25 February 2008

EDHEC: The practices of European asset managers and investors examined

Practices in the European asset management industry have failed to keep up with the research advances of the last twenty years, EDHEC concludes in its European Investment Practices Survey. Investment professionals are often familiar with research findings and new techniques but that these are rarely used, EDHEC found, leading to ‘substantial investment and risk management inefficiencies’.

Although a majority of managers take the core-satellite approach to asset management, many neglect the fundamentals of this approach and thus fail to take full advantage of the opportunities it provides for improved management of absolute and relative risk, the report finds.

Looking at indices and benchmarks, the study found that “despite their flaws-and for want of truly credible alternatives-capitalisation-weighted indices remain predominant”.

The EDHEC study shows likewise that when investors do manage assets and liabilities they favour simple solutions such as cash-flow matching or liability-driven investment, which now account for nearly half of the ALM approaches used.

Although managers now fairly often use measures of extreme risk to construct their portfolios, these measures are used much less frequently when reporting on performance and on the risks borne by funds or mandates, EDHEC criticizes. “Finally, the industry as a whole speaks of alpha, but very few professionals measure it correctly”, the study states.

EDHEC press release

© EDHEC