The objective of the Société Générale Corporate & Investment Banking (SGCIB) "Structured Equity Investment Strategies for Long-Term Asian Investors"strategic research project is to develop a framework for the comparative analysis of various forms of allocation to equities, including new structured forms of investment management, from an institutional asset allocation and risk management standpoint.
The project will build on earlier work conducted by EDHEC-Risk Institute in 2005, with the support of SGCIB, that documented the relevance of structured products in institutional investment. This research looked at structured products used in institutional management, explained their correspondence with dynamic trading strategies, and documented their diversification benefits using a guaranteed structured product as illustration. This was the first academic study to look at the place of structured products in institutional investors’ portfolios. The study’s empirical findings showed that investing in the guaranteed structured product generated considerable improvement in the efficient frontiers depicting the risk return trade-offs of institutional investors. It accordingly advocated that institutional investors make significant allocations to structured investment strategies.
This approach, however, was focusing on relatively simple structured payoffs. The focus of this new project is to extend the analysis to structured forms of investment management involving in particular a target volatility for the risky underlying asset as well as the introduction of short option positions, both of which initiatives aim at reducing the opportunity cost of downside risk protection.
The objective is to develop a formal comparative analysis of the distribution of various forms of allocation to equities, involving naked equity, equity with constant volatility target, as well as non-linear payoffs written on these underlying assets/strategies.
This strategic research project is under the leadership of Stoyan Stoyanov, Professor of Finance at EDHEC Business School, and Head of Research at EDHEC Risk Institute—Asia.
The work will be overseen by a joint Société Générale Corporate & Investment Banking/EDHEC Risk Institute—Asia steering committee.
Structured Equity Investment Strategies for Long-Term Asian Investors
The research results presented in this publication show that a structured target-volatility strategy significantly improves both the downside and the upside of the return distribution relative to a fixed-mix strategy and also allows investors to benefit more from the upside potential when a capital guarantee overlay is applied. It shows how the explicit management of volatility reduces the cost of the capital protection. It also documents utility gains for risk-averse investors, with and without capital guarantee overlay, and makes the case for significant allocations to structured equity investment strategies with volatility targeting. These results have important practical implications for long-term investors, first of all for insurance companies implementing new solvency frameworks, which need to access the equity risk premium while controlling for downside risk and minimising capital consumption. While presented in the context of Asian equity markets, these results are of general applicability and could be used in other regions and for asset classes exhibiting comparable dynamics.
[Press release announcing the publication of the research: 15/12/11]
Structured Forms of Investment Strategies in Institutional Investors’ Portfolios
Lionel Martellini, Koray Simsek and Felix Goltz
It is perhaps surprising that institutional investors in general, and pension funds in particular, have been so dramatically affected by recent market downturns, given that an increasingly thorough range of investment vehicles have been developed over the past few years, allowing investors to tailor the risk-return profile of their portfolio in a more efficient way than simple linear exposure to the return on traditional asset classes. The focus of the present paper is to determine what fraction risk-averse institutional investors should optimally allocate to structured investment strategies (i.e., strategies involving a non-linear exposure with respect to underlying asset classes) in a general economy with stochastically time-varying interest rates and equity risk premium. We also study the impact of the presence of realistic levels of market frictions and heterogeneous expectations on volatility estimates. Our conclusion is that typical institutional investors, with a strict focus on risk management driven by the presence of liability constraints, should optimally allocate a significant fraction of their portfolio to structured investment strategies. This research was sponsored by SGCIB.
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