EDHEC Publications
A Review of the U.S. Senate Report on the Amaranth Debacle
2007
This paper summarises what the U.S. Senate Permanent Subcommittee on Investigations' report on the Amaranth debacle covered, and briefly touches upon important areas that the report omitted.
State Dependence Can Explain the Risk Aversion Puzzle
2007
Risk aversion functions extracted from observed stock and option prices can be negative as shown by Aït-Sahalia and Lo (2000) and Jackwerth (2000). We rationalize this puzzle by a lack of conditioning on latent state variables. Once properly conditioned, risk aversion functions and pricing kernels are consistent with economic theory. A revisited version of this working paper was published in the April 2008 issue of the Review of Financial Studies.
Risk Management and Portfolio Construction in a Commodity Futures Programme
2007
This article focuses on risk management within the context of a total-return futures program centered on commodities. The following issues are addressed: the evaluation of normal versus eventful risk, the sizing of trades and strategy buckets, and the construction of a portfolio, which takes into consideration these risk and sizing metrics. The article provides examples from three historical portfolios in order to make this discussion concrete and practical.
Performance Measurement for Traditional Investment, Literature Survey
2007
This paper presents the state of the art of performance measurement in the area of traditional investment, from a simple evaluation of portfolio return to the more sophisticated techniques including risk in its various acceptations. It also describes models that take a step away from modern portfolio theory and allow a consideration of cases beyond mean-variance theory.
Asset-Liability Management Decisions In Private Banking
2007
Working from the observation that the contribution of asset-liability management techniques developed for institutional investors is not yet familiar within private banking, a new study from the EDHEC Risk and Asset Management Research Centre, entitled “Asset-Liability Management Decisions in Private Banking” shows the expected benefits of a transposition of that kind. According to the authors of the study, Noël Amenc, Lionel Martellini and Volker Ziemann, asset-liability management represents a genuine means of adding value to private banking that has not been sufficiently explored to date....
Response to CESR public consultation on Best Execution under MiFID - On the Importance of Transaction Cost Analysis
2007
Response to the CESR's public consultation on best execution under MiFID, EDHEC strongly defend the idea that the analysis of the total net proceeds of financial transactions represent the most important factor for assessing execution quality. But this analysis also represents the most significant conceptual and technical challenge the industry will face in order to consistently monitor execution quality, and therefore allow best execution to become a tangible and measurable objective for investment firms.
Quantification of Hedge Fund Default Risk
2007
In a working paper entitled ‘Quantification of Hedge Fund Default Risk’, which led to the publication of a full article in the Fall issue of the Journal of Alternative Investments, Jean-René Giraud and Stéphane Daul of the EDHEC Risk and Asset Management Research Centre, together with co-author Corentin Christory, examined numerous cases of hedge fund default in order to find the common factors behind fund failures. The objective of the paper was to provide an initial framework for quantifying the non-financial extreme risk of hedge funds with the aim of factoring it into the portfolio...
CP20: Significant improvements in the Solvency II framework but grave incoherencies remain - EDHEC response to Consultation Paper n° 20
2007
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".
Transactions Cost Analysis in Europe: Current and Best Practices - European Survey
2007
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.
Extending Black-Litterman Analysis Beyond the Mean-Variance Framework
2007
This paper introduces a suitable extension of the Black-Litterman Bayesian approach to portfolio construction in the presence of non-trivial preferences about higher moments of asset return distributions. It also presents an application to active style allocation decisions in the hedge fund universe. Overall the results suggest that significant value can be added in a hedge fund portfolio through the systematic implementation of active style allocation decisions provided that a sound investment process is implemented that accounts for both non-normality and parameter uncertainty in hedge fund...
A Copula Approach to Value-at-Risk Estimation for Fixed-Income Portfolios
2007
This paper introduces a multivariate copula approach to Value-at-Risk estimation for fixed income portfolios. Using a parsimonious model to extract time-varying parameters used as proxies for factors affecting the shape of the yield curve, and a Student copula to model the dependence structure of these factors, we are able to generate VaR estimates that strongly dominate standard VaR estimates in formal out-of-sample tests. A revisited version of this paper was published in the Summer 2007 issue of the Journal of Fixed Income.
The Challenge of Hedge Fund Measurement: a Toolbox Rather Than a Pandora's Box
2006
This paper, which is being written to provide an overview of the multitude of publications we have seen on hedge fund performance, is the result of a reading and analysis of about 200 studies on this subject. The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. The explanation of this complexity lies in the particular features of alternative funds.
QIS 2: Modelling that is at odds with the prudential objectives of Solvency II
2006
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....
The Impact Of IFRS And Solvency II On Asset-Liability Management And Asset Management In Insurance Companies
2006
A new study jointly produced by the EDHEC Risk and Asset Management Research Centre and the EDHEC Financial Analysis and Accounting Research Centre entitled ‘The Impact of IFRS and Solvency II on Asset-Liability Management and Asset Management in Insurance Companies’ reveals the contradictions inherent in the current Solvency II and IFRS provisions for insurance companies. The report shows notably that the numerous provisions proposed by the IFRS are at odds with the good risk management practices put forward by Solvency II. While IFRS and Solvency II should lead to a genuine evolution in the...
Assessing the Quality of Stock Market Indices: Requirements for Asset Allocation and Performance Measurement
2006
At a presentation to the members of the Af2i (French association of institutional investors) in Paris on September 12th, Noël Amenc, Director of the EDHEC Risk and Asset Management Research Centre, warned his institutional audience about the dangers of relying solely on stock market indices as a benchmark for their investment management performance.
Hedge Fund Returns: An Overview of Return-Based and Asset-Based Style Factors
2006
The goal of modelling is to find one or more factors that offer the best explanatory power for a given variable. Applied to hedge fund returns, it allows their sources to be better understood. In the search for significant factors, two approaches can be employed, namely return-based style factors (RBS factors) and asset-based-style factors (ABS factors).
Momentum Profits and Time-Varying Unsystematic Risk
2006
This article considers whether the widely documented momentum profits are a compensation for time-varying unsystematic risk as described by the family of autoregressive conditionally heteroscedastic models. The motivation for estimating a GJR-GARCH(1,1)-M model stems from the fact that, since losers have a higher probability than winners to disclose bad news, one cannot assume a symmetric response of volatility to good and bad news. A revisited version of this paper was published in the April 2008 issue of the Journal of Banking & Finance.
A Reply to the CESR Recommendations on the Eligibility of Hedge Fund Indices for Investment of UCITS
2006
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.
The Tortoise versus the Hare: The Role of Term Structure versus Spot Price Trends in Determining Commodity Futures Returns
2006
In the past, even if spot commodity prices declined, a commodity futures investor could still have a positive statistical expectation of profit, and that has been through the “roll yield” embedded in certain commodity futures contracts.When a near-month futures contract is trading at a premium to more distant contracts, we say that a commodity futures curve is in “backwardation.” Conversely, when a near-month contract is trading at a discount to more distant contracts, we say that the curve is in “contango.” When a commodity futures contract is in backwardation, an investor has two potential...
The Impact of Non-Normality Risks and Tactical Trading on Hedge Fund Alphas
2006
This paper highlights the importance of non-normality risks and tactical asset allocation in assessing hedge fund performance. As such, it underlines the inaccuracies of previous papers on hedge fund performance that ignored higher moments in the distribution of hedge fund returns and assumed constant asset allocation. Correcting for these shortcomings, the authors find that failure to account for non-normality risks and tactical asset allocation on average leads to an overstatement of performance by 1.54% and to incorrect statistical inference on the performance of 1 out of 4 funds. On...
How to Include Hedge Funds in a Risk Allocation Framework
2006
This article, which was originally written as a two-part series, discusses the innovative ways in which academics and practitioners are enhancing asset allocation methodologies in order to incorporate hedge funds. It begins by discussing the current practice in asset allocation work and goes on to describe the unique problems that occur when this methodology is applied to hedge funds. It also discusses a number of leading edge solutions to these problems. Included are anecdotes from anonymous hedge fund managers and traders, which illustrate some of the academic points made in the article. A...
Commodities at the Cross-Roads: Where to Now?
2006
While it is useful to review the past performance of commodities, investors are most concerned about what to expect going forward. And unfortunately, one cannot look in the rear-view mirror to see what is coming up ahead. In this article, the author reviews the drivers of commodity returns along with some observations on what the future may hold.
Hidden Liquidity in a Pure Order-Driven Market
2006
This letter focuses on hidden orders and shows how they contribute to liquidity. Based on a rebuilt order book from Euronext data, the part of liquidity which is not disclosed to market participants is described and its determinants are analyzed. A revisited version of this paper was published in the July 2006 issue of Finance Letters.
Derivatives Strategies for Bond Portfolios
2006
In this paper, the authors examine how standard exchange-traded fixed-income derivatives (futures and options on futures contracts) can be included in a sound risk and asset management process so as to improve risk and return performance characteristics of managed portfolios. The results show that the non-linear character of the returns on protective option strategies offers appealing risk reduction properties in the pure asset management context. Consequently, such strategies should optimally receive a significant allocation, especially when investors are concerned with minimising extreme...
Backwardation and Commodity Futures Performance: Evidence from Evolving Agricultural Markets
2006
The recent performance of commodities has spurred interest in the various sources of returns to commodity investment. The underlying sources of return include the potential return due to backwardation. The extent of backwardation existing in various commodities depends both on the actual commodity examined and the changing characteristics of that particular commodity market. In this paper, we examine the role of backwardation in the performance of passive long positions in soybeans, corn, and wheat futures over the period, 1950 to 2004. We find that over this period, backwardation has been...
Inferences about the Amaranth Case and the Emerging Maturity of the Hedge Fund Industry
2006
The Amaranth case is surprising in many ways. It is definitely a surprise that a well-respected multi-strategy hedge fund could lose about $6-billion in little over a week. It is perhaps an even greater surprise that such a loss would have little knock-on effects on the hedge fund industry and the wider capital markets. This paper will focus on providing new inferences on the riskiness of Amaranth’s trading strategies.
The Law and Economics of Self-Dealing
2006
This paper presents a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, governing a specific self-dealing transaction. This theoretically-grounded index predicts a variety of stock market outcomes, and generally works better than the previously introduced index of anti-director rights. A...
Cash Equity Transaction Cost Analysis: State of the art … and beyond
2006
MiFID is the second step in the harmonization of the European capital markets industry and intends to adapt the first Investment Services Directive (ISD 1 issued in 1993) to the realities of the current market structures. After having clarified the nature of the new regulation, this paper first describes the role of Transaction Cost Analysis in the fulfilment of the best execution obligation as well as the limits of existing frameworks. Then, the paper presents a new methodology that makes it possible to measure the quality of execution as part of peer group review and identify whether the...
La problématique du taux d’actualisation des concessionnaires d’autoroutes : le cas des ASF
2006
L’objectif de ce rapport a été, dans un premier temps, de trancher le débat méthodologique sur le choix de la valeur du taux d’actualisation des concessionnaires autoroutiers dans le cadre de leur actuelle privatisation. De nombreuses polémiques sont nées en référence à un rapport du Commissariat général au Plan de février 2005, qui conclut que les projets d’investissements publics doivent être réalisés sur 17/23 la base d’un taux d’actualisation de 4%. A notre avis, ce taux ne peut pas être retenu dans le cadre d’une valorisation effectuée par un investisseur privé, car il n’intègre...
Determinants of Funds of Hedge Funds' Performance
2006
Despite institutional investors’ growing interest in funds of hedge funds, little attention has been paid so far to their added value and/or the sources of their added value. This is all the more striking in that funds of funds are far from transparent and are, with their double-fee structure, relatively costly investment vehicles. The objective in this paper is to fill that gap and find out whether funds of funds add value through strategic allocation and active management. A revisited version of this paper was published in the Winter 2006 issue of the Journal of Investing.
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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.
