EDHEC-Risk and FirstRand to design and implement welfare-improving investment solutions

Written on 02 Jan 2020.

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New research chair Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals

EDHEC-Risk Institute and FirstRand Limited are partnering for the first time to launch a three-year research chair entitled “Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals” to expand the scientific literature on investor welfare-enhancing methodologies for portfolio construction in a goals-based investing framework.

Year 1 will focus on a detailed analysis of the interplay between diversification and insurance, with the aim of determining whether it is possible to achieve an improvement in investor welfare by creating a diversified portfolio of insured assets, as opposed to insuring a portfolio of diversified assets.

To answer this problem, in collaboration with the FirstRand team, EDHEC-Risk Institute will develop a comprehensive analysis of various forms of diversification strategies and various non-linear payoffs so as to measure the level of investor welfare achieved with two competing approaches as applied to different markets (equity, fixed-income, currencies, etc.). The two competing approaches are: 

  • Designing a well-diversified portfolio of individual assets and then generating a convex payoff aimed at maximising investor welfare;
  • Generating a convex payoff from individual assets and mixing these non-linear asset and factor exposures in a diversified portfolio in order to maximize investor welfare.

The research chair will involve a team led by Prof. Lionel Martellini, Director of EDHEC-Risk Institute, with Vincent Milhau, Scientific Director. Albert de Wet from FirstRand Group Treasury, along with Hannes du Plessis from the group’s Rand Merchant Bank Global Markets Division, will lead a team from across the group’s business to participate in the working committee of the research chair. “We are very excited and privileged to have access to the globally leading academic acumen of EDHEC-Risk Institute in tackling some of the most important unsolved questions in investment management” said du Plessis.

De Wet said that FirstRand believed working in partnership with EDHEC-Risk Institute represented an exciting opportunity to challenge the status quo in investment management.

“To partner with a leading, global think tank on this topic could be a game changer for the industry” he said. “FirstRand’s strategy is completely focused on delivering better outcomes for our clients and this research will definitely identify how we can most effectively service their needs.”

Prof. Martellini also welcomed the new partnership: “Even when implemented with the most advanced state­of­the­art techniques, diversification alone cannot satisfactorily address the needs and aspirations of all individual or institutional asset owners. Indeed, even a well-diversified portfolio based on objective market inputs such as a covariance matrix can fall short of an investor’s goal, which typically involves specific subjective inputs, for example related to the need to generate minimum and target levels of replacement income in retirement. Thus optimal payoffs should be determined by the investor’s preferences and horizon, and insurance is the risk management technique that can be used to most efficiently address the presence of these intrinsic features of an investment problem. With the support of FirstRand, one of the largest listed financial services groups in Africa, we very much look forward to advancing research on how diversification and insurance can be optimally combined within a comprehensive risk management framework best suited to addressing investors’ needs.”

More information about the partnership and research outputs is accessible in the industry partners dedicated page