EDHECRisk Redefining investment

Post on: 4 Июль, 2015 No Comment

Asset Management Education — November 19, 2009

Redefining investment

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Professor Sergio Focardi, Scientific Director of the EDHEC-Risk Institute Executive MSc in Risk and Investment Management

Historically, the investment management industry has focused its value proposal on asset selection and underutilised two key sources of added-value: asset allocation and risk management. Sophisticated asset allocation and consideration of liability constraints have heretofore largely remained limited to the confines of institutional investors with maturity transformation or retirement provision activities.

Over the last twenty years, the realisation of the difficulty in delivering added-value through asset selection has led to the brisk development of passive investment vehicles, to the emergence of the core-satellite management framework, and to renewed interest in asset allocation approaches as sources of performance. The turn of the millennium crises which sent the equity markets reeling at the same time as falling interest rates were increasing the value of future obligations prompted institutional investors to explore advanced asset-liability management techniques and alternative diversification. The recent financial market meltdown has served to dissipate the exaggerated hopes placed in diversification, highlight the challenges of alternative investment, and fuel investor demand for advanced asset allocation and risk management skills.

This new importance of asset allocation and risk management has profound implications for the investment management industry and calls into question the traditional concepts and techniques used by the profession.

The first major implication concerns the limits of using diversification as the sole approach to risk management. While diversification may be relied upon to beat a benchmark, it cannot be regarded as a robust risk management approach allowing for the respect of ‘hard’ risk budgeting constraints, whether absolute in an asset management context or relative in an asset-liability management framework.

Against this backdrop, the Executive MSc in Risk and Investment Management offered by EDHEC-Risk Institute devotes considerable attention to novel dynamic asset allocation and risk budgeting techniques which provide a solution to the limits of traditional static allocation approaches. This exploration of dynamic strategies is built on a review of the mathematical tools of continuous-time finance and the economic fundamentals of asset-pricing and market equilibrium.

The second significant issue relates to the correct integration of alternative and emerging classes in investment management be it to improve the risk-return trade-off of an asset-only mandate or to reduce the cost of liability-driven investing (LDI) solutions by relying on real assets. With their different risk profiles, alternative investments indeed offer opportunities for asset allocation. However, the scarce, biased, and non-Gaussian return data as well as the limited liquidity and transparency of hedge funds, private equity, real estate, or emerging alternatives have far-reaching impacts on all steps of the investment management process.

To allow participants to design investment solutions that capture the benefits of these vehicles in a risk-controlled fashion, the Executive MSc in Risk and Investment Management integrates the specific characteristics of alternatives throughout the risk and investment management process and equips participants with advanced knowledge of the operational aspects of alternative investment. Implementing LDI solutions that draw on the liability-hedging potential of alternative investments requires quantitative analysis not only of hedging properties but also of the robustness of methods used to assemble hedging portfolios. These requirements justify the prominent status and advanced nature of portfolio construction and empirical finance techniques in the programme.

The third key consequence involves the extension of the asset-liability management (ALM) approach not only to new institutional investors, such as sovereign investment funds, but also to high-net-worth and even mass-affluent clienteles. While it is recognised that investment objectives and liability constraints should play a central role in asset allocation and risk management policies, asset-liability management has remained the preserve of pension funds, insurance companies, and commercial banks. A solid understanding of state-of-the-art ALM techniques is required to optimally address the investment management needs of emerging institutional investors, offer truly client-centric services in private wealth management, and design innovative valueadding solutions for retail investors. The EDHEC-Risk Institute Executive MSc in Risk and Investment Management thus explores strategic asset allocation in the context of ALM, introduces the latest advances in ALM, and discusses the specifics of ALM for sovereign investment funds and private investors.

Since 2001, EDHEC-Risk Institute has been conducting academic research on asset allocation and risk management, highlighting research results and applications to practitioners, and assisting them in their implementation. This has allowed EDHEC-Risk to become the most influential centre for applied financial research in Europe and to attract considerable industry interest and financial support for its projects. EDHEC-Risk Institute’s unique blend of academic relevance and professional relevance permeates the Executive MSc in Risk and Investment Management and is epitomised by its first-rate faculty.

Bringing together EDHEC-Risk Institute’s professors and researchers and highlevel practitioners acting as affiliate instructors and guest speakers, the programme faculty team is a group of respected specialists who not only have scientific expertise in the variety of areas covered by the programme but also play a significant role in advancing investment management theory and practices through research, executive education, and direct industry involvement.

While the programme is broad and technically challenging, its underlying force and focus are on the business relevance of financial innovation and its uses for investors whether institutional, high net-worth, or mass-affluent. The Executive MSc in Risk and Investment Management offered by EDHEC-Risk Institute allows participants to cast all concepts and techniques covered in class in an investor solution perspective: innovation is pertinent only to the extent that it truly allows the needs of investors to be addressed. The curriculum’s manifold applications include designing long-only absolute return funds and dynamic risk-controlled strategies mixing traditional and alternative vehicles, creating new inflation-hedging solutions based on real assets, adapting asset-liability management techniques to private wealth management, implementing timeand state- dependent asset allocation models for target-date funds, and reconciling dynamic core satellite techniques and mean reversion approaches to optimise the long-term performance of pension schemes while respecting their short-term funding ratio constraints, to cite but a few.

We encourage you to find out more about the format, curriculum, and faculty of the EDHEC-Risk Institute Executive MSc in Risk and Investment Management and invite you to evaluate how the programme could help you embrace and lead the major changes that will reshape investment management.