EDHEC Publications
From Deterministic To Stochastic Life-Cycle Investing: Implications For The Design Of Improved Forms Of Target Date Funds
2010
In an attempt to address the concern over financially illiterate individuals being increasingly responsible for investment decisions related to retirement risk, the financial industry has started to design dedicated mutual fund products known as target date funds. These funds, whose aim is to provide investors with one-stop solutions to their life-cycle investment needs, typically propose a deterministic decrease of equity allocation until a date called the target date of the fund. This approach, however, has been found inconsistent with the prescriptions of standard life-cycle investment...
New Frontiers In Benchmarking And Liability-Driven Investing
2010
Meeting the challenges of modern investment practice involves the design of novel forms of investment solutions, as opposed to investment products, customised to meet investors' long-term objectives while respecting the short-term (regulatory or otherwise) constraints they have to face. This paper argues that such new forms of investment solutions should rely on the use of improved performance-seeking and liability-hedging building-block portfolios, as well as on the use of improved dynamic allocation strategies.
Optimal Hedge Fund Allocation with Improved Estimates for Coskewness and Cokurtosis Parameters
2010
Since hedge fund returns are not normally distributed, mean-variance optimisation techniques, which would lead to substantial welfare losses from the investor’s perspective, need to be replaced by optimisation procedures incorporating higher-order moments and comoments. In this context, optimal portfolio decisions involving hedge fund style allocation require not only estimates for covariance parameters but also estimates for coskewness and cokurtosis parameters. This is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis....
Do Funds of Hedge Funds Really Add Value: A Post-Crisis Analysis
2010
In spite of a somewhat disappointing performance throughout the crisis, and a series of high-profile scandals, investors are showing interest in hedge funds. Still, funds of hedge funds keep on experiencing outflows. Can this phenomenon be explained by the failure of fund of hedge fund managers to deliver on their promise to add value through active management, or is it symptomatic of a move toward greater disintermediation in the hedge fund industry? Little attention has been paid so far to the added value, and the sources of the added value, of funds of hedge funds. A revisited version of...
The Performance of Socially Responsible Investment and Sustainable Development in France: An Update after the Financial Crisis
2010
In an initial study done in 2008, EDHEC-Risk Institute established that socially responsible (SRI) funds—those funds made by selecting securities that meet ESG (environmental, social, governance) criteria—distributed in France did not produce both positive and statistically significant alpha. That study, which relied on the Fama-French three-factor model, covered a six-year period ending in December 2007, thus not including the recent financial crisis. The purpose of the present study was to update these results by extending the analysis to the years 2008 and 2009.
Banking on Liquidity: Liquidity, Collateral and Derivatives
2010
Changes in the nature and magnitude of banking activities over the past few decades are fundamental to comprehension of the failings that resulted in the financial crisis. The provision of financial risk management services and products by banks on the scale documented appears problematic. Derivatives contracts are the principal instruments used in financial risk management. The role and extent of liquidity and collateral security in facilitating these developments is investigated and policy recommendations advanced.
A Portfolio Approach to Venture Capital Financing
2010
This paper studies the contracting choices between an entrepreneur and venture capital investors in a portfolio context. We rely on the mean-variance framework and derive the optimal choices for an entrepreneur with and without the presence of different kinds of venture capitalists. In particular, we show that the entrepreneur always has the incentive to share the risk and benefits of the venture whenever possible. On the basis of their objectives and characteristics, we distinguish the situations of the corporate, independent, and bank-sponsored venture capital funds. Our framework enables...
A New Look At Minimum Variance Investing
2010
Disappointed with the performance of market-weighted benchmark portfolios yet skeptical about the merits of active portfolio management, investors in recent years turned to alternative index definitions. Minimum variance investing is one of these popular rule driven, i.e. new passive concepts. This paper shows theoretically and empirically that the portfolio construction process behind minimum variance investing implicitly picks up risk-based pricing anomalies. In other words the minimum variance tends to hold low beta and low residual risk stocks. Long/short portfolios based on these...
The Sophisticated and the Simple: The Profitability of Contrarian Strategies from a Portfolio Manager's Perspective
2010
Valuation signals have been among the most popular with equity portfolio managers and have recently attracted significant interest from cross-asset managers. Given a large variation of techniques and theories with regard to how value is measured, this paper investigates the efficacy of alternative value measures. It considers a cross-section of simple and sophisticated alternative measures and focuses on comparison metrics that are of primary interest for equity portfolio managers. A revisited version of this paper was published in the January 2014 issue of European Financial Management.
Strategic and Tactical Roles of Enhanced-Commodity Indices
2010
This article compares the risk and performance of two traditional commodity indices with enhanced long-only versions that exploit signals based on momentum, term structure and the time-to-maturity of the contracts. Regarding risk diversification and inflation hedging properties, the enhanced indices are as effective tools for strategic asset allocation as the traditional ones.
French Corporate Social Responsibility: Which Dimension Pays More?
2010
We use a sample of 148 events related to corporate social responsibility (CSR) to assess the impact of CSR on corporate financial performance. There is considerable heterogeneity in market reaction to different dimensions of CSR. Not all dimensions offer a positive reward; some yield a negative and even statistically significant impact on the firms’ stock returns. One main conclusion of this study is that socially responsible investment is not an excuse for passive management. There is still room for timing and stock picking within the socially responsible universe of stocks.
EDHEC Survey Of The Asset And Liability Management Practices Of European Pension Funds
2010
EDHEC-Risk Institute took a recent survey of pension funds, their advisers, regulators, and fund managers. One hundred twenty-nine of these asset/liability management (ALM) specialists, representing assets under management (AUM) of around €3 trillion, responded to the survey. Pension funds and their sponsors account for approximately €0.9 trillion.
The EDHEC European ETF Survey 2010
2010
The EDHEC European ETF Survey 2010 presents the results of a comprehensive survey of 192 institutional investors, asset managers and private wealth managers conducted between January and March 2010. It analyses the possible uses of ETFs (exchange-traded funds) in investment management and gives a detailed account of current perceptions and practices of European investors in ETFs.
Option Pricing and Hedging in the Presence of Cross-Hedge Risk
2010
This paper addresses the question of option pricing and hedging when the underlying asset is not available for dynamic trading, and some other asset is used as a substitute. It first provides an overview of the various hedging methodologies that can be used in this incomplete market setting, distinguishing between self-financing and non-self-financing strategies. Focussing on a local risk-minimization criterion, it presents an analytical expression for the optimal hedging strategy and the corresponding option price. It also provides a quantitative measure of the residual risk over the life of...
A Moment Expansion of Downside Risk Measures
2010
This paper introduces a decomposition of a sub-class of spectral risk measures in terms of L-moments accounting for geometric characteristics of the return distribution similar to the ones described by the ordinary moments. The decomposition completely characterises the spectral risk measures with square-integrable risk aversion functions and can be regarded as a link between higher-order moment risk and downside risk measures. Coherent approximations based on only a few L-moments can be successfully constructed for continuous risk aversion functions and can be applied to problems in...
Short Selling and the Price Discovery Process
2010
This paper shows that stock prices impound more information when short sellers are more active. First, in a large panel of NYSE-listed stocks, high-frequency informational efficiency of prices improves with greater daily shorting flow. Second, at monthly and annual horizons, more shorting flow accelerates the incorporation of public information into prices. Third, greater shorting flow reduces post-earnings announcement drift for negative earnings surprises. Fourth, we demonstrate that short sellers change their trading around extreme return events in a way that aids price discovery. These...
The Time-Varying Liquidity Risk of Value and Growth Stocks
2010
This paper studies the liquidity exposures of value and growth stocks over business cycles. In the worst times, value stocks have higher liquidity betas than in the best times, while the opposite holds for growth stocks. Small value stocks have higher liquidity exposures than small growth stocks in the worst times. Small growth stocks have higher liquidity exposures than small value stocks in the best times. The results are consistent with a flight-to-quality explanation for the countercyclical nature of the value premium.
Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales
2010
The ban on shorting had negative effects on the hedge fund industry. It also had a negative impact on the returns and the market quality of the stocks placed off limits by the ban. This paper examines the impact of the ban on broad market indices in the US and in Europe (the United Kingdom, France, and Germany). Since these indices and their performance are of great concern to the asset management and hedge fund industries, it is important for practitioners and policy-makers to understand the impact of changing the rules of the game (banning short sales) on the return distribution of these...
Adoption of Green Investing by Institutional Investors: A European Survey
2010
This document reviews the concept of green investing and reports the results of a European survey of investment management professionals. The objective is to provide background on industry and academic research into green investing and assess the views and uses of green investing. Our survey shows that green investing is a significant movement in which survey respondents are heavily involved. Nearly 90% of respondents consider environmental protection an investment theme and the same percentage plans to do more green investing in the future.
On the Suitability of the Calibration of Private Equity Risk in the Solvency II Standard Formula
2010
This publication studies the calibration of private equity risk in the Solvency II standard formula by analysing the correlation of listed share performance, measured through an MSCI index (Europe or the United States, depending on the region we consider in our study) and private equity performance.
Nonmyopic Optimal Portfolios in Viable Markets
2010
We provide a representation for the nonmyopic optimal portfolio of an agent consuming only at the terminal horizon when the single state variable follows a general diffusion process and the market consists of one risky asset and a risk-free asset. The key term of our representation is a new object that we call the “rate of macroeconomic fluctuation” whose properties are fundamental for the portfolio dynamics. We show that, under natural cyclicality conditions, (i) the agent’s hedging demand is positive (negative) when the product of his prudence and risk tolerance is below (above) 2 and (ii)...
Risk Control through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation
2010
This paper examines the ways dynamic asset allocation techniques can be used to manage portfolios of exchange-traded funds (ETFs). First, dynamic allocation to stock and bond ETFs and traditional static diversification are compared. Second, tactical allocation to stock and bond ETFs and risk-controlled allocation—with both forms of allocation informed by the same return forecasts—are compared. The paper shows that dynamic asset allocation techniques that can be used with frequently traded and broadly diversified instruments such as ETFs make it possible better to address investor concerns...
Are Hedge-Fund UCITS the Cure-All?
2010
As part of the CACEIS research chair on non-financial risks in investment funds, EDHEC surveyed UCITS and alternative asset managers, their service providers, external observers, and investors for their views of structuring hedge fund strategies as UCITS. The 437 respondents report assets under management (AUM) of more than €13 trillion. Investment fund managers account for roughly €7 trillion of these assets. In general, the survey suggests that institutional investors bound by quantitative restrictions will ask fund managers and distributors to repackage hedge fund strategies as UCITS. For...
Improved Estimates of Higher-Order Comoments and Implications for Portfolio Selection
2010
In the presence of non-normally distributed asset returns, optimal portfolio selection techniques require estimates for variance-covariance parameters, along with estimates for higher-order moments and comoments of the return distribution. This is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis. This paper extends the existing literature, which has mostly focused on the covariance matrix, by introducing improved estimators for the coskewness and cokurtosis parameters. A revisited version of this paper was published in the...
Efficient Indexation: An Alternative To Cap-Weighted Indices
2010
This paper introduces a novel method for the construction of equity indices that, unlike their cap-weighted counterparts, offer an efficient risk/return tradeoff. The index construction method goes back to the roots of modern portfolio theory and focuses on the tangency portfolio, the portfolio that weights index constituents so as to obtain the highest possible Sharpe ratio. The major challenge is to generate the required input parameters in a robust manner. A revisited version of this working paper was published in the Fourth Quarter 2011 issue of the Journal of Investment Management.
Does Finance Theory Make The Case For Capitalisation-Weighting Indexing?
2010
Proponents of cap-weighted stock market indices often argue that such indices provide efficient risk/return portfolios. This paper reviews the evidence in the academic literature and concludes that only under very unrealistic assumptions would such indices be efficient investments. In the presence of realistic constraints and frictions, cap-weighted indices cannot, according to the academic literature, be expected to be efficient investments. A revisited version of this working paper was published in the Fall 2011 issue of the Journal of Index Investing.
Has There Been Excessive Speculation in the US Oil Futures Markets? - What Can We (Carefully) Conclude from New CFTC Data?
2009
Because many facets of the global oil markets have not been sufficiently transparent, it is unclear how much of the oil-price rally that peaked in July 2008 can be put down to speculation. This uncertainty has led to concerns that there was actually excessive speculation in the oil derivatives markets. In an effort to make the oil markets more transparent, the U.S. Commodity Futures Trading Commission has recently launched the “Disaggregated Commitments of Traders” report. This report includes three years of enhanced market-participant data for twenty-two commodity futures contracts. This...
Fairness in Trading — A Microeconomic Interpretation
2009
We show that non-linear transaction costs generate external effects between accounts due to trade volume dependent marginal transaction costs. For an asset manager with multiple clients this raises the question of fairness. How do I ensure I treat all clients fairly? In general, two possible solutions exist. A revisited version of this paper was published in the Winter 2010 issue of the Journal of Trading.
An Alternative Route to Performance Hypothesis Testing
2009
A wide variety of risk–return ratios is routinely reported in sales pitches as well as academic publications. Few attempts have been made, however, to look at the small sample distributions of these estimators in order to derive confidence bands. The reason for this has been the extreme difficulty of working out the required statistics for most risk–return ratios.
A Note On Portfolio Choice For Sovereign Wealth Funds
2009
The vast current account surpluses of commodity-rich nations, combined with record current account deficits in developed markets (US, Britain), have created a new type of investor. Sovereign wealth funds (SWFs) are instrumental in deciding how these surpluses will be invested. A revisited version of this paper was published in Financial Markets and Portfolio Management, Vol. 23, 2009, Nº 3.
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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.
