EDHEC Risk Newsletter on Asset Management Research Feb 2015

EDITORIAL
Masterclass on Individual Investor Solutions Individual investors’ investment problems can be broadly summarised as a combination of various wealth and/or consumption goals, subject to a set of dollar budgets, defined in terms of initial wealth and future income, as well as risk budgets such as maximum drawdown limits for example. It is important to note that the success or failure of the satisfaction of these goals subject to dollar and risk budgets does not critically depend upon the stand-alone performance of a particular fund nor that of a given asset class. It depends instead upon how well the performance on the investor's portfolio dynamically interacts with the risk factors impacting the present value of investor's goals. More...

INDUSTRY ANALYSIS
Detecting true factors in the factor zoo: assessing the economic rationale behind equity factors Index providers and asset managers have been prolific at creating equity strategies which tilt towards various “factors”. While early attempts at factor investing concentrated on the small cap and value factors, we have seen a proliferation of factors that are supposed to be captured by investment products, including momentum, carry, “quality”, and earnings revisions, to name but a few. Rather than accepting new factors based on the back-tested performance improvements they bring, investors may be well advised to assess the theoretical groundings, i.e. the economic rationale, underlying a factor. More...

Accounting for pension liabilities via the liability-driven investing paradigm: from asset management to asset-liability management The first and most important dimension to take into account when dealing with pension fund investment problems is the impact of the presence of pension liabilities on the allocation strategy. This question has naturally raised substantial attention in academic research, where it has given rise to the emergence of two separate strands of the literature. More...

Hedging long-term inflation-linked liabilities under various inflation regimes without inflation-linked instruments A long-term concern over possible enhanced inflation uncertainty has increased the need for investors to hedge against changes in price levels, a problem of particularly critical importance for pension funds that have pension payments explicitly indexed with respect to changes in consumer price levels. More...

FEATURES
Unlisted Infrastructure Debt Valuation and Performance Measurement In a new paper entitled “Unlisted Infrastructure Debt Valuation and Performance Measurement”, drawn from the Natixis research chair at EDHEC-Risk Institute on the “Investment and Governance Characteristics of Infrastructure Debt Instruments”, we propose the first academically robust, yet operationally implementable valuation and risk measurement framework for illiquid infrastructure debt. More...

INTERVIEW
More institutions will be convinced to make the extra effort to contribute their data - an interview with Benjamin Sirgue In this month's interview, we speak with Benjamin Sirgue, Global Head of Aviation, Export & Infrastructure Finance within the Structured & Asset Finance business line of Natixis Wholesale Bank, about the most recent publication from the Natixis research chair at EDHEC-Risk Institute, on unlisted infrastructure debt valuation and performance measurement, the challenges raised by data collection, and future research on the valuation and regulation of infrastructure debt products. More...

EDHEC PUBLICATIONS
Should a Skeptical Portfolio Insurer use an Optimal or a Risk-Based Multiplier? Maxime Bonelli, Daniel Mantilla-García. Following recent evidence of out-of-sample stock market return predictability, the authors aim to evaluate whether the potential benefits suggested by asset allocation theory can actually be captured in the real world using expected return estimates from a predictive system. The question is addressed in the context of an investor maximising the long-term growth rate of wealth under a maximum drawdown constraint, and comparing the optimal strategy using the predictive system with a similar risk-based allocation strategy, independent of expected return estimates. More...

Commodity Risk Factors and Intertemporal Asset Pricing Adrian Fernadez-Perez, Ana-Maria Fuertes, Joëlle Miffre. This paper proposes a commodity-based specification of the Intertemporal CAPM (ICAPM) that uses state variables grounded on the theories of storage and hedging pressure. Accordingly, factor-mimicking portfolios are formed by taking long positions in backwardated contracts and short positions in contangoed contracts according to either term structure, hedging pressure or momentum signals. The resulting portfolio returns are able to predict changes in the investment opportunity set of agents over long horizons in a way that is consistent with rational pricing by risk-adverse investors. More...

The Importance of the Structural Shape of Crude Oil Futures Curves Hilary Till. In the past, one could confidently discuss how crude oil futures contracts typically trade in backwardation. By “backwardation”, one means that a near-month futures contract trades at a premium to deferred-delivery futures contracts. For example, Litzenberger and Rabinowitz (1995) pointed out that the NYMEX West Texas Intermediate (WTI) crude oil futures contract’s front-to-back futures spreads were backwardated at least 70% of the time between February 1984 and April 1992. This pattern was so persistent that these authors theorised why this should be the typical shape of the crude oil futures price curve. More...

EDHEC-RISK NEWS
PhD in Finance candidates to present at EDHEC-Risk Days Europe 2015 As part of the EDHEC-Risk Days Europe conference, the PhD Forum is an opportunity to showcase the industry-oriented research conducted by participants in the EDHEC PhD in Finance programme. More...

EDHEC-Risk Institute to present masterclass on risk allocation in New York EDHEC-Risk Institute will be holding a special masterclass on risk allocation for policy and equity portfolios entitled "New Frontiers in Risk Allocation and Factor Investing" on April 22, 2015 at The Princeton Club in New York. More...

EDHEC-Risk Institute to present masterclass on individual investor solutions in London EDHEC-Risk Institute will be holding a special masterclass on individual investor solutions entitled "Advanced Techniques for Wealth and Retail Investments" on March 23, 2015 at The Brewery in London. Like institutional investors, individual investors do not just need investment products with allegedly superior performance. They need investment solutions that help them meet their goals subject to a number of dollar and risk budget constraints. More...

EDHEC-Risk Days 2015 to take place on March 24-25, 2015 at the Brewery in London The EDHEC-Risk Days conference 2015 will take place on March 24-25, 2015 at the Brewery in London and will present the results of EDHEC-Risk research on themes of great interest to the institutional investment and fund manager communities. The 2015 conference is a two-day event focusing on new frontiers in risk allocation and investment management that will allow investment professionals to review major industry challenges, explore state-of-the-art investment techniques and benchmark practices to research advances. More...

Events
Yale School of Management EDHEC-Risk Institute Alternative Investments Seminar, London & New Haven
Masterclass on Individual Investor Solutions: Advanced Techniques for Wealth and Retail Investments, London
EDHEC-Risk Days 2015, London
Masterclass on New Frontiers in Risk Allocation and Factor Investing, New York
EDHEC-Princeton Institutional Money Management Conference 2015, New York
CFA Institute/EDHEC-Risk Advances in Asset Allocation Seminar, New York

 
Books
The Basics of Econometrics: Tools, Concepts, and Asset Management Applications