Presentation

© 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



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


– 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


• 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


• 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


– 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


• 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


• 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 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 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


• 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


• 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


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


© 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


• 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


• 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


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


© 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


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


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


© 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


• 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


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


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%

Date post:	04-Nov-2014
Category:	Documents
Upload:	jacknickelson
View:	360 times
Download:	1 times

Presentation

Documents