advances in asset allocation seminar · 2014-02-12 · anwiti bahuguna, phd director, bank of...

Advances in Asset Allocation Seminar

New York, 22-24 July 2014

Institute

õ Having learned through the recent crises about the limited payoffs and significant risks of excessive reliance on security selection models, investment managers and institutional investors are showing unprecedented interest in asset allocationapproaches as sources of performance.

õ Meanwhile, recent advances in academic research have paved the way for the development of a new generation of welfare-improving financial engineering techniques aimed at designing optimal investment solutions that take into account the specific constraints and objectives of the various types of investors. These solutions rely on an innovative exploitation of the benefits of the three competing approaches to risk management, namely risk diversification, risk hedging, and risk insurance, each of which represents a so far largely unexplored source of added value for investment management.

õ It is against this backdrop that EDHEC-Risk Institute has structured its work on asset allocation and risk management. Now regarded as the premier European centre for research in these fields, it plays a noted role in furthering asset allocation concepts and techniques and systematically highlighting their practical uses to the investment management industry.

õ Together with CFA Institute, EDHEC-Risk Institute has introduced seminars that take stock of the latest industry trends and research advances and clarify the distinction between true innovation and mere marketing claims. CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organisation is a champion for ethical behaviour in investment markets and a respected source of knowledge in the global financial community. CFA Institute’s end goal is to create an environment where investors’ interests come first, markets function at their best, and economies grow.

Advances in Asset Allocation Seminar — New York, 22-24 July 2014

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The Choice of Asset Allocation and Risk Management


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õ The Advances in Asset Allocation Seminar is an intensive three-day course that will provide participants with an in-depthappreciation of the concepts and techniques that will shape the future of investment management. The seminar will also equip them with practical tools to improve asset allocation and risk management processes, implement novel investment management approaches, and develop new products and solutions.

õ The first part of the seminar focuses on bridging the gap between portfolio theory and portfolio construction and outlinesa coherent framework in which can be framed optimal decisionsfor the design of well diversified asset class and asset allocationbenchmarks. It discusses the limits of modern portfolio theory and presents solutions to address estimation issues. It includes a presentation of portfolio optimisation models that takes non-normality risks and realistic preferences into account. It concludes with an application to the use of improved techniques for designing truly well-diversified improved equity or strategic allocation benchmarks.

The second part of the seminar shifts from static risk diversification to dynamic risk hedging and focuses on the design of optimal allocation strategies for investors endowed with long-term liability or consumption objectives. It presents the state of the art in asset-liability management (ALM) with a specific emphasis on the liability-driven investment (LDI) paradigm in institutional money management and its counterpart in private wealth management and retail investment management, the life-cycle investment (LCI) paradigm. It discusses the challenges

related to the implementation of novel forms of interest rate- and inflation hedging portfolios. Finally, it explores the interaction between the performance-seeking ad liability-hedging components in investors’ portfolios. Besides, it concludes on the design of improved forms of target-date funds.

The final part of the seminar shows how to account for regulatory, accounting, and other short-term constraints, which requires implementing risk insurance, in addition to risk diversification and risk hedging. It introduces the risk-controlled investing paradigm, which complements the LDI/LCI paradigm in the presence of short-term risk budgets. It shows how long-term objectives and short-term constraints can be simultaneously taken into account in a comprehensive disciplined asset allocation framework.

Each afternoon of the seminar is dedicated to integrative case studies providing practical applications in both the institutional and individual money management contexts, drawing examples from asset-only and asset-liability management perspectives, including the design of improved equity and bond benchmarks, the design of improved forms of target date funds, the transposition of ALM techniques to private wealth management as well as the use of dynamic LDI strategies for corporate and state pension funds, and also for insurance companies.

õ The seminar is presented in a highly accessible manner by an instructor who combines academic expertise and industry experience. It strikes a balance between exploration of new models and a study of applications.

Advances in Asset Allocation Seminar


Key Learning Benefitsõ Bridge the gap between modern portfolio theory and practical portfolio construction to build stable models: find out how to make parameter estimation manageable and reliable; discover how to account for non-normality, asymmetric risk preferences, and parameter uncertainty in portfolio construction.

õ Understand optimal benchmark construction and their application to smart index construction: review the limitations of traditional methodologies; find out about maximum Sharpe ratio minimum variance, equal-risk contribution, and other forms of benchmarks; find out how to measure diversification and how to manage diversification; understand how to move away from asset allocation to factor allocation decisions.

õ Understand state-of-the-art ALM and LDI: review the fundamentals of ALM and discover the latest developments; find out how to use derivatives for liability matching; uncover the potential of ALM in private banking and understand the specificities of ALM for sovereign investment funds; incorporate the sponsor perspective in ALM and incorporate funding ratio and inflation risk constraints in LDI; assess the inflation-hedging potential of alternative asset classes and strategies; and find out how to develop improved forms of target–date funds that extend beyond simple deterministic schemes and exploit changes in market conditions.

õ Use dynamic beta management, risk budgeting, and dynamiccore−satellite allocation to refine investment management and risk management processes and design new investment

solutions: learn to introduce risk management constraints into asset allocation and discover new risk management techniques; find out how to design investment solutions for the retail and institutional markets so as to take into account risk constraints and performance objectives, and how to use new LDI approaches to optimise regulatory constraints.

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Functions• Chief executive officers/ Managing directors• Chief investment officers/ Directors of investments• Heads of asset allocation/ investment strategy/ALM• Heads of investment solutions/ structuring/financial services• Portfolio managers• Risk managers• Senior analysts and investment officers• Senior investment advisers/ consultants• Senior research officers

Who Should Attendõ The programme is intended for investment management professionals who advise on or participate in the design and implementation of asset allocation policies and portfolio models, and for sell-side practitioners who develop new asset management and ALM solutions for investors.

õ Past editions of the seminar have attracted a large cross-section of buy- and sell-side institutions from thirty-four countries worldwide. Global giants, national champions, and small boutiques were represented by their senior officers and investment specialists. Participants included practitioners with the following functions and from the following types of institutions:


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Institutions• Asset management companies• Consultancies• Insurance and reinsurance companies• Investment banks• Non-financial companies• Pension funds, endowments and foundations• Private banks• Regulatory authorities• Research firms• Sovereign investment vehicles

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“ Excellent mix of theoretical concepts and their incorporation to portfolio management.Carlos Veintemillas, Deputy CIO, Texas Permanent School Fund, USA Past participant

The best training course that I have attended in my professional career. Fast paced, cutting edge and practical.David Rae,Head of Investment Analysis, New Zealand superannuation fund, New ZealandPast participant

In my opinion this seminar was on the leading edge of asset allocation and risk management and provided a balanced presentation of academic theory and practical/implementable solutions.Andrew Sawyer,Chief Investment Officer of MainePERS.Past participant

A must for all portfolio managers, and client advisors working on either asset allocation or LDI implementation. In this time of resource constraints, it is critical to understand where to focus your research efforts and this seminar is instrumental in understanding how to take the advances in available technology and improve upon portfolio construction and risk management.Anwiti Bahuguna, PhDDirector, Bank of America and Senior Portfolio Manager, Columbia Management, USAPast participant

Very high level and usefull seminar. Great speaker. Good quality of participants. A lot of food for thought. You don’t go out with one possible way of doing things, but with ideas on how to improve your own process. Worth the time and investment.Sylvain Ratelle,Vice President & Strategist, Valeurs Mobilières Banque Laurentienne, CanadaPast participant


Lionel Martellini is Professor of Finance at EDHEC Business School and Scientific Director of EDHEC-Risk Institute.

Lionel has consulted on risk management, alternative investment strategies, and performance benchmarks for various institutional investors, investment banks, and asset management firms, both in Europe and in the United States. His research has been published in leading academic journals, including Management Science, the Journal of Financial and Quantitative Analysis and the Review of Financial Studies, and leading practitioner journals, including the Financial Analysts Journal, the Journal of Derivatives, the Journal of Fixed Income, the Journal of Alternative Investments, the Journal of Investment Management, and the Journal of Portfolio Management. He sits on the editorial board of the Journal of Portfolio Management and the Journal of Alternative Investments.

Lionel has co-authored and co-edited reference texts on fixed-income management and alternative investment such as the much-praised Fixed-Income Securities: Valuation, Risk Management and Portfolio Strategies (Wiley Finance) and is regularly invited to deliver presentations at leading academic and industry conferences. He holds graduate degrees in business administration, economics, statistics and mathematics, as well as a PhD in finance from the Haas School of Business at UC Berkeley.

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Seminar Instructor

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The course was nothing short of excellent. Lionel Martellini did a great job of presenting complex concepts in an understandable fashion. I also learned a great deal that I can apply in my responsibilities to significantly improve our risk management processes. It was an invaluable experience that I would recommend to any asset manager with liability matching responsibilities.Paul Fahey, VP, Pension Investments, NAV CANADA, Canada Past participant

Professor Martellini teaches very complicated concepts in an easy to understand way. It was three days well spent at seminar to learn of the best practices in Asset Allocation.Harsh Parikh,Portfolio Manager & Strategist, BNY Mellon Asset Management, USAPast participant

Professor Martellini is a fantastic presenter: He makes the audience understand the intuition behind theoretical concepts. He is enthusiastic and knowledgeable and keeps the audience engaged. It was a pleasure attending his seminars.Farid Tabatabaie, Associate, CPP Investment Board, CanadaPast participant

Lionel Martellini is a wizard in translating technical aspects of quantitative finance into a very intuitive and interactive dialogue. I have already recommended this seminar to my colleagues!James Kwon, Senior Associate, CPP Investment Board, CanadaPast participant

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Day

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Risk diversification and the design of optimalperformance-seeking portfolios—Bridging the gap betweenportfolio theory and portfolio constructionSeminar contents: identifying paradigm shifts in the asset management industry, understanding when and why modern portfolio theoryfails in the real world, making covariance matrix estimation manageable and improving parameter estimates, incorporating active views ina Bayesian framework, implementing alternative portfolio models that integrate non-normality risks and realistic preferences, constructingwell-diversified efficient benchmarks, and identifying alternative forms of indices and benchmarks.

IntroductionParadigm shifts in the asset management industryõ Alpha-beta separation and risk management: understanding the difference between normal returns and abnormal returns, understanding the difference between investment products and investment solutions; understanding the main features that are present in most/ all investors’ needs; understanding the need to reconcile long-term objectives and short-term risk budgets and dollar budgets.

õ From asset management to risk and asset management: understanding the value of risk management in the asset management process; defining the three possible approachesto risk management: risk diversification, risk insurance, and risk hedging; shifting from ex-post risk management to using risk budgets as key ingredients in the design of the asset allocation solution; introducing the new paradigm that makes it possible to design investment solutions that meet investors’ needs.

Constructing Efficient Asset Allocation BenchmarksFrom Asset Allocation to Factor Allocation Decisionsõ From asset allocation to risk allocation: asset allocationdecisions across asset classes versus portfolio constructiondecisions within asset classes; allocating to risk factors versusallocating to asset classes; from measurement of factorexposures to passive replication of, and optimal allocationto, factor exposures; consequences for institutionalmanagement of this change of paradigm.

õ Measuring diversification: weight-based versus risk-basedmeasures of diversification; measuring the numberof independent bets in asset allocation decisions; turningcorrelated asset returns into uncorrelated factor returns;pros and cons of using principal component analysis,and minimal linear torsion.

õ Managing diversification: from naive diversificationto scientific diversification; assessing the out-of-sampleperformance of global minimum asset allocation variancebenchmarks, maximum Sharpe ratio asset allocationbenchmarks, equal risk parity asset allocation benchmarks.


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Constructing Efficient Asset Class Benchmarksõ Inefficient portfolios in efficient markets; inefficiency of cap-weighted indices; outperformance of equally-weighted indices; implications of the Capital Asset Pricing Model regarding the efficiency of cap-weighted equity indices; from inefficient equity benchmarks to inefficient bond benchmarks.

õ From naive to scientific diversification: implementing and improving risk parameter estimates with factor models and Baysesian techniques; dealing with non-normality and asymmetric risk preferences; the benefits and limits of global minimum variance portfolios, further information regarding the idiosyncratic volatility puzzle; hard versus flexible norm constraints; max Sharpe ratio approach; maximum diversity, equal risk contribution and risk parity benchmarks.

õ Smart beta benchmarks: alpha versus beta versus smart beta; measuring and managing systematic risks of smart beta benchmarks; measuring and managing specific risks of smart beta benchmarks; smart beta benchmark with tracking error constraints; from the multi-management of alphas to the multi-management of smart betas.

Day

One

Advances in Asset Allocation Seminar — New York, 22-24 July 2014Advances in Asset Allocation Seminar — New York, 22-24 July 2014

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wo Risk hedging and the life cycle and liability-driven investing

paradigms—Efficient long-term allocation strategies for institutional,private, and retail investorsSeminar contents: reviewing the latest advances in ALM and LDI; examining the inflation-hedging properties of traditional and alternative investments; designing new costefficientforms of inflation-hedging portfolios; hedging extreme inflation risk; incorporating the sponsor perspective into ALM; accounting for long-term objectives in portfolioconstruction and implementing new life cycle investing (LCI) strategies.

Towards Efficient Risk Hedging—From AssetManagement to Asset−Liability ManagementImplementing state-of-the-art liabilityhedgingõ A brief history of ALM: cash flow matching, immunisation, surplus optimisation; fund separation theorem and LDI strategies; performance-seeking portfolio vs. liability-matchingportfolio; using derivatives to implement the liability-matching portfolio.

õ Liability-hedging in the short-run and in the long-run: the trade-off between the short-term perspective, where interest rate risk dominates, and the long-term perspective, where inflation risk dominates; term structure of risk hedging benefits of various asset classes from an asset management and an ALM perspective; realised versus expected inflation risk; diversification versus hedging inflation risk; hedging inflationlinked liabilities without inflation-linked bonds; designing long/short nominal bond portfolio strategies to neutralise the exposure to unexpected changes in expected inflation.

õ Beyond LDI: from fund separation theorems to fund interaction theorems; performance seeking portfolios with attractive liability-hedging properties and liability-hedging portfolios with attractive performance properties; inflation hedging portfolios with enhanced performance; reducing the required allocation to the performance-seeking portfolio by enhancing the liability-hedging portfolio; selecting asset classes on the basis of their portfolio properties versus standalone properties; trading-off diversification benefits versus hedging benefits.

õ Case studies of LDI strategies: constructing better bond benchmarks from an ALM perspective; bond portfolios with duration constraints and improved Sharpe ratios; constructing performance benchmarks with improved hedging benefits; liability-friendly equity benchmarks based on selection and/or optimisation procedures..

Accounting for the presence of long-termobjectives in portfolio constructionõ From short-term static portfolio selection to long-term intertemporal portfolio selection: optimal allocation decisions in the presence of a stochastic opportunity set; hedging demands with respect to interest rate risk, inflation risk, equity volatility and risk premium risks; using econometric techniques to estimate latent mean-reverting variables such as equity volatility or equity risk premium.

õ Case study of LCI strategies: benefits and limits of current forms of target-date funds; designing improved forms of LCI strategies; implementing market-dependent allocation strategies; meeting the challenges of mass customisation and robust implementation.

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hree Risk insurance and the risk-controlled investing

paradigm–Achieving long-term investment objectives whilerespecting short-term risk budgets and constraintsSeminar contents: moving from static to dynamic beta management; optimising risk budgeting within the core−satellite architecture; usingdynamic core−satellite investing to achieve dissymmetric management of the risk budget; blending active management and risk managementin a unified framework; designing new asset management offerings and novel LDI solutions.

Towards Efficient Risk Insurance—From Asset LiabilityManagement to Risk and Asset Liability ManagementFrom static to dynamic beta managementõ From risk diversification to risk hedging: introducing risk management constraints into asset allocation; defining margin for error as a function of risk aversion; implementing time- and state-dependent asset allocation strategies for risk management; reviewing portfolio insurance strategies: constant proportion portfolio insurance vs. option-based portfolio insurance; understanding risk management techniques based on replication and on derivatives; introducing exotic structures

Dynamic core−satellite management and newapproaches for improved investment managementofferings õ Using risk budgets as ingredients in the design of the optimal portfolio strategy; implementing martingale techniques in optimisation; taking into account mean reversion in equity returns within the context of a risk– controlled strategy; incorporating maximum drawdown constraints in product design; minimising the costs of downside protection and maximising access to the upside potential.

Case studies of new investment management offerings: õ Designing improved forms of long-term investment strategies for institutional or individual investors : capturingthe benefits of mean-reversion in equity returns; including maximum drawdown constraints; introducing goal-orientedstrategies; reducing the opportunity cost of downside risk hedging; using improved asset class benchmarks within long-term investment strategies.

õ Designing dedicated ALM solutions for private wealth management: taking into account a private client’s full profile; including consumption/bequest objectives and shortterm performance constraints.

õ Designing dedicated equity solutions for insurance companies facing Solvency risk budgets: investing in equities within Solvency II; standard formula versus full or partial internal models; risk management in Pillar I versus Pillar II; optimising the use of capital charges via dynamic asset allocation strategies; implementing dynamic Solvency benchmarks with active managers; dynamic Solvency benchmarks versus structured products.


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Advances in Asset Allocation Seminar — New York, 22-24 July 2014Advances in Asset Allocation Seminar — New York, 22-24 July 2014

CFA Institute is the global association for investment professionals. It administers the Chartered Financial Analyst® (CFA®), CIPM® curriculum, Claritas® Investment Certificate, and exam programmes worldwide, publishes research, conducts professional development programmes, and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry.

As part of its commitment to professional excellence, it has developed the Advances in Asset Allocation Seminar jointly with EDHEC-Risk Institute specifically for senior-level investment professionals.

CFA Institute has more than 115,000 members, of which 16,000 reside in the European Union. Globally there are more than 108,000 CFA charterholders, as well as 139 affiliated professional CFA societies in 60 countries and territories.

The CFA Institute global operations centre is in Charlottesville, Virginia, USA, with offices also in London, Hong Kong, Brussels, and New York.

More information: www.cfainstitute.org

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Institute

Since 2001, EDHEC has been pursuing an ambitious policy in terms of international research. This policy, known as “Research for Business”, aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results.

Among these areas, asset and risk management have occupied privileged positions, leading to the creation in 2001 of a major research facility: EDHEC-Risk Institute. This institute now boasts a team of over 95 permanent professors, engineers and support staff, as well as 48 research associates from the financial industry and affiliate professors.

EDHEC-Risk Institute is located at campuses in Singapore, which was established at the invitation of the Monetary Authority of Singapore (MAS), the City of London in the United Kingdom, and Nice, France. In addition, it has a research team located in the United States.

The philosophy of the institute is to validate its work by publication in prestigious academic journals, but also to make it available to professionals and to participate in industry debate through its Position Papers, published studies and conferences. Each year, EDHEC-Risk organises three conferences for professionals in order to present the results of its research, one in London (EDHEC-Risk Days Europe) one in Singapore (EDHEC-Risk Days Asia), and one in New York (EDHEC-Risk Days North America) attracting more than 2,500 professional delegates.

To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access to its

website, www.edhec-risk.com, which is entirely devoted to international risk and asset management research. The website, which has more than 65,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC-Risk’s analysis and expertise in the area of applied portfolio management research. Its monthly newsletter is distributed to more than 1,500,000 readers.

EDHEC-Risk Institute also has highly significant executive education activities for professionals. In partnership with CFA Institute, it has developed advanced seminars based on its research which are available to CFA charterholders and have been taking place since 2008 in New York, Singapore and London. EDHEC-Risk Institute has an original PhD in Finance programme which, in addition to its highly selective residential track for young talents worldwide, has an executive track for high level professionals who already have masters degrees from prestigious universities and significant industry experience. These professionals are looking to go beyond their usual activities in order to develop research on the concepts that are relevant to their occupation. Complementing the core faculty, this unique PhD in Finance programme has highly prestigious affiliate faculty from universities such as Princeton, Wharton, Oxford, Chicago and CalTech.

In 2012, EDHEC-Risk Institute signed two strategic partnership agreements with the Operations Research and Financial Engineering department of Princeton University to set up a joint research programme in the area of risk and investment management, and with Yale School of Management to set up joint certified executive training courses in North America and Europe in the area of investment management.

Fees and Billing InformationFeesStandard rate: USD8,000/EUR6,000CFA Institute member rate: USD6,000/EUR4,500Institutional Investor rate: USD7,000/EUR5,000Early birds available before May 1st.Fees include instruction, documentation,refreshments at breaks, and lunch.Accommodation is not included.

Billing and paymentThe fee is billed upon registration and must be settled before the seminar begins. Payment can be made by credit card or wire transfer. Invoicing will be in Euros.

Transfer or cancellationTransfer of registration to a colleague, upon written notice, is allowed and free of charge. Transfer of registration fees to another EDHEC-Risk Institute programme must be requested in writing and is subject to the following charges: 45 to 30 days’ notice: 15% of the tuition fee; 29 to 11 days’ notice:30% of the tuition fee; 10 days’ notice or less: 50% of the tuition fee.

Cancellations of confirmed seats must be received in writing and are subject to the following charges: 45 to 30 days’ notice: 25% of the tuition fee; 29 to 11 days’ notice: 50% of the tuition fee; 10 days’ notice or less: 100% of the tuition fee.

Further Information and Registration

For further information,contact Mélanie Ruiz at: [email protected] on: +33 493 187 819

To register, visit: http://www.regonline.co.uk/AAA_July_2014

ScheduleA typical programme day lasts from 8:30 am to 6:00 pm and is usually divided into lectures and application cases. The two class sessions in each half-day period are separated by 30 minute refreshment breaks. Lunch is included.

VenueThe Westin New York at Times Square270 West 43rd StreetNew York, New York, 10036www.westinny.com

Institute

CFA Institute560 Ray C. Hunt DriveCharlottesville, VA 22903USATel: +1 434-951-5499 Web: www.cfainstitute.org

Continuing Education CreditsAs a participant in the CFA Institute Approved-Provider Programme, EDHEC-Risk Institute has determined that this programme qualifies for 20 credit hours. If you are a CFA Institute member, continuing education credit for your participation in this programme will be automatically recorded in your CE tracking tool.

EDHEC-Risk Institute393 promenade des AnglaisBP 3116 - 06202 Nice Cedex 3 - FranceTel: +33 (0)4 93 18 78 24

EDHEC Risk Institute—Europe 10 Fleet Place, LudgateLondon EC4M 7RB - United KingdomTel: +44 207 871 6740

EDHEC Risk Institute—Asia1 George Street#07-02 - Singapore 049145Tel: +65 6438 0030

EDHEC Risk Institute—North AmericaOne Rockefeller Plaza 10th & 11th Floors New York, NY 10020 USATel: +1 646 756 2638

EDHEC Risk Institute—France 16-18 rue du 4 septembre75002 Paris - FranceTel: +33 (0)1 53 32 76 30

www.edhec-risk.com

advances in asset allocation seminar · 2014-02-12 · anwiti bahuguna, phd director, bank of...

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