EDHEC Publications
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.
Construction Rules of Retirement Goal Price Indices
2018
This document describes the first family of EDHEC-Princeton Retirement Goal-Based Investing Indices, that is the EDHEC-Princeton Goal Price Index series. These indices represent the price of retirement income or retirement capital. A Retirement Income index is the price to pay today to receive one dollar of replacement income every year in retirement and a Retirement Wealth index is the price of one dollar to be received at retirement date.
Smart Beta And Beyond: Maximising The Benefits Of Factor Investing
2018
Factor investing is an investment paradigm under which an investor decides how much to allocate to various factors, as opposed to various securities or asset classes. Its popularity has been growing since the turn of the millennium, especially after the recognition in 2008 that multiple asset classes can experience severe losses at the same time despite their apparent differences. The term “factor”, however, is used with many different meanings depending on the context and the targeted application. The main goal of this paper is to provide clarification with respect to the various possible...
Smart Equity Investing: Implementing Risk Optimisation Techniques on Strategic Beta Portfolios
2018
We examine the performance of risk-optimisation techniques on equity style portfolios. To form these portfolios, also called Strategic Beta factors by practitioners and data providers, we group stocks based on size, value and momentum characteristics through either independent or dependent sorting. Overall, performing risk-oriented strategies on style portfolios constructed with a dependent sort deliver greater abnormal returns. On average, we observe these strategies to significantly outperform 42% of the risk-oriented ETFs listed on US exchanges, compared to 31% when the risk-oriented...
Factor-Based Commodity Investing
2018
A multi-factor commodity portfolio combining the high momentum, low basis and high basismomentum commodity factor portfolios significantly, economically and statistically outperforms, widely used commodity benchmarks. We find evidence that a variance timing strategy applied to commodity factor portfolios improves the return to risk trade-off of unmanaged commodity portfolios. In contrast, dynamic commodities strategies based on commodity return prediction models provide little value added once variance timing has been applied to commodity portfolios.
EDHEC Survey On Equity Factor Investing
2017
In the past few years, equity factor investing has become increasingly popular among institutional investors and their managers.At the start, and following the work of Ang et al., one of the motivations for smart equity factor investing was to replace active managers who were considered costly with indices representative of a choice of factors that were well rewarded over the long term. Since then, factor investing has corresponded to numerous practices and motivations: • Modifying the factor exposure of a core active or passive cap-weighted portfolio (factor overlay); • De-risking the...
Maximising an Equity Portfolio Excess Growth Rate: A New Form of Smart Beta Strategy?
2017
It has been argued that the simple act of resetting portfolio weights back to the original weights can be a source of additional performance. This additional performance is known as the rebalancing premium and a detailed analysis (see for example Fernholz (2002)) suggests that the portfolio excess growth rate, defined as the difference between the portfolio expected growth rate and the weighted-average expected growth rate of the assets in the portfolio, is an important component of the rebalancing premium. In this context, one might wonder whether maximising a portfolio excess growth rate in...
Predicting Risk Premia for Treasury Bonds: The ERI Risk Premium Monitor
2017
Investors in the Treasury market often observe an upward-sloping yield curve.1 This means that, by assuming ‘duration risk’, they can very often invest at a higher yield than their funding cost. Yet, if the Expectation Hypothesis held true — if, that is, the steepness of the yield curve purely reflected expectations of future rising rates — no money could on average be made from this strategy. This prompts the obvious question: When does the steepness of the yield curve simply reflects expectations of rising rates, and when does it embed a substantial risk premium?
The ERI Stress Testing Tool: A Coherent Approach to Stress Testing
2017
Risk management, prudential macro- and micro-regulation, portfolio allocation and, in general, the strategic analysis of financial and economic outcomes share the common unstated assumption that the past conveys useful statistical information about the future. Indeed, a large part of contemporary finance rests on modern portfolio theory, which in turn places the statistically-determined vector of asset expected returns and their covariance matrix at centre stage.
Factoring Characteristics into Returns: A Clinical Approach to Fama-French Portfolio Decomposition
2017
This paper thoroughly analyses competing construction methods for factoring characteristics into returns. We show the importance of ensuring a proper diversification of the factor's portfolio constituents for producing relevant and unbiased risk factors or benchmark portfolios. This is an important issue to be solved for asset pricing and performance models defined as a function of characteristics. As a practical case, the paper works on the design of size and value spread portfolios à la Fama-French. This quasi-clinical investigation examines three methodological choices that have an impact...
The EDHEC European ETF And Smart Beta Survey 2016
2017
The 10th EDHEC European ETF and Smart Beta Survey is a comprehensive survey of 211 European ETF and smart beta investors, conducted as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”, which provides a detailed account of European investor perceptions and practices in the domain of ETFs and smart beta strategies.
A Note on the Valuation of Asset Management Firms
2017
Market capitalisation relative to assets under management is a metric often used to value asset management firms. The dividend discount model of HUBERMAN (2004) implies that cross-sectional variations in this metric are explained by cross-sectional differences in operating margins, yet that does not accord with the evidence from our data set.
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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.
