
2009
The EDHEC European ETF Survey 2009 presents the results of a comprehensive survey of 360 institutional investors and private wealth managers conducted in January and February 2009. It also provides an overview of the ETF market and of the mechanisms behind ETFs, and shows how advanced techniques involving dynamic allocation strategies can be carried out with ETFs, in particular to implement the beneficial core-satellite approach to investment.
2009
The recent pension crisis has triggered a fierce debate in most developed countries between advocates of a tighter regulation designed to provide explicit incentives for pension funds to increase their focus on risk management, and those arguing that imposing short-term funding constraints and solvency requirements on such long-term investors would only increase the cost of pension financing. We analyse this question in the context of a formal continuous-time dynamic asset allocation model for an investor facing liability commitments subject to inflation and interest rate risks. In an...
2009
An in-depth study of the short-selling market calls into question both the reasons for the decision to ban short selling and the prejudices that weigh on those who short. According to recently published data (for the United States in particular), a large majority of short sellers are market makers who are hedging their bets on the options markets. They were not affected by the ban, which means that those who were using options to take synthetic short positions continued to do so. The others involved in short selling are mainly hedge funds.
2009
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. But it seems that these new regulations and techniques have not enabled the pension fund industry to weather the current return of the perfect storm? This study examines recent publications and looks into the reasons for the fall in funding ratios.
2009
This paper uses an error correction model in order to predict the changes in equity risk premia for a set of emerging markets and the US market. It analyses the period 2001-2006 for different forecasting horizons and considers different sub-samples. Using fundamental financial ratios and including variables such as the implied volatility of the S&P 500 index, the paper finds some evidence of predictability of equity risk premia for these markets. Other preliminary results include the tests of stationarity for all the variables and evidence is found of cointegration among some of the...
2009
This study analyses the impact of prudential and accounting constraints on the asset-liability management (ALM) of European pension funds in the Netherlands, the UK, Germany, and Switzerland.
2009
This paper analyses twelve years of data on EDHEC Alternative Indexes for different hedge fund strategies to provide some perspective on their performance. The extraordinary events of 2008 were not without an impact on hedge fund returns. Funds of hedge funds lost 17% in 2008, posting their worst annual returns since we began keeping records in 1997. Hedge fund investments lost value across the board. Except for CTAs and Short Sellers, all strategies posted their worst losses in 2008. Even after the impact of a calamitous year, half the strategies still post cumulative returns above 100% for...
2009
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. As it happens, a single minor change would make it possible to restore much of the confidence in...
2009
The EDHEC European Investment Practices Survey 2008 (EDHEC 2008) sheds light on current practices in the industry and compares these practices with the recent state of the art as described in the investment literature. The results of the survey show that the industry does not fully exploit a number of proven portfolio optimisation techniques that research has made readily available, such as management of extreme risks, improved covariance estimation or Bayesian and resampling techniques. We called for reactions to these results; the objective was to get feedback from the European industry on...
2009
This paper presents an empirical analysis of the benefits of alternative forms of investment strategies from an asset-liability management perspective. Using a vector error correction model (VECM) that explicitly distinguishes between short-term and long-term dynamics in the joint distribution of asset returns and inflation, we identify the presence of long-term cointegration relationships between the return on typical pension fund liabilities and the return of various traditional and alternative asset classes. A revisited version of this paper was published in the Summer 2009 issue of The...
2008
A "call for reaction" was sent by EDHEC to international institutional investors and asset managers to compare investor views of the amendments to the IAS39 and IFRS 7 standards not just with the conclusions of an initial EDHEC study ("The Fair Value Controversy: Ignoring the Real Issue"), but also with the ambitions of these reforms prepared and adopted in great haste. The call for reaction received more than 800 responses and represents the first international survey on the relevance of the reforms carried out by the IASB under pressure from the European Commission. The results of this...
2008
The results of this EDHEC position paper show that none of the sixty-two funds in the sample, covering various investment zones, manage to produce both positive and significant alpha (outperformance) over a six-year period and that the few significant alpha values are negative. Moreover, most of the funds generate negative, non-significant alpha. The study also shows that alpha values estimated over one year change greatly from one year to the next. The use of a period of various lengths shows that results can vary greatly from one length to another.
2008
This paper introduces a continuous-time dynamic asset allocation model for an investor facing liability constraints in the presence of inflation and interest rate risks. When funding ratio constraints are explicitly accounted for, the optimal policies, for which we obtain analytical expressions, are shown to extend standard Option-Based Portfolio Insurance (OBPI) strategies to a relative risk context, with the liability-hedging portfolio replacing the risk-free asset. We also show that the introduction of maximum funding ratio targets would allow pension funds to decrease the cost of downside...
2008
In the context of the measures being taken to put an end to the current financial crisis, the extent to which fair value accounting can be blamed—or whether it can be blamed at all—for the intensification of the slump has been widely debated. This new EDHEC position paper shows that this debate, which ignores the real issues, has led to accounting changes that are at odds with their objectives. We examine the relevance of the accusations levelled at fair value and of the responses proposed in an attempt to improve the use of fair value accounting and make it more relevant to the economic...
2008
This publication covers a broad range of material related to TCA and best execution. As understanding transaction costs is crucial to properly assessing the quality of implementation decisions and complying with the best execution obligation in the post-MiFID environment, it provides a state of the art of TCA fundamentals, undertakes a critical review of existing post-trade TCA techniques, and defines a new and complete approach.
2008
Following recent research on the relevance of idiosyncratic risk in asset pricing models, this paper proposes to use total volatility as a model-free estimate of a stock's excess expected return, and analyze the implications in terms of the design of improved equity benchmarks. It finds that maximum Sharpe ratio portfolios consistent with such expected return proxies, and built upon improved estimates of the correlation parameters, significantly outperform market cap weighted schemes on a risk-adjusted basis. This analysis, which rehabilitates the role of the tangency portfolio from modern...
2008
With the great economic growth of the past decade, private wealth management has become a very profitable business for banks worldwide. As a result, more and more asset management firms have jumped into the fray and competition has increased steadily. These industry changes have led to renewed attempts to improve client relationships and to develop tools and methods to enhance advisor effectiveness. Catering to the client’s specific needs is thus a central concern of private wealth managers. To take the client objectives into account, investments are frequently adapted to the client’s risk...
2008
Instead of assuming the distribution of return series, Engle and Manganelli (2004) propose a new Value-at-Risk (VaR) modeling approach, Conditional Autoregressive Value-at-Risk (CAViaR), to directly compute the quantile of an individual asset’s returns which performs better in many cases than those that invert a return distribution. This paper explores more flexible CAViaR models that allow VaR prediction to depend upon a richer information set involving returns on an index. Specifically, we formulate a time-varying CAViaR model whose parameters vary according to the evolution of the index. A...
2008
In September 2006, Amaranth Advisors, LLC collapsed under the weight of losses, which were reported as $6.6-billion. Unfortunately, this meant that the fund had become responsible for the largest hedge-fund debacle to have thus far occurred. There were and are many surprising aspects of this debacle. How could a well-respected hedge fund implode so quickly? A revisited version of this paper was published in the Spring 2008 issue of the Journal of Alternative Investments.
2008
In US dollar terms, crude oil prices increased 525% from the end of 2001 through July 31st, 2008. Was this rally yet another speculative bubble? Specifically, was the oil-price rally based on speculative excess rather than fundamental supply-and-demand factors? In a new position paper, “The Oil Markets: Let the Data Speak for Itself”, we argue that when the oil supply-and-demand balance becomes sufficiently tight and that when effective OPEC spare capacity becomes sufficiently low that it is logical to see very high prices to ration demand and/or encourage additional supply. That is the job...
2008
This article provides some preliminary contributions to the debate over the sources of return in the commodity markets, based on work that is drawn from the 2007 Risk Book, Intelligent Commodity Investing. Essentially, Till (2007) and Feldman and Till (2006) find that in examining a 55-year period in three grain futures markets that the term-structure of an individual contract is the dominant source of return, but only over long (five-year) time-frames. During periods of price stability, grain commodity futures prices have been naturally mean-reverting, meaning that sources of return...
2008
Equity returns are more dependent in bear markets than in bull markets. Previous studies have argued that a multivariate GARCH model or a regime switching (RS) model based on normal innovations could reproduce this asymmetric extreme dependence. This paper shows analytically that it cannot be the case. It proposes an alternative model that allows for tail dependence in lower returns and keeps tail independence for upper returns. This model is applied to international equity and bond markets to investigate their dependence structure. A revisited version of this paper was published in the...
2008
The EDHEC European ETF Survey 2008 is part of the EDHEC Risk and Asset Management Research Centre’s Indices and Benchmarking research programme. This programme has led to extensive research on indices and benchmarks in both the hedge fund universe and the more traditional investment classes. In 2006, EDHEC published a study of the quality of major stock market indices. Following up on this study, EDHEC is carrying out work that assesses the advantages and disadvantages of various new forms of equity indices. In view of the growth and development of ETFs in Europe, and in view of their growing...
2008
This paper analyses a set of characteristics-based indices that were recently launched on the US market and that, it has been argued, outperform standard market cap-weighted indices over particular backtest samples by a considerable margin. It analyses the performance of an exhaustive list of these indices and shows that i) the outperformance over value-weighted indices may be negative over long time periods, and ii) that there is no significant outperformance over simple equal-weighted indices. Furthermore, an analysis of both the style and sector exposures of characteristics-based indices...
2008
In July of 2007, we published a major position paper on the subject of hedge fund replication, entitled "The Myths and Limits of Passive Hedge Fund Replication: An Attractive Concept… Still a Work-in-Progress." That paper examined from both a theoretical and an empirical standpoint the respective benefits and limits of the two different approaches to hedge fund replication, "factor-based replication" and "payoff distribution replication." The present publication covers the industry reactions to last year’s position paper. The objective of the current paper is to compare the results of the...
2008
The recent pension crisis has triggered a fierce debate in most developed countries between advocates of tighter regulation designed to provide explicit incentives for pension funds to increase their focus on risk management and those arguing that imposing short-term funding constraints and solvency requirements on such long-term investors would only increase the cost of pension financing.
2008
This paper examines simple timing strategies for commodity momentum, based on whether the market is in backwardation or contango. It finds that these timed strategies outperform winner, loser and momentum strategies. The analysis thus provides evidence that commodity momentum is a dynamic phenomenon, and has implications for commodity managers as it provides simple active strategies that outperform passive momentum benchmarks.
2008
Institutional investors in general and pension funds in particular have been dramatically affected by negative stock market returns at the beginning of the millennium. In the context of a cumulative asset/liability deficit that was estimated at more than £55 billion in 2003 for the companies in the FTSE 100, institutional investors are seeking new asset classes or forms of investment management that would allow them to broaden their traditional choice of asset allocation. An alternative investment offering has been introduced in the past several years, allowing investors to optimise the risk/...
2008
This paper attempts to determine what fraction a static investor should optimally allocate to investment strategies with convex exposure to stock market returns in a general economy with stochastically time-varying interest rates and stock market excess returns. The results obtained using Monte Carlo analysis show that investors should allocate between 45% and 63% of their portfolio to such portfolio insurance strategies. Moreover, the inclusion of portfolio insurance strategies leads to important utility gains. The results are robust with respect to the choice of the objective, the presence...
2008
This paper is part of a broader project examining the rules of political disclosure and their consequences. It presents new measures of disclosure by MPs in 126 countries, and examines their determinants as well as consequences for corruption. The measures distinguished between disclosure by law and in practice, between public and non-public disclosure, as well as between more and less comprehensive disclosure. These distinctions motivated the creation of several indices of disclosure in sample countries.