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© Edhec 2003 030521 - 1
Edhec European Asset Management Practices Survey
Noel AmencProfessor of Finance,
Director of the “Edhec Risk and Asset Management Research Centre”Head of Research, Misys Asset Management Systems
21st May 2003
© Edhec 2003 030521 - 1
© Edhec 2003 030521 - 2
• Objectives
• Methodology
• Investment services
• Portfolio management process
• Performance analysis
• Risk management
Outline
© Edhec 2003 030521 - 3
Objectives of the study
• Assess the degree to which European asset management firms’ practices correspond to the most recent research in the asset management field;
• Identify the potential gaps with regard to the strategic and regulatory environments of the respondents;
• Establish a basis for a permanent observatory of asset management companies’ practices.
© Edhec 2003 030521 - 4
MethodologyOrganisation of the research
• “Industry Intelligence” - Edhec/MAMS cooperation;
• “Legal Intelligence”;
• Detailed summary of strategic, institutional and conceptual challenges (June 2002);
• Survey of current practices of the 400 leading European asset management companies (July to October 2002);
• Construction of the report (December 2002 to March 2003).
© Edhec 2003 030521 - 5
MethodologySurvey on asset management companies’ practices
How the questionnaires were administered:
3 questionnaires:– Strategy and Management Process– Risk Management– Organisation and Information Systems
• Anonymity guaranteed;
• 1,200 professionals contacted within the 400 largest European asset management firms (CIO, IT Director, Risk Director, etc.).
© Edhec 2003 030521 - 6
MethodologySurvey on asset management companies’ practices
Sample
• 60 asset management firms responded to the survey;
• AUM of respondents totals 6,211.62 billion Euros;
• The structure of the sample is very similar to the structure of the whole survey population;
• The number of responses allows for a pan-European analysis;
• Comparisons between countries should be considered with care.
© Edhec 2003 030521 - 7
MethodologySurvey on asset management companies practices
Appropriateness of the sample• The sample shows a size bias but a fairly good
geographic representation
• 38% of respondents have an AIMR or GIPS certificate
Breakdown by size in terms of assets under management (USD)
21
14
48
17
10
10
49
31
0 10 20 30 40 50 60
AUM in excess of 100bn
AUM between 50bn and 100bn
AUM between 10bn and 50bn
AUM between 5bn and 10bn
Percentage of respondents Percentage in the group contacted
Percentage of AUM by country in the group of respondents and in the group of contacted companies
28
15
15
42
33
12
11
43
0 10 20 30 40 50
Others
Germany
France
United Kingdom
In the group of respondents In the group contacted
© Edhec 2003 030521 - 8
The management offeringsGlobal or niche offering
• Most asset management firms position their offering as global offers, whatever their size;
• Strategic thinking on the question of critical size has not yet had a dramatic impact on the market.
0%
10%
20%
30%
40%
50%
60%
A g
lob
al s
erv
ice
co
veri
ng a
llin
vest
men
t st
yles
an
d s
tra
tegi
es
A s
erv
ice
ma
inly
ba
sed
on
ind
ex
or
pa
ssiv
e in
vest
men
t
An
act
ive
inve
stm
en
t se
rvic
e
A s
erv
ice
tha
t is
ma
inly
ba
sed
on
de
leg
atio
n a
nd
sel
ect
ing
spe
cial
ists
(su
bco
ntr
acte
d m
ulti
-ma
nag
em
en
t o
rp
art
ne
rshi
p
No
an
swe
r
How would you best describe the investment services proposed by your company?
© Edhec 2003 030521 - 9
The management offeringsActive vs Passive
• Development of passive offerings– Passive offerings represent 23% of “Equity” products and nearly
10% of all products;– These results are consistent with other market analysis (Morgan
Stanley, Watson Wyatt)
Country France Germany UK Others EuropeIndex Management - Equities 3.18% 4.25% 13.06% 11.55% 9.89%Index Management - Bonds 2.06% 0.75% 0.45% 4.97% 2.29%Active Investment - Equities 36.25% 27.95% 46.40% 25.85% 35.45%Active Investment - Bonds 36.42% 45.66% 29.00% 33.09% 33.65%Multi-Management - Traditional 0.53% 2.50% 1.73% 7.54% 3.64%Multi-Management - Alternative 0.86% 1.25% 0.00% 0.60% 0.50%Alternative Investment 1.16% 1.25% 0.88% 1.06% 1.03%Currency overlay 0.12% 7.64% 0.00% 1.26% 1.41%Private equity 0.00% 0.00% 0.81% 0.58% 0.50%Money market Investment 17.22% 3.00% 3.87% 9.23% 7.69%Others 2.35% 5.75% 3.79% 4.30% 3.98%No answer 28.57% 0.00% 0.00% 2.08% 8.57%
© Edhec 2003 030521 - 10
The management offeringsActive vs Passive
• The drivers for the growth of passive offerings:– Active products seen as too passive, too close to indices =>
what justifies the fee premium ?– Current difficulties of “Stock Picking” approaches in the “Long
Only” universe;– Cost of portfolio turnover not always offset by an enhanced
risk/return profile (cf. Fitzrovia study 2003)
© Edhec 2003 030521 - 11
The management offeringsNew forms of organisation: core-passive/active-satellite
Organisation of “core passive – active satellite” allocation:– Clear separation of a major portfolio (core) managed passively
from one or more very actively managed satellites;– Approach tightly linked to the development of ETFs;– Approach favoured by consultants for cost reasons.
© Edhec 2003 030521 - 12
The management offeringsNew forms of organisation: core-passive/active-satellite
– Example of cost reduction for an “International Equity” portfolio (€100m, 4% tracking error)
• Traditional approach: 100bp = €1m
• Core-satellite approach– Core portfolio management fees: 20bp– Satellite portfolio management fees: 100bp– Core portfolio tracking error: 0%– Satellite portfolio tracking error: 20%
• In order to obtain ex-ante a core-satellite with a 4% tracking error, 20% of the invested capital should be allocated to the satellite and 80% to the core portfolio;
• Overall management costs: 20 x 80% + 100 x 20% = 36bp
© Edhec 2003 030521 - 13
The management offeringsNew forms of organisation: core-passive/active-satellite
• Favoured by consultants for performance reasons:– Allows for a better distinction between good and poor
performers– Allows for manager diversification in the satellite portfolio– Ease the risk management process, a 20% tracking error limit is
easier to respect than a 4% limit
• The core-satellite approach can result in a new segmentation of management offerings:– Core-satellite assembler– “Core” producer or “Beta” factories– “Satellite” producer or “Alpha” specialists.
© Edhec 2003 030521 - 14
The management offeringsMulti-management
• Despite its popularity and success, multi-management only represents 4.14% of the existing offerings;
• Alternative multi-management is barely present with 0.5% of responses;
• Funds of funds represent the most popular way of implementing multi-management offerings (46% of responses)
© Edhec 2003 030521 - 15
The management offeringsMulti-management
• Arguments used by funds of funds promoters are different from the ones used by multi-managers:– multi-managers = fund pickers
• Selection by style, objective to avoid poor managers, diversify the best managers
• Belief in a certain level of performance persistence for the best, or “the least bad”
• The ongoing relationship with the managers does not allow for active allocation (style neutrality)
© Edhec 2003 030521 - 16
The management offeringsMulti-management
– Funds of funds = fund timer
• Use of both fund picking and tactical allocation
• Use of allocation as main explanation factor for performance (style, geogra-phic or industry sector)
46
17
26
20
11
20
34
0
5
10
15
20
25
30
35
40
45
50
Fu
nd
s o
f fu
nd
s
Man
ager
s'fu
nd
s
Mu
lti-
mg
mt
bas
edo
n s
tyle
div
ersi
fica
tio
n
Mu
lti-
mg
mt
bas
edo
n s
ecto
rd
iver
sifi
cati
on
Mu
lti-
mg
mt
bas
edo
n d
iver
sifi
cati
on
(*)
Mu
lti-
mg
mt
bas
edo
n g
eog
rd
iver
sifi
cati
on
No
an
swer
As regards to multi-management in the traditional universe, which investment services do you favour?
© Edhec 2003 030521 - 17
The management offeringsMulti-management
• New forms of multi-management: fund trackers– “Pure allocation” logic;– Low management fees;– Facilitates control over the risk of delegating management (no
style drift).
© Edhec 2003 030521 - 18
The management offeringsAlternative Investments
• A diversification approach rather than a quest for out-performance– Only 17% of respondents
mention the superior “alphas” of AI
– 60% of respondents put forward the diversification and de-correlation properties of AI.
0%
10%
20%
30%
40%
50%
60%
70%
As
a tu
rn o
f eve
nts
rela
ted
to th
ege
nera
l eco
nom
ic c
limat
e
As
an a
sset
cla
ss th
at is
par
t of
glob
al a
sset
allo
catio
n
As
a m
ore
valu
able
sou
rce
of
alph
as th
an th
at o
f the
trad
ition
alun
iver
se
As
a so
urce
of r
etur
n th
at e
xhib
itslo
w c
orre
latio
n w
ith tr
aditi
onal
stoc
k an
d bo
nd m
arke
ts
As
an e
xcel
lent
div
ersi
ficat
ion
tool
Perception of Alternative Investments
© Edhec 2003 030521 - 19
The management offeringsAlternative Investments
• The development of Alternative Investments favours outsourcing– Acceptance of the specifics of this form of management, including
for alternative multi-management– The low level of volumes does not justify internalisation of the
activity.
Implementation of alternative investment services
With a subsidiary company or a department within the asset management firm 37%With the investment bank of the group the asset management firm belongs to 11%With an external organisation 31%No answer 31%
© Edhec 2003 030521 - 20
The management offeringsStructured products
• Structured management is perceived as a strategic offering for 34% of respondents and of interest for 31%.
Do structured products play an important part in your company's strategy for the future?
Country France Germany UK Others EuropeYes 57% 0% 25% 42% 34%No 0% 50% 50% 25% 31%Of some interest 29% 50% 25% 33% 31%Don't know 14% 0% 0% 0% 3%
© Edhec 2003 030521 - 21
The management offeringsStructured products
• Structured management does correspond to a more significant need for “risk profiling” from investors– Managers have to be able to manage the different moments of
return distributions (especially the symmetry and extreme losses);
– The use of derivatives appears as a new source of added-value;
– The UCITS III directive should allow for “risk profiling” based on derivative instruments.
© Edhec 2003 030521 - 22
The management offeringsStructured products
• The investment bank is a partner/competitor for asset managers in this field.
Management of the guaranteed part Management of the underlyingUnderlying with "alpha", the Investment Bank acts like a
multimanagerUnderlying without "alpha", the Investment Bank is a provider
of ETFs or derivatives
Investment Bank
The future of structured management products and the investment bank
© Edhec 2003 030521 - 23
The management processAsset allocation
• Confusion between benchmark and index– The benchmark can be different from the index. The academic
studies very often mentioned by passive managers (Brinson, Singer, Beebower, 1991) did not say that nothing could be done outside of the indices, but that the benchmark, i.e. the strategic allocation, was a determining source of performance.
© Edhec 2003 030521 - 24
The management processAsset allocation
– The study does not conclude that one should not alter the initial allocation, but only that if one does not modify it, there is little hope of beating the classes in which the portfolio is invested.
– This tautology has very often led management companies to neglect active allocation techniques which remain determinant.
Explanation of return differences between funds
11%
45.5%
40%
3.5%
Stock PickingTactical Asset AllocationStrategic Asset AllocationFees
French mutual funds (1999-2001)(Source: Edhec 2001)
© Edhec 2003 030521 - 25
The management processAsset allocation
• United Kingdom and Europe– Active asset allocation is favoured in
the management process for all European countries, with the exception of United Kingdom (Investment Bank / Broker-Dealer culture)
64%
3%
33%
A top/down approach separating the strategic and tacticalallocation phase from the stock picking stage
An opportunistic approach based on stock selection withoutreference to a process or to asset allocation constraints
A bottom up approach based on stock selection with allocationconstraints
Country France Germany UKA top/down approach separating the strategic and tactical allocation phase from the stock picking stage 100% 75% 37%An opportunitic approach based on stock selection without reference to a process or to asset allocation constraints 0% 0% 0%A bottom up approach based on stock selection with
allocation constraints 0% 25% 63%
Percentage is established based on number of responses, eleven percent of respondents did not answer this question
Which investment process do you favour? (Europe)
© Edhec 2003 030521 - 26
The management processAsset allocation
• Tactical allocation is widely used by asset management firms– The allocation privileges
macro-economic forecasts (80%);
– Despite academic results, quantitative approach for tactical allocation is not widely used (17%), with investment management firms preferring a quali-tative approach.
0%
20%
40%
60%
80%
100%
120%
Is it
ass
ocia
ted
with
on
eo
r se
vera
l allo
catio
n or
inve
stm
ent
com
mitt
ees
?
Do
es it
inco
rpor
ate
mac
roec
ono
mic
fore
cast
ing
or s
cena
rios?
Do
es it
inco
rpor
ate
sect
or
or
mic
roec
ono
mic
Fo
reca
stin
g?
Do
es it
tak
e in
to a
cco
unt
the
extr
em
e ri
sks
ofa
lloca
tion
by m
ean
s of
sim
ula
tion
s an
d/or
Sce
nar
ios?
Do
es it
incl
ude
a ta
ctic
al
dim
ensi
on
by h
old
ing
am
onth
ly o
r q
uart
erly
inve
stm
ent
com
mitt
ee
Mee
ting
?
Is it
ma
inly
ba
sed
on
aq
uant
itativ
e p
roce
ss f
orst
rate
gic
allo
catio
n?
Is it
ma
inly
ba
sed
on
aq
uant
itativ
e p
roce
ss f
orta
ctic
al a
lloca
tion?
France Germany United Kingdom Others Europe
The Asset Allocation Process
© Edhec 2003 030521 - 27
The management processPortfolio construction
• The benchmark relative risk approach is favoured by respondents (74%)
– This approach is usually supported by a Black & Littermann approach which compares the market port-folio (neutral view) to a market capitalisation weighted index.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Opt
imis
atio
n of
abs
olut
e ris
k ba
sed
on a
mea
n-va
rianc
e ap
proa
ch
Opt
imis
atio
n of
abs
olut
e ris
k ba
sed
on a
mea
n-V
aR a
ppro
ach
An
appr
oach
bas
ed o
n a
min
imum
acce
ptab
le le
vel o
f ris
k or
ret
urn
The
min
imis
atio
n of
vol
atili
ty r
isk
The
min
imis
atio
n of
ext
rem
e ris
k
A r
elat
ive
risk
appr
oach
com
pare
d to
abe
nchm
ark
that
rep
rese
nts
the
long
-ter
mal
loca
tion
polic
y
Oth
ers
No
quan
titat
ive
met
hods
for
optim
isat
ion
France Germany United Kingdom Others Europe
Is portfolio composition for one or more asset classes, categories or styles based on:
© Edhec 2003 030521 - 28
The management processPortfolio construction
• Despite its weaknesses, 23% of management firms use the mean-variance approach;
• Only 22% of respondents take extreme risks into consideration in the portfolio construction process.
© Edhec 2003 030521 - 29
Performance analysisSuccess of GIPS standards
• Implementation of “Country Version” (CVG) or “Translated Version” (TG) within most European countries
• Acceptance of the unification process by European players (Gold GIPS - 2005)
© Edhec 2003 030521 - 30
Performance analysisRisk-adjusted measure
• An unsophisticated approach to measuring managers’ alphas– Low level of usage of multi-factor models (17%)– General use of Peer Groups (51%)– Measurement of out-performance with regard to a benchmark
(97%)
• The benchmark is usually a market index (97%) and rarely a normal portfolio representing the true risk exposures of a portfolio over the period (6%).
© Edhec 2003 030521 - 31
Performance analysisRisk-adjusted measure
How are the manager's alphas analysed?
0%
10%
20%
30%
40%
50%
60%
70%
80%
By
usin
g a
mul
ti-fa
ctor
mod
el
By
anal
ysis
bas
ed o
n re
lativ
epe
rfor
man
ce c
ompa
red
to t
hebe
nchm
ark
(info
rmat
ion
ratio
,et
c)
By
usin
g m
arke
t m
odel
s (C
AP
Man
d Je
nsen
's a
lpha
)
By
Sha
rpe-
type
sty
le a
naly
sis
By
anal
ysin
g ab
solu
tepe
rfor
man
ce in
a p
eer
grou
p
No
answ
er
France Germany United Kingdom Others Europe
© Edhec 2003 030521 - 32
Performance analysisPerformance attribution
• Not a genuinely global approach, strongly linked to “equity” offerings
51%
29%
14%
6%
For all investments For certain investmentsNo No answer
Are the sources of performance broken down?(Europe)
© Edhec 2003 030521 - 33
Performance analysisPerformance attribution
• Absence of international standardisation
0
10
20
30
40
50
60
70
80
90
Yes No Don't know Other
Money Managers Plan SponsorsInvestment Consultants
Source: Spaulding (200)
Favour GIPS/AIMR-PPS recommending disclosure of attribution statistics?
© Edhec 2003 030521 - 34
Performance analysisPerformance attribution
• Multi-factor models for performance attribution dominate;
• The arithmetic approach (Brinson et al.) is more often used for “client” reporting;
• Multi-factor models sourced from the risk management discipline, also widely used for performance attribution (49%) are nevertheless neglected for published measures of managers’ alphas.
© Edhec 2003 030521 - 35
Performance analysisPerformance attribution
Which performance attribution method and/or performance decomposition model do you use?
0%
10%
20%
30%
40%
50%
60%
70%
80%
Sty
le a
naly
sis
mod
el (
such
as S
harp
e)
Arit
hmet
icm
odel
( s
uch
as B
rinso
n,S
inge
r or
Bee
bow
er)
Mod
el b
ased
on m
ulti-
fact
oran
alys
is (
such
as B
arra
)
Oth
ers
No
answ
er
France Germany United Kingdom Others Europe
© Edhec 2003 030521 - 36
Risk managementRisk monitoring
• The measurement of risk as required by the regulator or the mandate is a key constituent of the risk monitoring function;
• Only 51% of respondents monitor the portfolio’s extreme risks;
• Only 23% of respondents consolidate and assess the risks of off-balance sheet operations.
0%
20%
40%
60%
80%
100%
120%
Ana
lysi
s of
the
extr
eme
risks
to w
hich
port
folio
s ar
e ex
pose
d
Mea
sure
men
t of t
he r
isk-
adju
sted
ret
urn
for
each
inve
stm
ent
Cre
dit r
isk
anal
ysis
Con
solid
atio
n an
d ev
alua
tion
of r
isk
asso
ciat
ed w
ith o
ff ba
lanc
e sh
eet p
ositi
ons
per
port
folio
, per
clie
nt, p
er m
anag
er a
nd fo
r
the
who
le in
vest
men
t firm
Ens
urin
g th
at r
isk
regu
latio
ns a
nd r
estr
ictio
ns
set b
y th
e cl
ient
and
/or
inve
stm
ent f
irm a
re
bein
g re
spec
ted
Mea
sure
men
t of o
pera
tiona
l ris
k
No
answ
er
France Germany United Kingdom Others Total Europe
Which of the following does risk analysis include?
4325
58 5851
2910
067
8369
7150 50
4251
29 250
4223
5710
083
75 77
71
250
3329
140
8 8 9
© Edhec 2003 030521 - 37
Risk managementFuture investment
• Investment priorities are consistent across the various geographical zones:– Management of allocation constraints and risk limits (60%)– Measure and analysis of extreme risks (46%)– Evaluation and monitoring of off-balance sheet positions (52%)
• It is also interesting to note that client reporting is widely seen as a key investment (71%)
© Edhec 2003 030521 - 38
Risk managementFuture investment
Which areas of risk management or analysis do you intend to invest in over the next three years?
0%10%20%30%40%50%60%70%80%90%
100%
Impr
ovin
g m
odel
s fo
r O
TC
ope
ratio
nsev
alua
tion
Mon
itorin
g of
f ba
lanc
e sh
eet
posi
tions
Ens
urin
g th
at t
he in
vest
men
t fir
m's
guar
ante
es a
re b
eing
res
pect
ed
Ens
urin
g th
at a
sset
allo
catio
n ru
les
and
risk
limits
are
bei
ng r
espe
cted
Ris
k re
port
s de
sign
ed f
or c
lient
s
Mea
sure
men
t of
ope
ratio
nal r
isk
Mea
sure
men
t an
d an
alys
is o
f ex
trem
eris
ks
Oth
ers
No
answ
er
France Germany United Kingdom Others Total Europe
1450
842
26 2975
1733
31
1450
1742
26
2975
5833
60
4375 75
3371
4350
2592
37
4350
2575
46
290 0
673
0
2525
814
© Edhec 2003 030521 - 39
Risk managementRisk measurement
• Two types of risks are not well represented:– Volatility risk (56%), for which the score is probably linked to the
low usage of derivative instruments. France is an exception with regard to this question;
– Liquidity risk (59%), for which the challenges are both conceptual (definition of a model for measuring liquidity risk) and technical (implementation of the consequences of liquidity risk on instrument pricing) (cf. CMRA study, 2001).
© Edhec 2003 030521 - 40
Risk managementRisk measurement
Which financial risks do you take into account when analysing portfolio exposure?
100%
100%
75%
88%
100%
50%
0% 0%
100%
100%
40%
100%
80%
40%
20%
0%
78%
78%
44%
67%
78%
44%
0%
22%
100%
92%
58%
100%
75%
83%
25%
0%
94%
91%
56%
88%
82%
59%
12%
3%
0%
20%
40%
60%
80%
100%
120%
market risk interest raterisk
volatility risk FX risk credit risk liquidity risk Others No answer
France Germany United Kingdom Others Total Europe
© Edhec 2003 030521 - 41
Risk managementValue at Risk (VaR)
• Usage not widespread (51%)– No regulatory framework;– The systematisation of VaR requires the adaptation of complex tools initially designed for investment banking
• Need to adapt the VaR calculations to the specific context of investment management firms (simple calculations but real inclusion of non-Gaussian risks)
– VaR Cornish Fisher (Favre Galinao, 2000)– Style VaR (L’habitant, 2001)
© Edhec 2003 030521 - 42
Risk managementRisk measurement
• An approach not really tailored to the measurement of extreme risks– Respondents favour parametric VaR (44%)– Very low usage of extreme value approaches (6%)– 21% of respondents trust the normal distribution laws to analyse
the consequences of extreme risk variations.
How do you assess the risk of extreme loss for your portfolio?
44%
32%
26%
15%
6%
18%
31%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Parametric VaR
Historical simulation VaR
Monte Carlo simulation based VaR
Simplified Monte Carlo VaR + scenarios
Extreme Value Theory
No VAR carried out
No answer
© Edhec 2003 030521 - 43
Risk managementMulti factor analysis
• Factor Analysis is one of the areas where asset managers have invested the most so far. The usage of multi-factor models is consistent with the “risk relative” asset allocation approach.
Do you base your portfolio risk anlysis on a multi-factor model?
0%
10%
20%
30%
40%
50%
60%
70%
Yes
, e
xplic
itm
icro
eco
no
mic
typ
e (B
AR
RA
)
Yes
, e
xplic
itm
acr
oe
con
om
icty
pe
(BIR
R)
Yes
, im
plic
itty
pe
(AP
T)
Yes
, o
ther
s
No,
bu
t w
e a
rep
lann
ing
to
do
so
No,
we
do
no
tco
nsid
er
this
use
ful
No
an
swe
r
France Germany United Kingdom Others Total Europe
63
4056
5053
25
200
812 13
022
09
1320
228
15
25
200
17 15
0
2011
3318
00
220
6
© Edhec 2003 030521 - 44
Risk managementMulti factor analysis
• Even though explicit models (BARRA, BIRR, etc.) still dominate the market, the implicit approaches are growing in importance (9% in Europe and 22% in the United Kingdom).
© Edhec 2003 030521 - 45
Risk managementCredit risk
• Quantitative approach not well represented;
• Financial analysis privileged despite its “backward looking” approach.
Is the specific approach to credit risk based on:
0%
10%
20%
30%
40%
50%
60%
70%
A m
odel
usi
ng
an
opt
ion-
bas
ed
app
roa
ch
A m
odel
bas
ed
on
the
pub
lishe
d ra
ting
An
anal
ysis
,
carr
ied
out
by
the
fina
ncia
l
ana
lysi
s
dep
artm
ent
A m
odel
ling
of
the
links
bet
wee
n cr
edi
t
risk
an
d liq
uid
ity
risk
Oth
ers
No
ans
wer
France Germany United Kingdom Others Total Europe
13
0 0
33
15
50
60
22
67
50
38
0
67
33
38
25
0
22
8
15
00
33
8
21
25
0
11
8
12
© Edhec 2003 030521 - 46
Risk Management Compliance: Level of compliance
• The level of compliance is quite high so far due to regulatory evolutions;
• Increasing importance of “contractual” compliance;
• Implementation of financial constraint monitoring (VaR 53%, risk factors 24%).
© Edhec 2003 030521 - 47
Risk Management Compliance: Level of compliance
What risk constraints do you take into account?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%C
omp
any-
rela
ted
rul
es
Ma
nd
ate
-re
late
d r
ule
s
Con
stra
ints
re
latin
g t
o a
sp
eci
fic a
sset
Con
stra
ints
re
latin
g t
o a
n in
vest
men
tca
teg
ory
Con
stra
ints
re
latin
g t
o th
e a
sse
t cl
ass
de
fine
d w
ithin
the
allo
catio
n f
ram
ewo
rk
Cou
nte
rpa
rty
limits
Con
stra
ints
lin
ked
to
a r
isk
fact
or
ide
ntifi
ed
by
mul
ti-fa
ctor
an
aly
sis
Le
vera
ge
eff
ect
co
nst
rain
ts
Ext
rem
e ri
sk c
onst
rain
ts (
Va
R)
Tra
ckin
g e
rro
r
Oth
ers
Non
e
76
79
65
71 71
62
24
50
53
6 6
3
© Edhec 2003 030521 - 48
Risk Management Compliance: Pre or Post trade compliance
• Pre-trade compliance becoming a strategic challenge for organisations and their portfolio management systems;
• This pre-trade compliance takes not only regulatory requirements into account but also financial constraints.
Total Europe Post trade Pre trade Both No answerType of investment 7% 32% 61% 18%Class or category related to allocation 11% 19% 70% 21%Counterparty 11% 22% 67% 21%Risk factor 27% 15% 58% 24%Leverage effect 16% 20% 64% 26%VaR 35% 12% 54% 24%
In your opinion, which of the following constraints require periodical control (post-trade) or alternatively should be systematically taken into account for each new trade (pre-trade)?
© Edhec 2003 030521 - 49
Risk Management Operational risk: What attention is given to Operational Risk ?
• Only 50% of European management firms feel impacted by the consequences of Basel II, despite the CAD III initiative;
• This lack of interest can be understood:
– Investment Management companies are not the most exposed to operational risks (custodian role);
– The implementation of new capital requirements to cope with an idiosyncratic risk is not supported by academic research, nor is it supported by industry studies (Oxera 2001, Biais et al., 2003);
Do you think the Basel II Accord, which allows for the allocation of share capital to cover operational risks of banks and their asset management subsidiaries, will affect your
activity?
50%
24%
24%
3%
Yes No Don't know No answer
© Edhec 2003 030521 - 50
Risk Management Operational risk: Measures taken to respond to the new regulatory requirements
• Despite their usefulness with regard to capital savings, internal models have not yet received attention from our respondents;
• Loss data collection is the current priority for investment management firms (53%). By definition, however, the data collection cannot serve as a basis for analysing extreme risks, which are supposed to be covered by capital charges. As a result, the question of operational risk is tackled from the operations efficiency angle.
Country France Germany UKYes 0% 20% 0%No 0% 0% 22%We have not examined the issue yet 100% 80% 78%