Tue, May 22, 2018
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

CFA Institute study – 10 things the investment management industry should take into consideration following the financial crisis

Tuesday, October 26, 2010
Opalesque Industry Update - The Research Foundation of CFA Institute announces the launch of a new monograph which looks at how the financial crisis has affected and will continue to affect the investment management industry. The publication brings together a review of literature, conversations with industry players, industry observers, executive recruiters, and academics in a single volume that provides insight into the lessons to be learned and changes that need to be made to improve investment and business practice in the industry.

Focusing on what the industry has identified as challenges in the post-crisis period, such as asset allocation, risk management, management fees and the redistribution of roles in investment management, as well as ethics and regaining the trust of the investor, the monograph highlights ten key considerations:

1. For effective diversification, consider correlations at the relevant time horizons. Instantaneous correlation between the returns of different assets and asset classes does not fully reflect the behaviour of the returns of assets or asset classes in times of crisis, when there can be shifts in medium-term trends or an increase in correlation at long time horizons.

2. Review asset allocation more frequently. Today’s markets experience more large swings in market valuations and change behaviour in fundamental ways that affect the forecasts of entire asset classes and require dynamic asset allocation. However, while dynamic asset allocation holds the promise of higher returns, it is a source of risk given that it shifts assets dynamically from entire asset classes, leaving little margin for mistakes in timing.

3. Consider extreme events as they do occur more frequently than today’s risk models forecast. Empirically, we know that returns distributions are fat-tailed. In addition, there are hidden sources of extreme risk that have to be accounted for. These facts need to be incorporated into financial decision-making.

4. Consider carefully the magnitude of losses should one need to unwind positions rapidly. Recent events have demonstrated that a sudden withdrawal of liquidity from markets might occur, leading to potentially very large losses on leveraged strategies.

5. Consider the complexity of the web of relationships between agents and between investment products. The structure of market links has come to the forefront as a source of risk as complex derivative products might propagate losses throughout the economy well beyond what was believed realistic before the 2007-2009 crisis.

6. Look at macroeconomic quantities as the real economy does matter. Though macroeconomic variables move slowly, they are important insofar as they can signal the building up of situations that might lead to large losses.

7. Consider the risk that hedging strategies can fail given that apparently solid counterparties can and do fail (Lehman Brothers). With the crisis that started in 2007, hedging has acquired a new dimension as the possibility of failure of counterparties such as major banks and insurance firms has increased beyond what was considered likely before the crisis.

8. Build up multi-asset and multinational capability: markets are global and investors increasingly expect those who manage their money to have a global view on the investment environment.

9. Build up the quantitative capability to address the size and complexity of markets, and the fact that optimal execution increasingly calls for automation and quantitative capabilities.

10. Align the promise with what the investment management industry can deliver. Investors have been stunned by large swings in market valuations three times in the past 10 years (1997-1998, 2000-2002, 2007-2009) years. The industry needs to regain investors’ confidence.

Sergio Focardi, co-author of the monograph and professor of finance at EDHEC Business School (Nice, France) said, “From mid-2007 through the first quarter of 2009, financial markets were shaken by a series of shocks. It is important that the investment management industry learns lessons from this crisis to understand what needs to be done differently going forward. Everyone in the industry will need more ‘science’, a more systematic consideration of the true risks that lie ahead, be they the risk of extreme events, liquidity risk, counterparty risk or systemic risk. At the same time, investors are asking for more transparency in products and processes and are increasingly reluctant to pay high fees for low returns. The industry needs to propose strategies and a fee structure more aligned with today’s reality. We hope that the monograph’s findings can help impart valuable lessons on today’s industry players.”

The monograph is free to download (Source) and available to the public. It was researched and authored by Frank Fabozzi, CFA, Sergio Focardi, and Caroline Jonas on behalf of the Research Foundation of CFA Institute. The Research Foundation is a not-for-profit organisation established to promote the development and dissemination of relevant research for investment practitioners worldwide.

(press release)

About CFA Institute
CFA Institute is the global association for the investment profession. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 100,000 members, who include the world’s 93,700 CFA charterholders, as well as 135 affiliated professional societies in 58 countries and territories. More information may be found at www.cfainstitute.org.

- FG

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. News Briefs - Warren Buffett: Target date funds aren't the way to go, Cambridge Analytica could be reborn under a different name[more]

    Warren Buffett: Target date funds aren't the way to go Planning for retirement can be complicated and stressful. This is why target date funds - funds that are managed based on when you expect to retire - are so attractive. Over time, the balance of stocks, bonds and cash evolve automati

  2. Investing - Hedge funds hike Smurfit Kappa positions amid takeover deal hopes, Hedge fund IBV Capital digs deep to unlock long-term value in a competitive market, Eisman of 'The Big Short' fame recommends shorting Deutsche Bank[more]

    Hedge funds hike Smurfit Kappa positions amid takeover deal hopes From Irishtimes.com: Two US hedge funds, Davidson Kempner and York Capital, have accumulated a combined 4.74 per cent interest in cardboard box maker Smurfit Kappa using financial derivatives. It comes as many investors cl

  3. Foundations of hedge fund managers gave big to controversial donor-advised funds[more]

    In the world of philanthropy and tax-deductible charitable giving, the explosion of donor-advised funds has touched off intense debate. Now, there is evidence that the DAF boom is being further fuelled by hedge fund foundation money. Four of the top five foundations that gave the most to large do

  4. Study: For hedge funds, smaller is better[more]

    From Institutionalinvestor.com: The smaller the hedge fund is, the better its performance is likely to be, according to a new study. The study - "Size, Age, and the Performance Life Cycle of Hedge Funds," released April 26 - sought to determine whether a hedge fund's size and age had any effect on i

  5. Hedge fund returns rose in April for first gain since January[more]

    From Bloomberg.com: Bloomberg Hedge Fund Database shows returns flat this year - Currency strategies had the biggest monthly gain at 13% Hedge fund returns increased 0.78 percent in April, reversing two consecutive monthly declines. The swing of 134 basis points was driven by gains in all seven