The Need for Investment Solutions
Investment management is justified as an industry only to the extent that it can demonstrate a capacity to add value through the design of dedicated and meaningful investor-centric investment solutions, as opposed to one-size-fits-all manager-centric investment products. After several decades of relative inertia, the much needed move towards investment solutions has been greatly facilitated by a true industrial revolution triggered by profound paradigm changes in terms of mass production (of cost- and risk-efficient smart factor indices), mass customisation (of liability-driven investing and goal-based investing strategies) and mass distribution (with robo-advisor technologies). In parallel, the investment industry is strongly impacted by two other major external revolutions, namely the digital revolution and the environmental revolution.
In this fast-moving environment, EDHEC-Risk Institute positions itself as the leading academic think-tank in the area of investment solutions, which gives true significance and virtue to the investment management practice. Through our multi-faceted programme of research, outreach, education and industry partnership initiatives, our ambition is to support industry players (both asset owners and asset managers) in their efforts to transition towards a novel, welfare-improving, investment management paradigm.
Risk Management as the Key Source of Added Value in Investment Management
Investment management in the new era can be defined as the art and science of efficiently spending institutional or individual investors’ dollar and risk budgets to help them achieve their meaningful wealth-/income-/consumption- or liability-driven objectives, subject to regulatory constraints. Addressing this challenge involves institutional and individual asset owners (or their investment managers) efficiently using a holistic risk management framework known as liability-driven investing or goal-driven investing. Whatever the context, meaningful investment solutions are based on three fundamental sources of added value: (1) the use of an efficient risky performance-seeking portfolio (PSP); (2) the use of an efficient safe liability-hedging or goal-hedging portfolio; and (3) the use of an efficient allocation strategy for efficient risky and safe building block portfolios.
The risky portfolio should be efficient at harvesting risk premia across and within asset classes: It’s all about diversification!
The safe portfolio should be efficient at matching risk factor exposures on the asset and liability sides: It’s all about hedging!
The allocation to the efficient risky and safe portfolios should secure investors’ essential goals while generating a high probability of achieving their aspirational goals: It’s all about insurance!
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