EDHEC Publications
What Drives Robo-Advice?
2021
The promise of robo-advisory firms is to provide low cost access to diversified portfolios built in accordance with the academic literature on normative portfolio choice. The authors investigate the latter claim. How much normative advice does robo-advice contain? For this purpose, they web-scrap portfolio recommendations for 151,200 investor types (input combinations from an online questionnaire) for one of the largest US robo-advisors. Results show that the type of investment goal and the length of time horizon are dominating inputs with significant influence on recommended equity...
Investor Experience and Portfolio Choice: Regulatory Costs from MiFID II
2021
MiFID II forces banks and wealth managers to ask clients for their investment knowledge and experience. The implied regulatory view is that less experience should result in less risk taking. While this is neither shared in theoretical nor in empirical finance, it becomes a source of legal risk for asset managers and banks. How do banks react? What are the welfare implications? So far, this question was impossible to answer. The relevant data have not been available as they are not shared by banks. The authors circumvent this problem by using publicly available portfolio recommendations from...
Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing
2021
This study, “Measuring and Managing ESG Risks in Sovereign Bond Portfolios and Implications for Sovereign Debt Investing" demonstrates that implementation choices regarding how ESG constraints are incorporated in the context of sovereign bond portfolio construction have a material impact on this opportunity cost. In particular, we find that higher environmental scores for developed countries and higher social scores for emerging countries are associated with lower costs of borrowing for issuers and consequently with lower yields for investors. We also confirm that negative screening leads to...
Covid-19 and Smart-Beta
2021
Authors investigate the role of sectors on the performance of smart-beta products during the COVID-19 crisis. Cross sectional differences in excess returns (versus a market capitalized portfolio) are driven by strong exposures to a historically unique COVID-19 related industry rotation, rather than to long term structural causes.
“Flexicure” Retirement Solutions: A Part of the Answer to the Pension Crisis?
2020
Individuals preparing for retirement are currently left with an unsatisfactory choice between security with no flexibility with annuity products and flexibility without security with investment products such as balanced funds or target date funds. To get out of this impasse, the authors introduce a range of “flexicure” retirement goal-based investing strategies that offer both security and flexibility with respect to the objective of generating replacement income in decumulation. Recent advances in financial engineering and digital technologies make it possible to apply goal-based investing...
The EDHEC European ETF, Smart Beta and Factor Investing Survey 2020
2020
The latest edition of the EDHEC European ETF, Smart Beta and Factor Investing Survey was conducted as part of the "ETF, Indexing and Smart Beta Investment Strategies" research chair at EDHEC-Risk Institute, in partnership with Amundi. With this survey, we aim to provide insights into investor perceptions of exchange-traded funds (ETFs) and of smart beta and factor investing strategies, building on the analysis of this year’s responses and relating them to past results of our annual survey. In 2020, the survey results show a slowdown in the use of smart beta and factor...
The Seasons of the True Size Anomaly
2020
This paper employs a robust portfolio sorting procedure to factor size characteristics into returns. The US size anomaly boils then down to a pure seasonal effect, fully supporting the “tax-loss-selling” hypothesis. We build a long-short calendar trading strategy, easily reproducible by an asset manager, being long the Smallminus-Big (SMB) portfolio in January (or in Q1), staying in cash in Q2 and Q3, and shorting SMB in Q4. The strategy achieves a mean yearly return close to 11% from 1963 to 2019. It does not decay over time, remains steady across all subperiods, and resists to the detection...
Risk Optimizations on Basis Portfolios: The Role of Sorting
2020
This paper investigates the mean-variance and diversification properties of risk-based strategies performed on style or basis portfolios. We show that the performance of these risk strategies is improved when performed on portfolios sorted on characteristics correlated with returns and is highly sensitive to the sorting procedure used to form the basis assets. Whereas the extant literature provides mixed support for the outperformance of smart beta strategies based on scientific diversification, our designed strategies outperform both the market model and multifactor model. Our testing...
Research Topics from Across the Commodity Markets
2020
In this working paper, the author concisely summarizes five research papers on (1) metals hedging; (2) energy policy; (3) the logistical planning of a grain-trading firm; (4) commodity pricing; and (5) the development of commodity exchanges. Before providing these summaries, she notes the main points of each of these academic articles below.
Climate Change and Credit Risk
2020
Authors investigate the relationship between exposure to climate change and firm credit risk. They show that the distance-to-default, a widely used market-based measure of corporate default risk, is negatively associated with the amount of a firm’s carbon emissions and carbon intensity. Therefore, companies with high carbon footprint are perceived by the market as more likely to default, ceteris paribus. The carbon footprint decreases the distance-to-default following shocks - such as the Paris Agreement - that reveal policymakers’ intention to implement stricter climate policies. Overall,...
Predicting and Decomposing the Risk of Data-Driven Portfolios
2020
Sophisticated algorithmic techniques are complementing human judgement across the fund industry. Whatever the type of rebalancing that occurs in the course of a longer horizon, it probably violates the buy-and-hold assumption. In this article, authors develop the methodology to predict, dissect and interpret the h-day financial risk in data-driven portfolios. Their risk budgeting approach is based on a flexible risk factor model that accommodates the dynamics in portfolio composition directly within the risk factors. Once these factors are defined, they cast portfolio risk measures, such as...
Factor Investing in Liability-Driven and Goal-Based Investment Solutions
2020
A new approach known as factor investing has recently emerged in investment practice, which recommends that allocation decisions be expressed in terms of risk factors, as opposed to standard asset class decompositions. While the relevance of factor investing is now widely accepted amongst sophisticated institutional investors, an ambiguity remains with respect to the exact role that risk factors are expected to play in an asset-liability management investment process. The main objective of this paper is precisely to contribute to the acceptance of factor investing by providing useful...
Commodity Trading Strategies: Examples, Mistakes, and Famous Debacles
2020
This paper provides a reasonably comprehensive tour of the always dynamic and frequently opaque commodity markets, including views on (1) commodity trading strategies, (2) common mistakes, and (3) two famous debacles. The specific types of commodity trading strategies that are included are trend-following and calendar-spread trading.
The EDHEC European ETF, Smart Beta and Factor Investing Survey 2019
2019
EDHEC-Risk Institute conducted its 12th survey of European investment professionals about the usage and perceptions of ETFs, smart beta and factor investing, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. The aim of this study is to analyse current European investor practices and perceptions on ETF, smart beta and factor investing strategies, as well as future plans in these domains. By comparing our results to those of our previous surveys, over more than a decade, we aim to shed some light on trends within the ETF market...
A Financially Justifiable and Practically Implementable Approach to Coherent Stress Testing
2019
We present an approach to stress testing that is both practically implementable and solidly rooted in well-established financial theory. We present our results in a Bayesian-net context, but the approach can be extended to different settings. We show i) how the consistency and continuity conditions are satisfied; ii) how the result of a scenario can be consistently cascaded from a small number of macrofinancial variables to the constituents of a granular portfolio; and iii) how an approximate but robust estimate of the likelihood of a given scenario can be estimated. This is particularly...
Factor Investing in Fixed-Income – Defining and Exploiting Value in Sovereign Bond Markets
2019
Value has been recognised as one of the most important factors for equities since the pioneering work by Fama and MacBeth (1973). In equities, the book-to-market value ratio has traditionally been used as a proxy for the value factor. Natural as this choice is for this asset class, it is difficult to translate the concept of value to the fixed-income domain. In this paper, “Factor Investing in Fixed-Income – Defining and Exploiting Value in Sovereign Bond Markets”, we propose a definition of value in Treasury bonds that, we believe, is more satisfactory than definitions found in the recent...
Factor Investing in Fixed-Income - Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets
2019
Looking at momentum in fixed-income markets at the security level is very important, because studies that employ ‘synthetic’ zero-coupon bonds can be vitiated by the well-known serial autocorrelation of pricing errors, which can masquerade as a momentum effect. To our knowledge, no empirical study of momentum in Treasuries has looked at the problem at this level of granularity. In this paper, “Factor Investing in Fixed-Income – Cross-Sectional and Time-Series Momentum in Sovereign Bond Markets”, we undertake a systematic, security-level analysis of momentum and reversal strategies in US...
Assets’ Correlation Implications for Portfolio Insurance Strategies Performance
2019
The estimation of the multiplier parameter of portfolio insurance is crucial for this kind of investment strategies because it determines the risk exposure to the performance-seeking asset (PSA) at each point in time. Studies that address the estimation of the maximum multiplier of portfolio insurance strategies have been limited to the case in which the safe asset is a short-term bank account paying a constant rate of return. However, more general portfolio insurance strategies using a stochastic safe asset have important practical applications, such as the control of active-risk relative to...
Factor Investing in Sovereign Bond Markets – A Time-Series Perspective
2019
This paper has been produced as part of the "ETF, Indexing and Smart Beta Investment Strategies" Research Chair at EDHEC-Risk Institute, in partnership with Amundi. Following up on more than a decade-long research effort in the area of factor investing in equity markets, we have felt a timely need amongst asset owners and asset managers to gain a better understanding of the theoretical and practical challenges involved in harvesting risk premia in fixed-income markets. This paper “Factor Investing in Sovereign Bond Markets – A Time-Series Perspective” provides a detailed analysis of the...
Weathering the Storm in Commodity Risk Premia Strategies
2019
A 2018 Financial Times article described how commodity risk premia strategies had caused a “boom in trading volumes on exchanges” with estimates of $60 to $80 billion eventually going into these types of strategies (Meyer, 2018). With “risk premia strategies[,] investors systematically place bets based on so-called factors such as momentum, volatility and the pattern of prices for future delivery,” explained Meyer (2018). In this article, we describe risk premia strategies more broadly and note how commodity risk premia strategies are an extension of ideas that were originally from...
An Update on Weather Fear Premia Trades
2018
This article reviews a class of trading strategies known as “weather fear premia” trades. The article describes them, arguing that they may comprise a type of risk premium and noting the extra diligence needed in their risk management. The author notes that both superior trade construction and an analysis of fundamentals are also critical for the successful implementation of these types of trades. The article concludes with a cautionary note on a catastrophic trading blow-up that occurred in November 2018, illustrating the risk of such strategies.
EDHEC European ETF and Smart Beta and Factor Investing Survey 2018
2018
EDHEC-Risk Institute conducted its 11th survey of European investment professionals about the usage and perceptions of ETFs and smart beta and factor investing, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. The aim of this study is to analyse current European investor practices and perceptions on ETF and smart beta and factor investing strategies, as well as future plans in these domains. By comparing our results to those of our previous surveys, conducted for over a decade, we aim to shed some light on trends within the...
Gamma Trading Skills in Hedge Funds
2018
This paper explores the gamma trading, timing and managerial skills of individual hedge funds across categories. We replicate the non-linear payoffs of hedge funds with traded options, with the option features being endogenously defined in our replication model. On top of providing a flexible tool to create individual benchmarks for the payoff curvature of hedge fund, the model helps assigning hedge fund styles into three categories: directional with market timing skills, non-directional and market timers. Overall, our empirical results show that, on 30% of replicated funds in our sample (10...
Introducing “Flexicure” Goal-Based Investing Retirement Solutions
2018
Individuals need “flexicurity” in retirement solutions, and should not have to choose between security and flexibility. In this context, we propose to apply the principles of goal-based investing to the design of a new generation of retirement goal-based investing strategies, which can be regarded as risk-controlled target date funds that strike a balance between security and performance with respect to the objective of generating replacement income. These simple retirement goal-based investing strategies can be used to help individuals and households secure minimum levels of replacement...
Applying Goal-Based Investing Principles to the Retirement Problem - Executive Summary
2018
In most developed countries, pension systems are being threatened by rising demographic imbalances as well as lower growth in productivity. In this paper, we propose to apply the principles of goal-based investing to the design of a new generation of retirement goal-based investing strategies, which can be regarded as risk-controlled target date funds that strike a balance between safety and performance with respect to the objective of generating replacement income.
Maximising the Volatility Return: A Risk-Based Strategy for Homogeneous Groups of Assets
2018
The long-term performance of any portfolio can be decomposed as the sum of the weighted average long-term return of its assets plus the volatility return of the portfolio. Hence, maximising the volatility return of portfolios of assets with similar characteristics, such as factor portfolios, yields an important increase in performance and risk-adjusted return relative to market-cap weighted factor portfolios. We derive the closed-form solution of the strategy as well as properties that relate it to other risk-based weighting rules, such as minimum variance and risk parity. In our empirical...
Applying Goal-Based Investing Principles to the Retirement Problem
2018
In most developed countries, pension systems are being threatened by rising demographic imbalances as well as lower growth in productivity. With the need to supplement public and private retirement benefits via voluntary contributions, individuals are becoming increasingly responsible for their own retirement savings and investment decisions. This global trend poses substantial challenges to individuals, who typically lack the expertise required to make such complex financial decisions. Unfortunately, currently available products such as target date funds or annuities and variable annuities...
Are You Rich Enough for A (Single) Family Office
2018
Are you rich enough for a family office? Focusing purely on the financial economics of a family office, we derive the minimum assets under management compatible with the family office’s investment management skills and costs versus the family benchmark alternative as well as its risk aversion. We find that rules of thumb like “the minimum size for a family office is 100 million” can be grossly misleading. Our analysis is equally applicable to deciding on the threshold size for in-house asset management.
Inferring Petroleum-Complex Fundamentals
2018
This paper will discuss inferring crude-oil-market fundamentals through price-relationship data, largely through the perspective of a commodity futures trader. In doing so, the paper will briefly cover (1) the promise of big data; (2) the reality of data “black holes”; (3) the wealth of futures price data; (4) what futures prices potentially reveal about petroleum-complex fundamentals; and (5) caveats on the use of price data.
Construction Rules of Retirement Goal-Based Investing Indices
2018
This document presents the second family of EDHEC-Princeton Retirement Goal-Based Investing Indices. The Retirement Goal-Based Investing Indices represent the performance of dynamic strategies that aim to deliver high probabilities of reaching high levels of wealth upon retirement, or high levels of replacement income for a period equal to life expectancy at retirement.
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About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.
