article. This has potential implications for the willingness of US local authorities to continue their programme of infrastructure sales. More...
22/02/11

Alternative Investment
Massive investment in infrastructure, embracing both new developments in areas such as green energy and badly needed regeneration of existing stock, is seen as not only essential for the global economy but also providing it with a substantial stimulus in the years to come. This sector has had a bad time during the recent credit crisis, but there are signs of it picking up. It might seem far-fetched but infrastructure looks like being a possible way for western economies to solve their huge public sector debt problems. At least, this might be particularly true of the USA. More...
20/01/11

Institutional Investment
The current crisis reemphasizes the necessity of a well-founded strategic risk management that focuses on funded ratio risk, rather than on implementation risk. In this paper we describe our methodology on how strategic risk management of a pension fund should be organized. The key message is to lay down an ambition that is feasible under the risk appetite of the pension fund and which is accompanied by a suitable investment strategy. The investment strategy should be based on an ALM study that determines the strategic asset allocation that satisfies the risk limits in the most efficient way. More...
12/01/11

Private Wealth Management
Far-reaching developments embracing the future of offshore centres, prospects in Asia and the Swiss reaction to these are set to change the landscape of global wealth management. Leading offshore centres such as the Channel Islands, Liechtenstein and Luxembourg are all haemorrhaging funds, a result of the wealthy shifting their assets back onshore. Stringent government measures aimed at tax evasion, coupled with tax amnesties as well as the economic crisis, are leading to this move back onshore. The decline of offshore money in wealth management is unsurprisingly causing the biggest difficulties to Swiss private banks, which hitherto have been globally dominant. The big debate currently under way is whether the integrated universal banking approach is the best for servicing the wealthy. More...
06/12/10

Investment Management
“Emerging markets” have become an asset class that is both fashionable and recently very rewarding in share price terms. However, the very notion of “emerging markets” now needs to be reviewed. “The shock to public finances is undermining the analytical relevance of conventional country classifications,” according to Mohammed El-Erian, the Chief Executive of Pimco, who is widely respected as a thought leader. He points out that the traditional idea of the division between “advanced” and “emerging” economies is now being undermined by a growing number of the former having significantly poorer prospects with respect to their economies, finances and risk, compared with the latter. More...
19/11/10

Investment Management
From mid-2007 through the first quarter of 2009, financial markets were shaken by a series of shocks. It is important that the investment management industry learns lessons from this crisis to understand what needs to be done differently going forward. Everyone in the industry will need more ‘science’, a more systematic consideration of the true risks that lie ahead, be they the risk of extreme events, liquidity risk, counterparty risk or systemic risk. At the same time, investors are asking for more transparency in products and processes and are increasingly reluctant to pay high fees for low returns. The industry needs to propose strategies and a fee structure more aligned with today’s reality. More...
04/11/10

Risk Management
After the credit crisis, practitioners are rushing for better, more frequently updating risk models. Daily stock market data are used in multifactor risk models by commercial software vendors or in trading desk risk models. The use of daily data is motivated by the fact that risk (unlike return) estimates are becoming more and more precise as we increase the observation frequency. This allows us to estimate risk models with the required degrees of freedom on shorter time intervals. We simply do not have to include a lot of economically irrelevant history to satisfy our need for data. Equally, it allows us to include more explanatory variables for the same time interval, without having to worry about arriving at noisy estimates. However, this advantage comes at a cost that is worryingly overlooked. Daily data exhibit autocorrelations as well as spuriously low correlations due to little common trading time over the course of a day. More...
27/10/10

Regulation
After a long period of gestation and debate, regulatory initiatives in both the US and Europe have either come into law or are approaching fruition, but they are widely criticised for failing to meet desired objectives and for adverse effects. More...
25/10/10

Regulation
Many US and international fund managers previously exempt from registration under the Investment Advisers Act of 1940 must now, as a result of passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, contemplate registration with the US Securities and Exchange Commission within the next 10 months. This article summarizes the implications for US and non-US fund managers including registration, record-keeping, reporting and other compliance requirements, and “Volcker Rule” provisions. More...
15/10/10

Business Analysis
Over the past decade or so, all of the major European economies have made substantial changes to their corporate rehabilitation frameworks, essentially moving them closer to a US Chapter 11-style framework. Their main aim has been to assist the survival chances of insolvent companies with viable businesses. The ongoing difficulties in the credit markets are providing an environment in which we will see these laws put to the test. More...
08/09/10

Asset Management
Many mainstream asset management businesses are facing a question over their future, and various forces, including regulatory developments, suggest that a reshaping of financial services, and asset management in particular, might be on the cards. Two unorthodox investment vehicles, one old and one new, point to intriguing possibilities. More...
23/07/10

Socially Responsible Investment
The growth of socially responsible investment (SRI) is a major ongoing trend in the global asset management industry. A study by Eurosif estimated that the European SRI market grew 102% between 2005 and late 2007. Eurosif put the value of this market at €2.7 trillion out of a total of €13.5 trillion for the asset management industry. SRI would thus have 17.6% of the market. This growth, as it happens, dovetails with changes in society, the agents of which, whether individuals or institutions, are seeking to make their investments meaningful, whether their concerns are social or environmental. In response to these “concerned” agents has appeared, a vector of a better world, a range of virtuous product offerings. This idyllic view of the SRI world should, of course, be opposed. It’s not that the intentions are not honorable, but that the diversity of those involved and the vagueness surrounding the themes are highly problematic. More...
19/07/10

Performance
Currency plays an important, yet often complicating, role in performance attribution. The currency dimension has many faces. We have to differentiate between local, base, and reporting currency. Besides, currency can be viewed as an asset class or as a risk factor that is managed in an overlay. It is this variety that might cause difficulties in dealing with currency in the analysis of investment decisions. In this article we describe how to properly measure performance of currency overlay programmes. Recent events in the European monetary union have sparked new anxiety in financial markets across the globe. The Euro fell to its lowest level in more than 3 years against the dollar, as investors dropped the currency on their flight to safety. Investors fear a collapse of the economies of EMU countries because of the burden of government debt. More...
07/07/10

Capital Markets
Asset management houses, institutional investors, and the retail public to a lesser extent, sit at the end of the purchasing chain as companies resort to public bond markets in place of bank loans. This is good news for those fund management companies, which have the expertise to analyse credit. One of the key questions is, when banks retreat, as they have to, from providing credit, how will the gap be filled? To some extent, part of the gap should not be closed, as deleveraging is required, particularly in the UK and the USA. Some of the vacuum will have to be filled by private investors acting through mainstream bond funds and hedge funds, and credit analysis will become a growth sector. More...
18/06/10

Institutional Investment
At a conference in Paris on June 8-9, EDHEC-Risk Institute examined the key challenges currently faced by French institutional investors. The topics discussed included the measurement and integration of operational and counterparty risks in asset management, new forms of risk management in institutional investment, and the risk and performance results for socially responsible investment after the financial crisis. In this article, Noël Amenc, Director of EDHEC-Risk Institute, provides a detailed summary of EDHEC-Risk Institute’s views on risk management, asset-liability management and asset allocation in the current institutional investment environment. More...
10/06/10

Investment Management
The way bonds in the western economies are bought and sold is undergoing several radical changes, affecting all participants, ranging from banks to dealers, asset managers, retail customers and the issuers, including governments. Asset managers have to come to terms with the new dealing practices, as the relationships between them and the dealers are in evolutionary mode. It is interesting that the banks are shifting their role to supporting government bonds with the vast amount of deposit money they get from the public. In effect, the role of the banks is undergoing a partial shift from being an intermediary for capital allocation in the private sector to becoming more like an agent of the government. More...
18/05/10

Investment Management
Convergence of mainstream asset management and alternative hedge funds has been much talked about for some years, but has not been realised on any significant scale until recently. The benign influence of the Ucits III directive coming into force a couple of years ago has been the major impetus behind convergence. It allowed mainstream fund managers to supply hedge fund-type, though regulated, products to their traditional customer base, while also permitting hedge funds to reach out to the same customers. More...
21/04/10

Alternative Investment
Private equity is supposed to outperform its public counterpart, but the opposite was true for most of 2009. By the fourth quarter of 2009, public equity markets had bounced back from crisis lows, but private equity remained in the doldrums. The players in this sector were not idly waiting for better times, however, but were in general making the most of adverse circumstances, in keeping with their entrepreneurial mind-set. More...
24/03/10

Institutional Investment
The upcoming Solvency II guidelines will have a profound influence on capital budgeting and risk management for insurers. For example, under Solvency I the investment policy has no impact on the solvency ratio. This picture will change completely under Solvency II. The investment policy in terms of the asset allocation and asset duration will therefore have a large impact on the capital requirements. It may also be the case that by reducing the short-term risk (as measured by the required capital) the long-term expected return also decreases. Insurers should therefore perform additional multi-period calculations for different stochastic scenarios to truly optimize their risk / return trade-off in terms of setting the appropriate investment policy. More...
23/03/10

Asset Management
Accusations of dark behaviour in two separate situations threaten to undermine the probity of the asset management industry on a global basis, with far-reaching ramifications. The issues of corruption and criminality are rearing their ugly heads in two important sectors of the US asset management industry, hedge funds and pension funds. The first embraces what, in its October cover story, Institutional Investor refers to as the “dark underworld of the US public pension system” and the second has to do with insider dealing. More...
17/02/10

Business Analysis
The banking crisis and the furore about bonuses have sparked two major debates. The first concerns how the company profits pie should be divided between employees and shareholders. The second has to do with the latter’s role in corporate governance, given perceived shareholder failure to reign in bank excesses. This debate has led to radical changes being put forward for shareholder ownership structures. More...
22/01/10

Risk Management
The serious and potentially systemic danger posed by counterparty risk hit the headlines last year. Regulators naturally reacted. The fear was that, should one bank default on its counterparty obligations, a chain reaction could set in, as those who dealt with it in turn get into trouble, and so on. More...
15/12/09

Performance
In 1986 Brinson et al wrote: “Many [pension] funds that employ multiple managers focus their attention solely on the problem of manager selection”. Astonishingly, that is often still the case; performance evaluation has still not reached the level that was considered appropriate almost a quarter of a century ago. Brinson et al were the first to provide a systematic framework to quantify so-called allocation and selection decisions. The Brinson model has long dominated the toolset of performance analysts. However, in today’s asset management environment it falls short of providing a comprehensive analytical framework. More...
25/11/09

Investment Management
Whatever happens in the short-term, that shares are a good long-term bet is a cherished paradigm in the investment industry. Another universally-held belief asserts that economic growth is good for equities. In this article, we discuss recent authoritative research that has undermined both of these beliefs. More...
23/11/09

Risk Management
The European Commission consultation on the UCITS depositary function is necessary and welcome, because it puts an end to a long period of European ignorance of the importance of the depositary function to the construction of a single market for investment funds. The European regulator long focused on the responsibilities and obligations of asset management firms and on adapting the UCITS framework to new asset classes or to changing investment practices, as it mistakenly believed that stewardship would follow, and it thus paid too little attention to operational problems and the management of non-financial risk in the European fund industry. From this perspective, it is logical that maintaining the quality of the UCITS label should lead to in-depth reflection on the role and responsibilities of the depositary. More...
20/11/09

Sovereign Wealth Funds
This is the second in a series of articles on the contribution structure of sovereign wealth funds (SWFs). This article looks at the Azerbaijan State Oil Fund and provides a detailed description of the factors affecting inflows to it. Since these inflows have an impact on the wealth of the fund, sound portfolio management must take into account the drivers behind them, rather than managing portfolio risk separately from contribution risk. In fact, working from a traditional asset management perspective and focusing on portfolio risk alone would be appropriate only if the fund held all its wealth in financial assets and were to receive no further inflows. More...
22/10/09

Investment Management
A new fund management behemoth was formed this year when Barclays Global Investors (BGI) was sold by its parent bank Barclays to BlackRock. Mergers of this sort have a patchy history and this particular merger has not occurred for the reasons generally put forward – that is, the much-needed streamlining of the industry, or banks having to dispose of their asset management arms for reasons of incompatibility or indifferent performance. The issues of how this particular alliance will fare and the wider industry implications are examined. More...
22/10/09

Investment Management
Micro-finance involving lending to the world’s poor has moved from being a mere social undertaking to a near investment asset class in its own right. In the first instalment of this two-part article, made available with EDHEC’s July newsletter, the factors underlying the rapid takeoff of this new sector were analysed. All rapid growth, however, goes hand in hand with short-term problems, and micro-finance is no exception. In this second and final instalment some of these problems are highlighted. More...
17/09/09

Sovereign Wealth Funds
Sovereign wealth funds (SWFs) need an investment management approach that is different from existing approaches, since these funds have some distinct characteristics. For example, contributions usually depend heavily on macroeconomic variables such as commodity prices or trade surpluses. Most existing approaches do not sufficiently address exposure to these risk factors. This analysis illustrates and describes the contribution structure of one of the largest sovereign funds, the Norwegian Government Pension Fund – Global. More...
16/09/09

Investment Management
The success of micro-finance as a social enterprise for the alleviation of world poverty was highlighted by the award of the 2006 Nobel Peace Prize to Muhammad Yunus and the Bangladesh-based Grameen Bank which he founded. What is less well known is that micro-finance is commercially viable as a profit-making private-sector activity and not just a charitable operation. Growth in recent years had led to increasing interest within the fund management industry and there is now a case for regarding it as an asset class in its own right. More...
29/06/09

Risk Management
Not only has the current crisis given many a deeper appreciation of the meaning of stress, it also has become a catalyst for change in the conduct of risk management. The crisis is a catalyst because it has challenged the efficacy of the existing risk management model. The response to the challenge is coming from two levels. At the level of the individual firm, risk management approaches associated with survivability are being enhanced and copied, while approaches associated with failure are being discarded. More...
02/06/09

Private Equity
For much of 2008 sentiment towards private equity had held up reasonably well amidst the carnage suffered by mainstream asset managers as well as hedge funds. This picture changed towards the end of 2008 and early 2009. A lot more pessimism about the near term has developed but there are some positives. The longer-term case for the sector should be solid once the debt-ridden froth is squeezed out of the system. Many who invested in the last couple of years would have burnt their fingers. However, the basic skills and expertise of private equity remain intact and once the worst of the downturn is over, the chances are that this expertise will shine through. More...
18/05/09

Institutional Investment
In 2003, the pension fund industry was severely affected by the steep fall in equity prices and the fall in interest rates. This fall and its consequences led to broad regulatory changes and spurred work on asset and liability management theory and techniques. More...
28/04/09

Private Wealth Management
The Private Wealth Management industry is coming to terms with the fact that customised risk management and client-centred advice is no longer just a wish, but a prerequisite of sustainable business. According to a recent survey by EDHEC, Private Wealth Managers are neither satisfied with the risk management tools at their disposal nor with the quality of their overall risk management services. More...
27/04/09

Asset Management
Bankers have acquired notoriety for their role in the global financial crisis. The asset management industry has not been criticised on a similar scale. However, there are several serious problems in this industry largely to do with how the consumer is treated. When leading industry practitioners draw attention to these problems it is time to take note as the potential effects could be serious. Many of the problems highlighted are to do with how the retail public is treated. There is a huge problem in that responsibility for this currently is clearly not assigned to any one party. Some hold asset managers to blame while others feel that the distributors are at fault. This is a major structural issue that the industry needs to address. More...
27/04/09

Regulation
In this article, Dan Waters, Asset Management Sector Leader with the Financial Services Authority and Member of the EDHEC Risk and Asset Management Research Centre's International Advisory Board, discusses the current regulatory challenges for fund managers, including the appropriate regulatory framework for hedge funds and the impact on fund managers of the Internal Capital Adequacy Assessment Process. More...
07/04/09

Asset Management
Even before the sub-prime crisis broke, many traditional investment management houses were being squeezed from several directions. The credit crunch has added to their woes in devastating style and the key question is what sort of future do they face. It could well be that they emerge as relative winners from the credit crunch, contrary to previous expectations which had arisen from them having met with testing times from the start of this decade. Though some had prospered, many more had been struggling, as the sector as a whole lost market share to various newcomers. More...
23/03/09

Indices
The standard in equity index construction is to weight the component stocks by their market capitalisation. EDHEC has long pointed out that weighting stocks by their market capitalisation leads to considerable variations in the style and sector exposures of these indices. Since a declining market value of a stock leads to a lower weight, and an increasing market value leads to a higher weight, cap-weighted equity indices are similar to trend-following strategies that overweight the past winners and underweight the past losers. More...
02/03/09

Alternative Investments
Hedge funds are being vilified for poor performance and are threatened with heavy regulation. Amidst all this negative comment, it is salutary to remember the hedge funds’ pioneering and dynamic contribution to the investment management industry, as well as their substantial positive social contribution. It will be a pity if the heavy hand of regulation destroys the benefits they bring to asset management, the wider economy and society. Much of the current attention is focused on disappointing performance, whereby hedge funds are accused of not delivering what they promised. More...
23/02/09

Private Wealth Management
The financial crisis makes it a great challenge for private wealth bankers to hedge the risks of their wealthy clients. Unlike many previous crises, this crisis has hit almost all asset classes equally hard: equities, real estate, hedge funds, and commodities have fallen steeply and volatility has risen abruptly. So allocating assets optimally has become difficult, especially since the so-called total return strategies of many hedge funds have failed for the first time in more than a decade. Sophisticated and customised risk management is certainly a key element of any successful private wealth management strategy—and an important means of differentiating industry competitors. More...
02/02/09

Regulation
Regulators have historically hesitated between recommending deriving the risk-free rate from the government yield curve or from the swap yield curve. The swap curve is becoming the norm for insurance companies and pension funds; for instance, it is mandatory in the Netherlands. In the Netherlands however, as the long swap yields briefly fell below the long-dated average euro yield curve at the end of 2008, some pension funds were tempted to switch back to the euro yield curve to discount liabilities and assess future investment opportunities. This switch was prohibited by the Dutch National Bank. The Bank was probably right to argue that the implied risk-free rate in the economy was not higher than the swap curve More...
20/01/09

Asset Allocation
A new technique of floating companies and raising equity capital has blossomed in the US in recent years, accounting for a substantial share of new issues launched in 2007. This vehicle is a fascinating hybrid between IPOs and private equity, with which it has much in common. There is however some controversy surrounding how beneficial it is for investors. Key questions are whether this technique will withstand expected problems in 2009 and how this might affect the longer term. More...
20/01/09

Asset Allocation
Defined benefit (DB) pension schemes are increasingly giving way to Defined Contribution(DC) schemes as employers seek to reduce their risks. However DC schemes pose massive new problems of their own. In response, a new type of retirement savings vehicle, Target Date Funds has come to the fore and has experienced explosive growth rates in the US in recent years. In current or modified form they offer the potential of becoming an important aspect of pension arrangements worldwide. More...
17/12/08

Regulation
The financial crisis has put great pressure on banks and led to a number of emergency measures intended to restore confidence in the banking system: tentative changes to accounting standards, recapitalisation of the banking industry, and higher capital requirements. Each measure targets a specific concern that has arisen during the crisis. Governments and regulators, however, have yet to deal with one of the essential causes of systemic risk: the inflexibility of prudential regulation for banking. More...
17/12/08

Regulation
The Solvency II directive is to be submitted for approval to the EU Council of Economic and Finance Ministers on December 2. Under an agreement buoyed by the French presidency of the EU, the latest version of the directive abandons the notion of “group support”, originally a key concept of the directive. More...
24/11/08

Best Execution and Operational Performance
It must be a truism that efficient trading on the buyside is important at all levels. The fiduciary duty on a fund manager has always existed. However, the focus upon that duty, perhaps exacerbated by hedge funds inexorably moving into the institutional arena and the attendant higher profile on the regulatory radar screen, is intensifying. Hence the need for fund managers to supply demonstrable evidence that Best Execution has been performed. More...
17/11/08

Asset Allocation
The main features of this new asset class, including key risks, were described in part 1 of this two-part article last month. In this second part, some short-term developments and how well it is weathering the storm in financial markets are analysed. In the last few years, infrastructure has become fashionable as an asset class, and investors’ money has been pouring into the sector. In May this year alone, $10bn was raised for two funds. One of them is run by Global Infrastructure Partners, a private equity firm who already co-own London City Airport and the UK waste management company Biffa, and who are backed by Credit Suisse and General Electric. They raised nearly $6bn. The second fund, run by Morgan Stanley, raised $4bn, exceeding its target of $2.25bn. More...
17/11/08

Regulation
If all institutional investors are bound by regulations that force them to sell risky assets during downturns, these assets will ultimately be absorbed by unregulated long-term investors. Additional examination shows that, in the current environment, sovereign wealth funds and governments are the possible buyers of these assets. As public intervention entails moral hazard, it follows that for the stability of the financial system throughout the business cycle regulations must be improved. More...
28/10/08

Asset Allocation
As fears of global recession loom, markets are getting battered, but one fast-growing sector, infrastructure, has been regarded as a relatively safe haven. In the next 16 – 20 years estimates of total infrastructure investment worldwide range up to $50 trillion. Even the more conservative figure of $22 trillion would put the total size of this new asset class in the same league as global equities, currently at less than $30 trillion. The main features of this new asset class, including key risks and how well it is weathering the storm in financial markets, are analysed in a two-part article. More...
20/10/08

Risk Management
Financial leverage (leverage) is at the heart of the current financial crisis, and now is as good a time as any to shed light on this elusive topic. Many people think it is effective to control risk by limiting leverage, but that is a trap to be avoided. It is well known that leverage has the potential to introduce new risks, as well as magnifying returns and existing risks. What is less well known, however, are the practical considerations and limitations. Here, the devil is in the detail. More...
10/10/08

Business Analysis
Libor (London Interbank Offered Rate), one of the most famous acronyms in global finance, is a casualty of the current credit crisis. The credibility and reliability of this universal benchmark of short-term interest rates has come into question, with a potentially incalculable impact on the smooth functioning of markets and financial contracts. Entrenched for over 20 years as the money-market measuring tool, it came under suspicion earlier this year, mainly for not being measured correctly. More...
16/09/08

Alternative Investments
The Securities and Exchange Commission (“SEC”) recently proposed amendments to Rule 15a-6 under the Securities Exchange Act of 1934 (the “Exchange Act”), which provides limited exemptions to foreign broker-dealers to engage in activities with U.S. investors, including hedge funds, private equity funds and other investors in foreign securities. The proposed amendments to Rule 15a-6 would expand the category of U.S. investors that foreign broker-dealers may contact for the purpose of providing research reports and soliciting securities transactions. More...
10/09/08

Alternative Investments
The financial crisis that began more than a year ago now, after the sudden fall in the prices of investments backed by subprime loans, sent shockwaves through the markets, with unprecedented writedowns of asset values continuing to undermine the foundations of the banking system and leading to a pronounced economic slowdown. The great increase in risk aversion ultimately led to great adjustments in the stock markets. Since the initial falls of June 2007, the major stock market indices have posted losses in the double digits. More...
29/08/08

Alternative Investments
The staff of the Securities and Exchange Commission (the “SEC”) issued a no-action letter on July 15, 2008, clarifying that Rule 206(4)-3 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), known as the “cash solicitation rule,” does not apply to a registered investment adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for an investment pool, such as hedge funds, managed by the adviser. More...
19/08/08

Alternative Investments
On Friday 13 June (who said regulators lacked a sense of humour?) the FSA announced that it was introducing provisions into its Code of Market Conduct, effective from Friday 20 June, which would require the disclosure of significant short positions in stocks admitted to trading on a prescribed market (which includes all the markets established under the rules of a UK recognised investment exchange, such as the London Stock Exchange). For this purpose, a significant short position is defined as a short position representing an economic interest of 0.25% of the issued share capital of a company, including any form of economic interest in the shares of the issuer, but excluding any interests held in the capacity of market maker. More...
22/07/08

Liquidity Risk
Showing assets at fair (market) values in balance sheets has provoked one of the most furious debates of the credit crunch. Many authoritative industry, media and academic figures are attacking this approach for aggravating the crisis. Collectively, they make a conceptual and practical case for mitigating the damage by modifying the accounting methodology. The critical question is whether their arguments are compelling enough to justify changing a system put in place after years of consultation and inquiry. More...
22/07/08

Credit Risk
With a credit rating of AAA, and a coupon of Libor plus 200bp, the CPDO was initially hailed as the “holy grail” of credit investing. Unfortunately, the market volatility of the past 18 months has shown that its AAA rating was not deserved. In this article we show that despite this, there is some merit in the CPDO mechanism which means that it could regain popularity in the credit market, albeit in a more conservative form. More...
22/07/08

Performance
The first IPE-EDHEC Institutional Asset Management Awards (IAMAs) were presented at a gala ceremony in Paris on June 12 compered by French television personality Eglantine Eméyé. The ceremony took place during the EDHEC Institutional Days before an invited audience of investors, asset managers, investment banks and other industry advisers and suppliers. More...
24/06/08

Alternative Investments
A new sector with promise is the ancient pastime of betting on ships and their voyages, which is springing to modern life and enjoying massive growth through the introduction of derivatives. This sector offers a variety of techniques for making money at both micro and global macro levels. Enterprising hedge funds and investment banks have already entered the field, which is as yet largely undiscovered by institutional investors. Relatively unaffected by the credit crunch, investments in this area have produced substantial returns recently. More...
18/06/08

Alternative Investments
Deusche Bank published in May its 6th Alternative Investment Survey. As a reminder, Deutsche Bank’s survey is not a quantitative and/or qualitative analysis of the hedge fund industry on a given period, but presents expectations, forecasts, and opinions of investors about the hedge fund industry. More than 1000 investors, totalizing nearly USD1 trillion in hedge fund assets, participated in the survey. Funds of funds are the most represented (40%), followed by family offices, high net worth individuals and wealth management companies (22%), pensions, endownments and foundations (15%), consultants (13%), and banks, corporations and insurance companies (10%). More...
20/05/08

Sovereign Funds
Sovereign Wealth Funds (SWFs) owned by governments round the world are expected to become a major force in the global asset management industry, with total assets forecast to exceed $12 trillion by 2015. Their potential activities are causing considerable concern among western governments, but a wide spectrum of commercial organisations are positive. The answer to which of these sharply opposed attitudes is justified carries profound implications for the evolution of global finance. The dominant emotion amongst western political circles seems to be a fear that Machiavellian motives, rather than the pursuit of investment performance, might guide the policies of these funds controlled by foreign governments. These worries however, are far from universally held in the west. More...
17/03/08

Institutional Investment
In its response to the CEIOPS consultation on the preliminary technical specifications for the fourth quantitative impact survey (QIS4), EDHEC argues that the main risk faced by life insurance companies is not taken into account in the standard formula. This risk is that following market (or other significant) losses, a wave of surrenders leaves shareholders bearing the entirety of losses. This is the phenomenon that led to such bankruptcies as that of Executive Life, where losses made public by rating agencies and the media triggered a wave of surrenders and bankruptcy–even though the losses alone were thought bearable for some time. More...
14/02/08

Performance
Assets under management managed by French mutual funds reached €918bn at the end of what proved to be a particularly turbulent year. Indeed, 2007 was the first year in a decade in which outflows reached €44.7bn. While assets under management topped the €1,000 bn mark during the course of 2007, growth in EuroPerformance's French mutual funds slowed on the back of the morose economic and financial climate seen over the second half of the year, coming in at -2.5% for the full twelve months. More...
14/02/08

Credit Risk
The purpose of this article is to introduce the reader to the US subprime mortgage market and to explain the factors which have led to the subprime crisis. Once upon a time, local banks lent money to local citizens to help them to buy their home. Based on first-hand knowledge of the creditworthiness of the borrower, an independent appraisal of the value of the house, and the size of the down-payment, the bank would decide if they were happy to assume the credit risk and if so, the loan went ahead. The bank would charge the borrower an interest rate which would be higher than the interest rate paid to its depositors, and the difference would be used to compensate the bank against the risk of a default by the borrower and to provide a fee. More...
21/01/08

Indices
Although there are many problems with value-weighted stock market indices, these indices are clearly the most firmly established in the financial industry. Recently, in the equity universe, there has been an increasing variety of indices, with new weighting methodologies, and an extension of indexing to asset classes such as hedge funds and real estate. In the equity universe, there is a wide range of alternative index construction methodologies that compete with standard value weighting. Characteristics-based indices, weighted by variables such as firm size, book-value, income, and sales, are used for increasing amounts of assets and have been the focus of many recent media reports. More...
17/12/07

Alternative Investments
In the last quarter, the cumulated volume of transactions on the UK commercial property swap market broke the GBP10bn mark, the nascent French and German markets almost reached the GBP1bn mark, and the first Swiss deals were recorded. Meanwhile in the U.S. a market in NPI swaps finally took off and a flurry of new indices were introduced to serve as underliers for derivatives transactions. On October 1st, LIFFE launched futures on European indices of listed real estate companies, following in the steps of the CBOT, which started offering US REIT derivatives in February. More...
18/11/07

Risk Management
Risk management can be achieved in two possible ways, one being the reduction of risk through proper asset allocation decisions (diversification benefits), the other being the elimination of risk through the use of suitably designed solutions based either on derivative instruments or dynamic asset allocation strategies (hedging benefits). Before presenting an overview of how to implement asset management with a focus on risk control, the authors first introduce the modern framework for institutional money management known as the core-satellite approach, which advocates a separation of beta and alpha benefits in the portfolio performance. More...
09/11/07

Institutional Investment
The proposed Solvency II level 1 directive has been supported by most of the industry. This directive paves the way for the implementation of the Solvency II regulation, which can be considered a huge step forward for the insurance industry. The European Insurance and Reinsurance Federation, CEA, recently issued a position paper, which, while strongly supporting the European directive, has underlined some potential weaknesses or risks within the new supervision scheme, in particular the threat of the SCR’s being treated as a "hard target", as a sort of minimum capital requirement, in other words. More...
17/10/07

Exchange-Traded Funds
A previous article introduced some of the results of the EDHEC European ETF Survey 2006 when discussing the topic of core-satellite investing. The present article looks in more detail at the responses given to the survey and the overall conclusions that can be drawn on the use of ETFs by European investors. More...
16/10/07

Exchange-Traded Funds
In a recent survey, the EDHEC European ETF Survey 2006, the EDHEC Risk and Asset Management Research Centre carried out an in-depth study on the use of ETFs (Exchange-Traded Funds) by European institutional investors, private bankers and asset managers. This article examines the benefits of using ETFs within the core-satellite investment approach. As a result of tight tracking error constraints, only a limited part of traditionally managed portfolios is actively managed, while the essential part of the portfolio passively replicates its benchmark. More...
16/10/07

Alternative Investments
While the ability to replicate hedge funds is still being widely debated, the last few months have seen one hedge fund clone launch after another. Partners Group, which is considered the pioneer in this area, launched its Alternative Beta Strategies at the end of 2004. Partners were followed by Rydex Investments and AlphaSwiss in 2005, and Merrill Lynch and Goldman Sachs in 2006. In September 2007, more than 20 hedge fund replicators were on the market. Some institutions have launched several clones, for example HedgeIQ with four clones, and Merrill Lynch with three. The main arguments that are presented at each launch are basically the same, i.e. lower costs than individual funds or funds of funds, easier access to the hedge fund universe by lowering the minimum investment level, or better liquidity. More...
11/10/07

Alternative Investments
High-conviction funds, beta-one funds, short extension funds, limited-shorting funds, long-enhanced funds, active extension funds, hedge-fund lite: there is a wide range of terms for what is most frequently called 130/30. This paper examines some crucial points related to these funds: their theoretical foundation, the optimal level of shorting, the distinction between the quantitative and fundamental approaches, whether these funds are natural extensions of long-only funds, and finally the risk of neglecting their risk. More...
03/10/07

Best Execution and Operational Performance
In response to a letter from the European Commission on EDHEC's position paper, "MiFID: the (in)famous European Directive?", EDHEC have reiterated that there are a number of issues that may threaten the fairness of the market upon the demise of the concentration rule currently prevailing in many member states. These issues are related to three aspects of the Directive that are supposed to act as counterweights to the consequences of the likely fragmentation of the market: the post-trade transparency obligation; the pre-trade transparency obligation; and best execution. More...
17/09/07

Real Estate
Property derivatives have been promoted as a revolutionary tool for real estate portfolio risk management, Frédéric Ducoulombier of the EDHEC Risk and Asset Management Research Centre argues that this is a misguided approach that obscures the key benefits of these instruments. This article introduces property derivatives and hedging, points out the specificities of the real estate market that impact an investor’s ability to hedge with index-based products, and looks at the empirical evidence that can help predict hedge effectiveness in the real estate market. More...
17/09/07

Alternative Investments
Within the equity risk sub-module of the third Quantitative Impact Study (QIS3) undertaken by the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), a preamble to the Solvency II supervisory standard, all alternative investments are subject to a capital charge of 45%, nearly 50% higher than the 32% applied to regular equity exposures. In this article, we briefly go over the calculations required for equity risk, and then include a reminder of why hedge funds on average are certainly not the riskiest bet an investor can make. More...
23/07/07

Alternative Investments
In May 2007 the Organisation for Economic Co-operation and Development (OECD) issued a report by Adrian Blundell-Wignall entitled “An overview of hedge funds and structured products: issues in leverage and risk.” According to the OECD report, structured products from investment banks have so far benefited from a virtuous cycle: the absence of volatility anomalies has allowed hedge funds to successfully sell portfolio insurance for these products to investment banks, thus contributing to a reduction of volatility risk, a narrowing of spreads, and considerable market growth. However, neither investment banks nor hedge funds have stress-tested their portfolios. More...
17/07/07

Industry Analysis
In its latest study—made public on July 9, 2007—on the pension commitments of the CAC-40 companies, Mercer Human Resource Consulting analyses the consolidated accounts of those companies on December 31, 2006, with particular attention to the appendices referring to commitments for pensions and other post-employment benefits. These commitments are as crucial to the appropriate management of human resources as they are to financial and accounting management. Accounting for pension commitments is a major issue for these companies, which have had to follow international accounting standards since January 1, 2005. Regulations concerning the quality and the transparency of information have become more and more stringent. More...
16/07/07

Alternative Investments
On June 25th, 2007, the U.S. Senate Permanent Subcommittee on Investigations released a report on the Amaranth debacle, entitled, “Excessive Speculation in the Natural Gas Market.” The report was released in conjunction with the subcommittee’s public hearing on the same date. The 135-page report (and its further 345 pages of appendices) provides a wealth of detail on the largest hedge-fund debacle to have thus far occurred. The report provides factual detail on how massive Amaranth’s natural-gas positions were and discusses how inadequate the U.S. regulatory approach currently is in the face of large-scale energy trading. This review summarizes what the report covered, and briefly touches upon important areas that the report omitted. More...
13/07/07

Real Estate
After reviewing the NCREIF Property Index, Frédéric Ducoulombier of the EDHEC Risk and Asset Management Research Centre looks at the transaction-based indices also competing to serve as underlyings for the budding US property derivatives markets. More...
11/07/07

Alternative Investments
At the inaugural EDHEC Research Day held in Paris on 7th June, Jean-François Lepetit, Associate Professor at EDHEC, Chairman of the EDHEC Risk and Asset Management Research Centre's International Advisory Board and recently appointed chairman of the CNC (Conseil National de la Comptabilité or National Accounting Council), delivered a presentation on Regulation and Hedge Funds. More...
27/06/07

Alternative Investments
Institutional assets have been flowing into hedge funds for the past several years, with repercussions for all alternative investment players. The general expectation is that these flows will continue and increase. Infovest21 conducted over the first quarter of 2007 a survey of 108 American institutional investors to better determine their motivations and concerns when allocating to hedge funds or funds of funds. Three major themes, which are developed in the first part of our article, are highlighted in the survey: the conservative approach and main concerns of institutions allocating to hedge funds; the key criteria in manager selection; and differences between endowments and pensions concerning their experiences and views on hedge funds. More...
31/05/07

Style Analysis
Style analysis of portfolios and mutual funds is a subject of great interest both for investors and managers, as style management is related to funds’ risk and return characteristics. Two different methods make it possible to perform this analysis. The first one is the return-based style analysis (RBSA) and the second is called holding-based style analysis (HBSA). More...
21/05/07

Alternative Investments
The International Organization of Securities Commissions (IOSCO) this month issued for public review and comment its Principles for the Valuation of Hedge Fund Portfolios. The purpose of the Principles is to ensure that hedge funds' financial instruments are appropriately valued and that fund investors are not disadvantaged by inaccurate valuations. More...
30/03/07

Real Estate
In mid-2005, the National Council of Real Estate Investment Fiduciaries and Credit Suisse First Boston entered into an exclusive agreement to develop property derivatives in the United States. While only two NCREIF swaps have been reported to date, several new indices have hit the market at the end of 2006 and more are in the wings. In a two-part article, Frédéric Ducoulombier of the EDHEC Risk and Asset Management Research Centre looks at the characteristics of the indices vying to serve as underlyings for the budding US property derivatives markets. Part 1 looks at the appraisal-based NCREIF Index; Part 2 introduces its various transaction-based challengers. More...
21/03/07

Alternative Investments
Will the hedge fund industry imitate the mutual fund industry by following the path of passive investing? This question is at present one of the hottest in the alternative universe, where the ability to replicate hedge funds is being extensively debated. Whatever the term used – clone, synthetic fund or replication index – this new product is presented as a third generation of products in the passive representation of hedge funds, after non-investable indices and investable indices. More...
18/03/07

Real Estate
Long present in the books of European institutional investors, real estate began to gain acceptance amongst U.S. investors in the 1970s and investors worldwide are now seeking to increase their allocations to this asset class. Real estate assets are traditionally regarded — and marketed — as real and therefore solid investments that offer attractive risk-adjusted returns, significant portfolio diversification benefits, a high and stable income component and long-term inflation protection. More...
02/03/07

Alternative Investments
On February 22, 2007, the President’s Working Group on Financial Markets (the “Working Group”) issued guidelines for the oversight of hedge funds, private equity funds and other private pools of capital, entitled “AGREEMENT AMONG PWG AND U.S. AGENCY PRINCIPALS ON PRINCIPLES AND GUIDELINES REGARDING PRIVATE POOLS OF CAPITAL”. The Working Group consists of representatives from the Treasury, the Federal Reserve, the Securities and Exchange Commission and the Futures Trading Commission. More...
28/02/07

Institutional Investment
A new EDHEC position paper entitled "CP20: Significant improvements in the Solvency II framework but grave incoherencies remain", by Philippe Foulquier, Director of the EDHEC Financial Analysis and Accounting Research Centre, and Samuel Sender, Research Associate with the EDHEC Risk and Asset Management Research Centre, contains EDHEC's answer to CP20, a consultation process initiated by CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) on the "Advice to the European Commission in the Framework of the Solvency II Project on Pillar I Issues". More...
26/01/07

Alternative Investments
In a reply to the CESR Issues Paper on the eligibility of hedge fund indices for the purpose of UCITS, the EDHEC Risk and Asset Management Research Centre argues that hedge fund indices should not be required to offer more controls and more transparency than existing financial indices such as stock market indices. Likewise, their construction should not be subjected to detailed rules for choosing constituents and implementing rebalancing and weighting mechanisms. More...
23/01/07

Transaction Cost Analysis
A new report from EDHEC Risk Advisory, Transaction Cost Analysis in Europe: Current and Best Practices, which was commissioned by HSBC Investment Bank, reviews the conditions in which buy-side firms (traditional and alternative) are currently monitoring transaction costs and investigates the various issues related to transaction cost analysis in the context of the Markets in Financial Instruments Directive due to be enforced in November 2007. This directive contains an important provision related to Best Execution. More...
16/01/07

Alternative Investments
The Securities and Exchange Commission (the “SEC”) has published the text of its proposed new rules for advisers to hedge funds and private equity funds. First, the SEC are proposing to adopt a new antifraud rule under the Investment Advisers Act of 1940 (the “Advisers Act”) that would clarify, in light of the recent court decision in Goldstein v SEC, 451 F.3d 873 (D.C. Cir. 2006), the ability of the SEC to bring enforcement actions under the Advisers Act against investment advisers who defraud investors or prospective investors in a hedge fund or other pooled investment vehicle. More...
10/01/07

Alternative Investments
On December 13, 2006, the Securities and Exchange Commission (the “Commission”) voted to propose new rules that will provide additional protections to investors in hedge funds and other pooled investment vehicles. The proposals include new antifraud provisions under the Investment Advisers Act of 1940 (the “Advisers Act”) and new marketing provisions under the Securities Act of 1933 (the “Securities Act”). The Commission’s proposals are a reaction to a U.S. Court of Appeals ruling earlier this year overturning their new hedge-fund registration requirements, thereby significantly limiting their authority to monitor such fund’s activities. As a result of this decision, the Commission’s concerns about industry fraud and the potential risk to ordinary investors, voiced over the last three years, were left unaddressed. More...
14/12/06

Institutional Investment
In a new position paper by Philippe Foulquier, director of the EDHEC Financial Analysis and Accounting Research Centre, and Samuel Sender, research associate with the EDHEC Risk and Asset Management Research Centre, entitled ‘QIS 2: Modelling that is at odds with the prudential objectives of Solvency II’, EDHEC regrets the approach chosen by the CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) for the European Commission as proposed in the QIS 2 (Quantitative Impact Study 2), which does not favour optimal management of the risks of European insurance companies. In light of the changing face of risks and how they are perceived, the existing prudential rules are totally inadequate and the European Commission has established a vast project to overhaul the methods used for calculating the solvency of insurance companies. More...
15/11/06

Indices
Felix Goltz Over the past few years, the hedge fund market has probably constituted the most remarkable growth area within the fund management industry. Investable hedge fund indices have appeared, trying to build on the passive investing argument that a lot of institutional investors are familiar and comfortable with from their equity portfolios. However, a sometimes confusing debate on the usefulness of indices has emerged, with some stating that indices contradict the very nature of the investment strategies followed by hedge funds. More...
05/10/06

Indices
V. Le Sourd & F. Goltz Benchmarks are an essential part of the investment process for most investment managers. They play a critical role in both asset allocation and performance measurement. Often however, benchmark selection is not given the attention it requires. Despite the development of techniques for constructing customised benchmarks or normal portfolios, reflecting the manager’s strategic asset allocation, most investment managers still use simple market indices. More...
05/10/06

Alternative Investments
François-Serge Lhabitant When investing in hedge funds, the control of risk should be of primary importance, while gaining some return in excess of the risk-free rate should only be a secondary objective. Many investors tend to forget this basic principle, and therefore end up holding alternative portfolios that do not match their risk/return expectations. One should always remember that risk, by itself, is not bad – it normally implies gaining some risk premium. What is bad is a risk that is misunderstood, or even worse, not detected. More...
04/10/06

Alternative Investments
Noël Amenc et al. While there has been a significant amount of research on the predictability of traditional asset classes, and the implications in terms of tactical asset allocation strategies, very little is known about the predictability of returns emanating from alternative vehicles such as hedge funds. Also, and not surprisingly given the absence of academic evidence on the predictability of hedge fund returns, very little is known about the performance of tactical asset allocation strategies involving hedge funds. More...
04/10/06

Hedge Fund Indices
Walter Géhin & Mathieu Vaissié In contrast with high net worth individuals, who focused on absolute returns, the more recent investors in the hedge fund universe — especially institutional investors — require risk-adjusted performance measures. Unfortunately, the limitations of traditional performance measures (e.g. the Sharpe ratio) and multi-factor models have been successively identified. Although hedge fund indices have received increasing acceptance, they suffer from numerous theoretical shortcomings and practical challenges, and the engendered heterogeneity of the returns, as shown in the academic and practitioner literature, suggests that the selection of an index is not a free lunch. More...
04/10/06

Alternative Investments
Felix Goltz After tremendous growth over the last decade, the hedge fund industry has clearly entered a more mature stage. From an initial phase, when some high net worth individuals invested in hedge funds, the industry has moved into the mainstream as more and more institutional investors have started allocating to, or at least looking at, hedge funds as a distinct asset class. As these investors consider investing in hedge funds, it is useful to review the benefits they can expect. In addition, a question that directly results from the diversity of the products available is: “How should institutions choose to access hedge funds in order to maximise these benefits?” More...
03/10/06

Alternative Investments
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...
02/10/06

Hedge Fund Strategies
Noël Amenc and Lionel Martellini Just because a fund is a hedge fund does not mean that the risk-free asset is necessarily a good benchmark. While nearly all hedge funds highlight a so-called "absolute return" policy, the risk-free rate is only a good benchmark if certain conditions are respected. The objective of this article is to emphasise the role that hedge fund strategies can play in traditional investors’ portfolios. More...
29/09/06

Alternative Investments
Noël Amenc et al. In 2003, the EDHEC Risk and Asset Management Research Centre presented a detailed survey on European Investment Management practices, highlighting major discrepancies between current industry practices and leading academic thought. This article covers the main findings of the survey with regards to the management of risks, describes the importance of the risk management function and discusses the various techniques available to investment managers. More...
29/09/06

Alternative Investments
Mathieu Vaissié Hedge fund strategies have long been regarded as “absolute return strategies”. Investors who suffered as a result of their sub-optimal diversification policy after the bursting of the Internet bubble began to look at alternative investments as a way to improve their protection. In particular, they became interested in the genuine diversification properties of hedge funds and progressively introduced them into their “Core” portfolio. However, capitalising on the diversification potential of hedge funds requires a good understanding of the risk characteristics of hedge fund strategies. More...
26/09/06

Performance Persistence
The debate remains open for the performance indicator that is best adapted to the specific characteristics of hedge fund return distributions, and new propositions are regularly formulated to replace the traditional performance measures like the Sharpe ratio. After the calculation of risk-adjusted returns, whatever the formulas employed, another aspect of performance takes on particular importance, namely the persistence of the performance. More...
22/09/06

Fund Ratings
Noël Amenc The rating of mutual funds has been an area of considerable growth not only in the United States but also in Europe. Increasingly demanding investors now require fund performance measurements that are both relevant and scientifically rigorous. More...
21/09/06

UCITS Eligibility
In a document entitled ‘A Reply to the CESR Recommendations on the Eligibility of Hedge Fund Indices for Investments of UCITS’, Noël Amenc and Felix Goltz of the EDHEC Risk and Asset Management Research Centre have urged the CESR to reconsider their position on suspending the eligibility of hedge fund indices. More...
21/09/06

Performance Measurement
Noël Amenc and Jean-René Giraud In 2003, the EDHEC Risk and Asset Management Research Centre presented a detailed survey on European Investment Management practices that highlighted significant discrepancies between current industry practices and leading academic thought. The risk-adjusted measure favoured by professionals still relies to a large extent on the Sharpe ratio, which assumes that fund performance can be reduced to the first and second order moments of the return distribution. More...
21/09/06

Alpha League Table
Virginie Buey and Peter O'Kelly The EuroPerformance-EDHEC and Alpha League Table for Switzerland reveals that the best ‘alpha’ performers are the most illustrious and venerable institutions in Geneva and Zurich. This article offers a look at the table's top companies and how they got to where they are. More...
20/09/06

Alternative Investments
Core and satellite portfolio construction is recognised as an effective strategy for institutions that want to diversify their portfolios without giving up the potential for higher returns generated by selected active management strategies. It also provides the framework for targeting and controlling those areas where investors are willing to take more risk in a cost-efficient manner. More...
18/09/06

Alternative Investments
Mathieu Vaissié For several months, investors and their advisors have been worrying about the profitability prospects for hedge funds, faced with fears that hedge fund alpha is diminishing. The objective of this article is to examine whether the opinions on the capacity effect of the finance professionals in the field, and their views on the real sources of hedge fund performance, are consistent with academic findings. More...
18/09/06

Alternative Investments
Lionel Martellini and Volker Ziemann Recent difficulties have drawn attention to the risk management practices of institutional investors in general and defined benefit pension plans in particular. The fact that institutional investors have been so dramatically affected by market downturns at the beginning of the new millennium has led to major changes in institutional money management, including notably the need for an increased focus on asset-liability management (ALM). More...
15/09/06

Alternative Investments
The advantages offered by hedge funds do not come without a downside. Exposure to alternative risk factors is a source of superior return-risk trade off and is the very essence of hedge funds’ extensive diversification possibilities when compared to traditional investments. However, such exposure usually requires trading activities that can be considered less conventional than in the long only universe. More...
15/09/06

Alternative Investments
There are two main challenges involved in the application of standard asset allocation methods to the design of optimal portfolios that include hedge funds. One is that it is extremely difficult to obtain a forward-looking estimate of a hedge fund’s expected return. The other comes from the fact that in general hedge fund returns are not normally distributed, which makes the use of any asset allocation model based on sole estimates of expected return and volatility somewhat problematic. More...
15/09/06

Alternative Investments
The US Securities and Exchange Commission (SEC or Commission) has continued with its efforts to address the fallout from the decision in the Goldstein Case. The latest action in its ongoing attempts to bring hedge fund advisers under greater scrutiny came in the form of a letter to the American Bar Association setting out the Commission’s views following the vacating of the rule 2003(b)3-2 placing registration obligations on hedge fund managers. More...
31/08/06

Alternative Investments
At the beginning of June, the FRR (Fonds de Réserve pour les Retraites) announced its decision to allocate 10% of its assets to so-called alternative products. The reason highlighted was the risky nature of the current composition of the fund, which is dominated by two asset classes, stocks and bonds. The allocation to alternative products targeted by FRR is part of a diversification logic: by being exposed to different risk factors (i.e. different asset classes) the portfolio’s sensitivity to a given source of risk is reduced. This aims to generate returns that present greater stability over time. However, the FRR’s decision to allocate 10% of its assets to alternative products is accompanied by a decision to exclude hedge funds from that allocation. More...
27/07/06

Alternative Investments
A US federal appeals court has unanimously held that the Securities and Exchange Commission (SEC) exceeded its authority when it adopted a controversial new rule requiring hedge fund managers to register as investment advisers with the SEC, throwing the SEC’s long-running battle to better regulate hedge funds into doubt and disarray. The shock decision leaves hedge fund managers and their investors in limbo, while they await a definitive response from the SEC on how it intends to regulate this $1.5 trillion industry in the future. More...
25/07/06

Indices
Looking at the market for equity indexing, it is easy to see that capitalization weighting dominates the offerings. In fact, most investors probably do not even ask whether other types of indexes should or do exist. In addition to being standard practice, capitalization weighting receives theoretical backing from the original Capital Asset Pricing Model (CAPM), established by William Sharpe in 1964. However, capitalization weighting is currently under fire from both academic scholars and industry practitioners. This article reviews the reasons for this. More...
07/06/06

Industry Analysis
Like most European countries, the Nordic countries – Denmark, Finland, Iceland, Norway and Sweden - have also implemented Solvency I in their own legislation on the solvency requirements of insurance companies. However, for pension funds, some countries apply the Basel I rules (e.g. Norway) even though these rules are generally applied by commercial banks and financial companies. Some countries set up their own solvency requirements (e.g., Sweden, Finland). In this article, we will review the solvency requirements for insurance companies and pension funds in those countries. More...
13/05/06

Indices
Fundamental weighting indexing has drawn some attention recently, following the launch of a fundamental weighting index by the FTSE Group and Research Affiliates at the end of last year. In this article, we will first describe the construction methodology of fundamental weighting, and then review some pros and cons concerning this method that have been brought up in the industry. More...
04/05/06

Alternative Investments
Over the past five years, the number of hedge funds has increased to over 8,000, with assets under management exceeding US$1 trillion. Generally speaking, hedge funds operate with few constraints in order to achieve the absolute return, or “alpha”, that they seek. As the funds themselves are largely unregulated, the investor relies primarily on the directors of the fund to oversee the arrangements entered into with third parties, such as the investment manager. More...
02/05/06

Industry Analysis
In order to improve the protection of policyholders and enhance the financial health and sustainability of insurance companies, European countries have revamped their related insurance laws in recent years within the framework of the EU regulations. In this article, we will look at the EU directives and review the recent developments on the solvency requirements of insurance companies in some European countries. More...
03/04/06

Indices
Interest in indexed real estate investments from investors and asset managers is increasing, as evidenced by recent launches of index products such as ETFs. In this article, we will give an overview of some general concerns relating to the construction of real estate indices. More...
17/03/06

LDI
The concept of LDI (Liability Driven Investment) has spread quickly in recent decades among defined benefit pension fund managers. In this article, we review the motivation behind LDI strategies, the concept of LDI and recent market developments relating to LDI. More...
13/03/06

ETFs
Built on the foundations of the efficient market hypothesis, the idea behind indexation is relatively straightforward: if modern capital markets are efficient, the added value in search of alpha can only be negative. In other words, investing in an index that tracks the market portfolio is possibly the best bet for an investor. More...
09/03/06

Asset-Liability Management
In order to protect the benefits of pension beneficiaries, reforms on funding requirements have been taking place in many countries. It is believed that this will help the development of the second pillar in pension systems and help to alleviate the financial pressure on the state pension schemes, as it is thought that these will be a threat for governments in the not-too-distant future. In this article, we will compare the requirements relating to the asset-liability situation of pension funds in the US and Europe. More...
20/02/06

ETFs
In the realm of asset management, the Exchange Traded Fund (ETF) is not an unfamiliar term to savvy investors. Compared with traditional mutual fund and pooled products, ETFs provide investors with some significant advantages, such as lower fees, an exchange listing and the ability to trade continually, as well as minimisation of capital gains distributions. More...
20/02/06

Asset-Liability Management
As a worldwide trend, pension reforms are ongoing in many countries. This is especially the case in developed countries which will face problems with aging populations and the associated heavy burden on pension payment in the near future. Accompanying the reforms in the pension system, measures to improve the governance and transparency of the pension funds are also being introduced in those countries. More...
10/02/06

Alternative Investments
U.S. hedge fund managers are being or will be more regulated in the new legal environment, since the era of registration for hedge funds has begun and all registrations will be completed by February 1, 2006. On October 26, 2004 the Securities and Exchange Commission (SEC) voted 3 to 2 to adopt a regulation requiring most U.S. hedge fund managers to register as investment advisers. More...
18/01/06

Alternative Investments
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...
18/01/06

Asset-Liability Management
Before 1979, there was no unified pension system in China. Firms provided all benefits, including medical expenses and pensions, to their employees. However, from the early 80s, with the development of the market economy, more and more problems began to challenge the original pension system. First of all, some enterprises began to suffer losses, so they did not have enough cash flow to pay for their retirees. More...
17/01/06

Asset-Liability Management
In 2000, pension expenditure in Italy reached 13.8% of its GDP. In the future, the pension system in Italy will face considerable challenges because of the demographic transfer – it is expected to be the ‘oldest’ country in the EU in a few years’ time. In order to sustain the stability of the economy, the Italian government has adopted a series of reforms in the past few decades. More...
12/01/06

Investment Management
The European Commission recently released a new green paper, "Green Paper on the Enhancement of the EU Framework for Investment Funds", which aims to consider the orientations for enhancing the UCITS framework to be announced in early 2006. More...
19/12/05

Alternative Investments
New Spanish Collective Investment Institutions (CII) regulations were approved by the Ministry of Finance on November 4, 2005. In the realm of alternative investment products, the Spanish market will be among the most modern after adopting these new regulations, in which most matters pertaining to the establishment, governance and transparency of funds, as well as retail investor protection, have been addressed. More...
19/12/05

Asset Allocation
Modern Islamic finance is just 30 years old. Despite its relative youth, the sector has seen rapid (and accelerating) growth, increasing from US$10 million in 1975 to now over US$250 billion under management with dedicated Islamic banks, together with another US$200 billion with units of conventional financial institutions. This expansion has attracted the interest not only of conventional bankers and borrowers, but increasingly investment fund structurers and promoters. More...
09/12/05

Asset Allocation
Strategic allocation is the first step in the investment management process. This allocation involves choosing the portfolio’s composition over a long period between the different asset classes, in accordance with the investor’s objectives. In 1952, Harry Markowitz was the first to quantify the link that exists between the risk and return of a portfolio, and thereby introduced modern portfolio theory. More...
18/11/05

Performance Measurement
Evaluating the performance of a portfolio, or an investment fund, is an unavoidable step both for managers, whose results are highlighted, and for investors, who are looking for the best investments to make. The development of performance measurement techniques stems from modern portfolio theory. More...
17/11/05

Asset Allocation
It is usual to group funds according to their investment style. The resulting groups serve in particular to compare fund performance and to perform a ranking of the funds. These groups are supposed to be made up of funds exhibiting similar characteristics and risk. However, several studies have identified evidence of fund misclassifications. More...
17/11/05

Asset Allocation
The seminal work on style investing was carried out by Kenneth French and Eugene Fama (1992). Fama and French highlighted the fact that the market factor in the Sharpe model alone was insufficient to explain the risks and returns of assets, and showed that it was useful to add two complementary factors characterising the style of the assets, which allowed for a better explanation of the variation in portfolio returns over the long-term. More...
17/11/05

Asset-Liability Management
Like in most other countries, the pension system in Ireland is currently divided into three pillars: state pensions, occupational pensions and personal pensions. The Department of Social & Family Affairs deals with the compulsory contributory - PRSI (pay related social insurance) - and non-contributory state pensions and social welfare entitlements. The second pillar consists of voluntary occupational pension schemes - largely defined benefit (DB) - and PRSAs (Personal Retirement Savings Accounts). Finally, Retirement Annuity Contracts (RACs) – also known as (‘personal pensions’) managed by the Irish Insurance Federation (IIF) are also available. More...
16/11/05

Alternative Investments
The performance of hedge funds could be decomposed into three distinct components, namely traditional betas, alternative betas, and alpha. As a result of the very nature of their return generating processes, hedge funds can be used to improve the diversification of traditional portfolios (i.e. as part of investors’ core portfolio) or to implement portable alpha strategies (i.e. as part of investors’ satellite portfolio). More...
27/09/05

Asset-Liability Management
As the first formal pension system in the world, the German pension system has more than 120 years of history. The pension system in Germany is also thought to be one of the most generous pension systems in the world. In 2000, public pension expenditure amounted to some 200 billion euro, representing 21% of public spending and 11.8% of GDP. However, the high cost of pensions is thought to have a negative effect on economic growth and job creation. More...
27/09/05

Asset-Liability Management
On January 1, 2005, FRS 17 became mandatory for all UK companies. FRS 17 was published in November 2000 and amended in November 2002. It replaces SSAP 24 “Accounting for pension costs” and UITF Abstract 6 “Accounting for post-retirement benefits other than pensions”. In this article, we will analyse the general requirements, the actuarial assumptions of FRS 17, and its impact on pensions and companies. More...
08/09/05

Alternative Investments
The indexing approach constitutes a sound choice for an investor’s hedge fund portfolio, given that the investor does not want to take on selection risk and is interested in controlling his risk/return profile. Research results show that the investability of a hedge fund index does not necessarily come at the cost of representativeness. However, using strategy indices that are both investable and representative to optimally include hedge funds in the portfolio still requires a fair amount of allocation skill and significant minimum investment. More...
07/09/05

Asset-Liability Management
At present, the pension system in Switzerland is undergoing a series of reforms. In this article, we will present the current status, the main problems that led to the reforms and the changes in the Swiss pension system. In addition, we will list the expected results of the reforms. More...
01/09/05

Performance Persistence
Annual fund rankings are published at the end of each year. At first sight, it seems attractive to invest in the top-ranking funds. However, an important question has to be asked beforehand: do winners repeat? This question relates to a primordial aspect of the performance measurement process, namely performance persistence. More...
19/08/05

Alternative Investments
At a time when hedge funds are more widely reported and discussed in the general and financial press than ever before, the Financial Services Authority has recently released two new discussion papers addressing a number of important issues related to their structure and operation. More...
18/07/05

Asset Allocation
While stock picking strategies are logically supposed to exploit evidence of predictability in individual stock specific risk, most equity managers, as a result of their bottom-up security selection decisions, often end up making discretionary, and most of the time unintended, bets on market, sector and style returns as much as they make bets on individual stock returns. More...
11/07/05

Alternative Investments
Managed accounts have emerged over recent years as a viable alternative to direct hedge fund investing for many investors. They have seen considerable growth for a number of reasons, including: greater demands for transparency; growing use of structured products leading to increased liquidity requirements; and increasing appetite for investable hedge fund indices, which are largely based on managed accounts. More...
27/06/05

Asset-Liability Management
On the 18th November 2004, the UK parliament voted a reform of the UK pension system, the Pensions Act 2004. Some aspects of this act have been effective since April 2005 and the entire regulation is expected to take effect in April 2007. This new pension framework replaces the pension acts of the years 1995 and 2000 and is the result of four years of consultation and legislation. More...
27/06/05

Asset-Liability Management
The Netherlands is currently experiencing huge pension reform. A new pension fund system is supposed to take effect on 1st January 2006, but due to considerable lobbying from pension funds, the system will probably be implemented in January 2007. This new system, determined by the FTK Consultation Document, will affect the Dutch pension funds’ asset and liability management strategy and therefore their investment decisions. More...
13/06/05

Operational Risk
Hedge funds face different risk exposures, not the least important of which is operational risk. Operational risk here refers to the non-financial risk factors which encompass everything from fraud and mis-pricing of positions to common operational issues such as processing errors, technology failure, and poor data. Operational issues have increasingly become an important factor in hedge-fund failures. PWC in their global hedge fund valuation and risk management survey found that managing and mitigating operational risks were at the top of the list of hedge fund risk management priorities. More...
19/05/05

Alternative Investments
Recently, much attention has been given in the financial and industry press to the steady progression of hedge funds into transactions typically reserved to private equity players. This has caused a stir in the markets, both from the point of view of private equity players, as well as their financial advisers, who see the increasing prominence of hedge funds as an opportunity for more deals and greater fees. What are the implications arising from such hedge funds activities? How will established PE funds react? What does the future hold for both sets of alpha-driven money managers? More...
18/05/05

ETFs in Core-Satellite Portfolio Management
It is widely accepted that an investor’s asset allocation decision – as opposed to his stock selection - is the prime determinant of portfolio performance. However, this does not mean that the investor should merely seek passive exposure to indices for different asset classes. In fact, active allocation between asset classes has been shown to be an important source of value added in a managed portfolio. Exchange traded funds that track stock and bond indices and are easily tradable offer useful tools for implementing such decisions. More...
18/05/05

Best Execution
Best execution has been considered so far to be one of the key responsibilities of the broker/dealer, with agreements such as agency/principal trading allowing the asset manager to transfer all costs and risks related to best execution to the broker in return for a higher transaction fee, or to agree a price objective such as the VWAP (Volume Weighted Average Price) with the intermediary. More...
13/05/05

Alternative Investments
The debate on hedge funds’ transparency, though relevant, often fails to emphasise the right issue. One has to bear in mind that transparency is not an objective per se, it is simply a means. Indeed, it is no use seeking absolute transparency. What investors really need is enough information to assess the risk and return profile of an investment opportunity with a reasonable degree of certainty, nothing more. More...
13/05/05

Risk Management
Recent difficulties have drawn attention to the risk management practices of institutional investors. This issue is the most apparent in defined contribution corporate pension plans, as many plans have reached funding levels where their assets do not cover liabilities. Consequently, plan sponsors are faced with unexpected contributions, which directly impact the shareholders of these companies. More...
13/05/05

Derivatives
Institutional investors have long used derivatives in their portfolios, going back to the surge in portfolio insurance techniques in the eighties. Most commonly, simple equity index options or futures contracts are employed to hedge equity portfolios. Institutional investors often face the constraint that portfolio value must at all cost exceed a given value, but thereafter reasonable risks may be accepted. More...
13/05/05

Alternative Investments
As the hedge fund industry continues to move closer to the investment mainstream, most investors still lack the adequate resources required to invest directly into single hedge funds (time, knowledge, capital, etc). They may instead decide to invest through third parties like funds of hedge funds. However, if as is evidenced in academic literature, hedge fund picking is a challenging task, then fund of hedge funds picking, is also particularly tricky. More...
12/05/05

Hedge Fund Indices
Over the past few years, the hedge fund market has probably constituted the most remarkable growth area in the fund management industry. From an initial stage, when some high net worth individuals invested in hedge funds, the industry has moved into the mainstream as increasing numbers of institutional investors have started allocating to, or at least looking at, hedge funds as a distinct asset class. More recently, investable hedge fund indices have appeared, trying to build on the passive investing argument that a lot of institutional investors are familiar and comfortable with from their equity portfolios. However, a sometimes confusing debate on the usefulness of indices has emerged, with some stating that indices contradict the very nature of the investment strategies followed by hedge funds. More...
12/05/05

Alternative Investments
The potential for conflicts of interest on the part of hedge fund managers is integrally linked to their provision of discretionary investment management services. Where a hedge fund manager has a number of other hedge funds actively investing, or is part of a larger financial conglomerate, investors will demand to understand very clearly how potential conflicts will be resolved. This will require, among other things, precise drafting in contracts and prospectuses with regard to investment objectives and restrictions. More...
13/04/05

Asset-Liability Management
Koray Simsek, who is co-head of the ALM research programme with the Edhec Risk and Asset Management Research Centre, is the co-author, with Frank Fabozzi, John Mulvey, William Pauling and Zhuojuan Zhang, of "Modernizing the Defined-Benefit Pension System". In this paper, the authors introduce a model for integrating the management of corporate pension plans and the financial accounting of companies. More...
08/03/05

Alternative Investments
On November 9, the AMF officially announced the final specificities of the new single manager's onshore vehicles called ARIA ("OPCVM Agréés à Règles d’Investissement Allégées", or funds with lighter procedures). The final regulations on hedge funds will be approved by the finance minister most probably towards the end of November. The regulatory body expects to approve the first French single manager fund by the end of December 2004. More...
10/11/04

Strategy and Practices
The “Greying generation is an old problem”, says John Kay of the Financial Times. Indeed, the issue of an aging population and workforce has been a global phenomenon for years. With the continuously low and declining fertility rate, the issue seems to have snowballed in advanced economies during recent years. As such, it is only natural that funded pension plans should be growing in both size and importance. Amidst all the changes, this is probably a good juncture to review the evolving pension fund system and its impact on the asset management industry. More...
07/10/04

Alternative Investments
The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment association, and the Dublin Funds Industry Association (DFIA), the representative body for the international investment community in Ireland, have launched an initiative to educate administrators in the hedge fund industry and highlight the differences with the administration of mutual funds. More...
13/09/04

Business Analysis
A recent survey published in July 2004 by the Department of Work and Pensions reported that voluntary progress towards adopting the Myners Principles has been significant, although most of the trustees are heavily dependent on their investment consultants for the reform. The report states that “Leadership of pension schemes' responses to the Myners Principles most often lay outside the board of trustees, with investment consultants frequently taking the lead”, and that “pension schemes rarely challenge the views of their investment consultants”. More...
31/07/04

Alternative Investments
In the wake of the recent publicity on regulating hedge funds, regulators have widened the scope and stepped up policing of how brokerage firms market and service hedge funds. In April, the Securities and Exchange Commission sent a lengthy questionnaire to many big Wall Street firms seeking extensive information about potential conflicts of interest involving hedge funds. Since then, officials from some of the firms have met with the agency to discuss its questions. More...
27/07/04

Alternative Investments
According to a recent survey jointly released by Watson Wyatt and Global Investor magazine, assets under management for funds of hedge funds increased by 30% in 2003.
The survey, the Alternatives 99 ranking, which brings together the world’s 99 largest alternative players in funds of hedge funds, private equity funds of funds, and the property and commodities arena, also reveals growing interest by institutional players in the alternatives space.
More...
12/07/04

Alternative Investments
“Too much regulation kills regulation” seems to be the general industry sentiment in response to the recent buzz on hedge fund regulations. Industry veterans think that greater regulation of hedge funds could limit their growing role as major providers of stability and liquidity in times of turmoil. To them, the increasingly competitive hedge fund industry is already cleaning up its act to attract institutional investors, who are known to be risk averse and perhaps even conservative in their investment directives. More...
09/07/04

Business Analysis
Preliminary results from the forthcoming “European Institutions Alternative Investment Survey” indicate that consultants would advise their institutional clients to allocate almost half of their active risk budgets to hedge funds, currency management and tactical asset allocation (TAA). More...
21/06/04

Alternative Investments
To many investors, investing in hedge funds is not unlike joining an established English club. Exclusive, sophisticated and discreet, admission by recommendation only, the old boys' club is hardly awed by new money or fads. The current hype surrounding investing in hedge funds has probably heightened the curiosity to sneak into its cool plush interior to get an idea of what is happening behind the closed doors. Funds of hedge funds (FoHF) seem to have provided logical access to this old boys' club. More...
11/06/04

Alternative Investments
In a series of articles, we are examining the regulatory framework for alternative investment in various countries, with the focus in this article on France. More...
04/02/04

Business Analysis
Inarguably, socially responsible investment (SRI) has become a new trend in the investment industry. Just by “Googling” the abbreviation on the web, we can find many recent surveys, research studies and debates about the topic. More...
19/11/03

Business Analysis
The percentage of investors whose outlook for the coming year was “good” or “very good” was reported to be 46%, a four-year-high, in the Ninth Annual Investor Survey of the Securities Industry Association (SIA), the trade industry body. More...
19/11/03

Business Analysis
A report issued by UBS Warburg Global Equity Research foresees a change in focus of the industry from managing assets to controlling risk. Simple seizure of risk premiums through buy-and-hold positions in assets is a business model that could be seriously challenged by portfolios using more sophisticated risk management techniques. More...
25/06/03

Risk
Structured products, which are constructed to limit the risk in downside markets, come in different variants. Principal protection guarantees either a certain percentage of, or all of, the capital invested, to which some structures add a guaranteed minimum. More...
06/02/03

 
   
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