EDHEC-Risk Institute Partner News

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we looked at how non-financial risks and failures have impacted the regulatory agenda in Europe and traced the management of liquidity, counterparty, compliance, misinformation, and other non-financial risks in the fund industry. There are several reasons for the increase in non-financial risks in investment funds. One is the growing sophistication of the transactions and financial instruments involved. A second is the attempt to obtain returns above the risk-free rate from non-traditional assets (ie not stocks and bonds). A third is regulatory developments such as the eligible assets directive and the possibilities for leverage in sophisticated Ucits. (...)“ Copyright Financial Times Fund Management Sovereign wealth funds: worth $4,000bn – or slightly more than twice the estimated size of the hedge fund industry. Post-crisis estimates suggest the total will rise to $7,000bn by the end of the decade. This rapid growth of sovereign wealth funds and its implications poses a series of challenges for the international financial markets, and also for sovereign states. In particular, an outstanding challenge is to improve our understanding of optimal investment policy and risk management practices for sovereign wealth funds. Recent academic research conducted by EDHEC-Risk Institute in co-operation with Deutsche Bank suggests it is desirable to analyse the optimal investment policy of a sovereign wealth fund in an asset-liability management framework. (...)“ Copyright Financial Times Fund Management Hedge fund indices: • IPE Asia (03/02/2011) You need three different portfolios Article by Professor Lionel Martellini, scientific director of the EDHEC-Risk Institute, and Dr Vincent Milhau, research engineer “(…) An SWF’s investment strategy should include three building blocks. (The proportion of assets allocated to each of the portfolios will vary dynamically depending on each country’s changing circumstances.) Firstly there should be a performance-seeking portfolio (PSP). Typically this will invest heavily in equities. Secondly, SWFs should have an endowment-hedging portfolio (EHP) to protect against variations in revenue. Thirdly, a liability-hedging portfolio (LHP) is needed, to invest in bonds for interest rate hedging, and in assets that protect against inflation if liabilities are likely to increase in line with prices. (…)“ Copyright IPE Asia • Financial Times (21/02/2011) Sovereign wealth funds make presence felt Article by Lionel Martellini, scientific director at EDHEC-Risk Institute, and Vincent Milhau, senior research engineer “(...) It is now widely recognised that sovereign funds are a dominant force on international financial markets. Some estimates say they manage assets • Financial News (07/02/2011) EDHEC corrects distortion of fund performance figures “(...) EDHEC-Risk Institute, one of the leading European business schools, has come up with a new way of correcting misleading hedge fund performance figures. It has highlighted three ways in which hedge fund performance in non-investable indices have been flattered. One of the most common is the “survivorship bias”, where poorly performing funds simply stop reporting numbers. Another is when funds that have closed down or blown up are then pulled from a database. The third is when a fund that has done well is included in the database retrospectively. (...) EDHEC proposes comparing the monthly returns of the EDHEC (non-investable) composite indices and the average monthly returns of a set of investable indices from a range of providers for each underlying strategy. The model consists of regressing the returns of the non-investable EDHEC-Risk Alternative Index on the returns of the corresponding investable indices. (...)“ Copyright Financial News EDHEC-Risk Institute Partner News - Issue nº 5 - April 2011 - 6
• Financial Times (07/03/2011) Hedge fund indices’ accuracy in question “(...) Industry-wide performance indices are an excellent recruiting sergeant for the hedge fund industry. These indices, published by a number of data providers, typically boast attractive annualised double-digit returns with scarcely a down year, the industry’s annus horribilis of 2008 excepted. But how confident can investors be that these indices provide a true reflection of the returns of the underlying hedge fund industry? The EDHEC-Risk Institute, an arm of France-based EDHEC Business School, stirred the pot recently when it stated that “the performance of multistrategy indices whose portfolios included illiquid [or less liquid] strategies was extraordinarily overstated after mid-2008”. Felix Goltz, head of applied research at EDHEC added: “It is more and more difficult to justify the use of non-investable composite indices as benchmarks unless we can suggest a practical and easy-to-implement solution that could substantially reduce the biases that overstate their performance, especially in periods of market stress.” (...)“ Copyright Financial Times Fund Management Short selling ban: • Global Pensions (09/03/2011) European Parliament backs naked short selling ban “(...) The moratorium applies to shorting sovereign debt, where sellers do not simultaneously hold offsetting, long positions in that debt. National regulators fear the activity could cause mispricing and, in extreme cases, downwards price spirals, the EC says. But EDHEC said intermediaries and regulators will be unable to verify long positions the CDS hedge is assumed to cover. A ban makes it more difficult for countries to manage interest rate risk on their debt actively, because counterparties would be barred from hedging the country risk of interest rate swaps they had entered into, EDHEC added, saying “such active management of the yield curve is a major component in the optimisation of the cost of public debt.“ It added that defining “naked sales“ too strictly will make it impossible for financiers to hedge the default risk of public or private entities they supported, where those entities did business with sovereign nations. “At a time when public-private partnerships and private financing of public infrastructure projects are considered one of the drivers of global growth, making it harder to manage country risk may at the very least increase the costs of these partnerships and this financing,“ EDHEC wrote. (...)“ Copyright Global Pensions • Financial News (09/03/2011) Fears grow over CDS restrictions “(...) In a statement issued yesterday, EDHEC Risk Institute, an academic think tank, added that the proposed rules could deter companies from financing major projects in foreign countries or entering into contracts with governments as they would not be able to hedge the default risk of their counterparties. (...)“ Copyright Financial News EDHEC-Risk Institute • Risk.net (25/01/2011) EDHEC-Risk Institute makes Asian debut in Singapore “(...) EDHEC-Risk Institute has opened its first Asian office in Singapore and named Frederic Ducoulombier the director of the EDHEC-Risk Institute Asia, heading the operations and business development of the risk research institution in the region. Ducoulombier will be based in Singapore and report to London-based Noel Amenc, director of EDHEC-Risk. The institute is planning to conduct research on the uses of volatility derivatives in equity portfolio management and also volatility indicators for Asia. it will also research extreme risk measures for hedge funds and volatility risk exposure of hedge funds. Amenc said the growing influence of Asian markets and investors requires more industry-relevant academic research be performed in the region. (...)“ Copyright Incisive Media Investments Limited EDHEC-Risk Institute Partner News - Issue nº 5 - April 2011 - 7
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