This new research from the Pensions Institute at the Cass Business School studies the effect of decentralised investment management, including the use of multiple competing managers in specialist asset classes, on the risk and performance of pension funds.

In this paper Joop Huij from the Rotterdam School of Management, Erasmus University and Jeroen Derwall from Tilburg University, School of Economics show the observed relation between portfolio concentration and performance is mostly driven by the breadth of the underlying fund strategies, not just by fund managers’ willingness to take big bets.

The events of the last two years have demonstrated that risk management cannot afford to stop at the 95th percentile, and that risk management based solely on volatility is not sufficient. This research paper by Tim Unger, head of investment strategy at Watson Wyatt Australia and member of the global Thinking Ahead Group, considers 15 unlikely, but potentially high impact events - such as the demise of capitalism - their effect on investments and possible hedging strategies.

Notwithstanding the effect, for investors, of globalisation, country and sector bets still drive the performance of global equity portfolios. And research shows that whole countries tend to stray from fair value for a lot longer than individual stocks do. Deutsche Asset Management has produced a paper on ‘Diversification-Based Investing’, which leads one to think about building a core balanced portfolio of country and sector index funds.

The inherent breadth and ambiguity of environmental, social and governance issues has resulted in the integration of ESG considerations into portfolio design remaining largely a philosophical push, without clarity on the direct and indirect impacts on shareholder value. In this working paper, AQR Capital Management's Jeff Dunn, outlines a simple framework for considering the impact of ESG issues with respect to their role in investment decisions, with the aim of providing a clearer path for further investigation of the impact of ESG policies on shareholder value and how they can be appropriately included in the investment decisions of both investors and fiduciaries.

For the first time since 2006, Watson Wyatt has written a report that revisits the macro-economic factors that may affect global returns over the next decade. It highlights the increasing influence of public policy and emerging wealth on the investment agenda, and draws some tentative conclusions regarding the implications for investment portfolios.

In this latest piece of research the US-based independent investment consulting firm, NEPC, examines whether the assumptions about hedge funds, hedge fund of funds and portable alpha, are broken or merely damaged, and whether there is still a case for including these strategies in institutional investment programs.

In this research insight MSCI Barra explores the mitigation of misaligned risk and alpha factors by modifying the optimisation process. Firstly it reviews how to decompose a set of alphas into two components - one that is related to risk model factors, and one that is not. Then it shows how penalising the residual alpha in portfolio optimisation may improve a portfolio's exposures and ex-ante information ratio. 

This paper, produced by EDHEC Risk and Asset Management Research, presents an empirical analysis of the benefits of alternative forms of investment strategies from an asset-liability management perspective.

Using a vector error correction model that explicitly distinguishes between short-term and long-term dynamics in the joint distribution of asset returns and inflation, we identify the presence of long-term cointegration relationships between the return on typical pension fund liabilities and the return of various traditional and alternative asset classes.

The results suggest that real estate and commodities have particularly attractive inflation-hedging properties over long-horizons, which justify their introduction in pension funds' liability-matching portfolios.

Investors need to be aware that rare events with an extreme impact that, afterwards, we think we could have predicted—in short, black swans—happen in the markets. Those who are trying to measure risk in the financial markets need to carefully distinguish risk, with its probabilities, from uncertainty, which cannot be measured. We have become increasingly vulnerable to black swans because our financial economy has come to play an ever-larger role in our productive economy.

In a research paper entitled "Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis" in the latest Financial Analysts Journal, Bruce Jacobs argues that highly complex financial instruments, were devised to shift risk from one part of the financial system to another, but the underlying systematic risk remained. And when magnified by huge amounts of leverage, blew up the foundations of the financial system and the economy.

Randy Cohen from Harvard Business School, Christopher Polk from the London School of Economics, and Bernhard Silli from the Universitat Pompeu Fabra and the London School of Economics, provide powerful evidence that mutual fund managers can pick stocks that outperform the market.

Recent pricing dislocations in U.S. fixed-income markets have illustrated there is more to hedging a liability’s interest rate risk than simply matching its duration. Basis risk – in the context of liability hedging – is the risk that the changes in the market value of assets, designated as a hedge, will deviate from the changes in the value of the appropriate liability benchmark.

Alpha is shrinking, and it’s good news for investors. This idea may seem paradoxical. But alpha is really just the portion of a portfolio’s returns that cannot be explained by exposure to common risk factors (betas).

With the emergence of new betas, the unexplained portion (alpha) shrinks – alpha gets reclassified as beta. The rise of a group of risk factors we call hedge fund betas makes this transformation especially relevant today. Hedge fund betas are the common risk exposures shared by hedge fund managers pursuing similar strategies.

We believe these risk factors can capture not just the fundamental insights of hedge funds, but also a meaningful portion of their returns. Hedge fund betas are available for investment and can also be used to enhance portfolio construction and risk management.

Ultimately, we believe the rise of hedge fund betas will lead not only to the reclassification of alpha, but also to better-diversified portfolios with greater transparency, improved risk control, and – perhaps most importantly – higher net returns.

Abstract: This report defines and explains the rise of investments outsourcing—the practice of delegating part or all of a portfolio to third-party, multi-asset specialists—among U.S. institutional investors. The study presents key findings from a Casey Quirk survey of more than 20 of America's largest investments outsourcing vendors.

In the CFA Institute’s new Investment Performance Measurement newsletter, launched this month David Spaulding, president The Spaulding Group, and Steven Stone, partner at Morgan, Lewis & Bockius discuss the issues concerning the use of theoretical performance, summarise the regulatory implications and risks of using such presentations, and suggest best practices and appropriate disclosures.

This latest research by MSCI Barra Research analyses the equity allocations of European institutional investors, arguing the practice of separating international equities allocations into regional mandates at a strategic level "deserves a thorough rethink" 

In this white paper by DB Climate Change Advisors, led by global head of climate change investment research Mark Fulton, the drivers of climate change for 2010 are examined in the context of strategic asset allocation.

The REIT market will not consistently outperform the broader equity and fixed income markets has it has done for thepast 20 years, according to this research by Mercer Real Estate Boutique's David Nix and Michelle Reuter, but there will be pockets of opportunity ripe for stock pickers.

A survey of more than 85 senior level financial executives at US-based companies reveals few are taking steps to cut costs and improve governance but are reacting to the economic crisis by decreasing equities and eliminating defined contribution investment options. The report by Watson Wyatt shows that two thirds of companies have made changes, or are planning to make changes to their defined benefit asset allocations, while more than half have already made changes, or plan to make changes, to the investment lineups of their defined contribution plans.

MSCI Barra takes a close look at the stock performance in various emerging markets, examining the differences to developed market stocks in the performance of particular sectors and styles.

While recent manager performance has raised concerns about active management, US consulting firm Rogerscasey believes that active management is often called into question at precisely the wrong time. And while passive investing has proven to be a cost effective way for some investors to access some portions of the capital markets, there are situations where hiring a fund manager is the more appropriate course of action. This research brief by Chris Thompson, director in the alpha investment research group, outlines the consultant's case.

This paper by Scott Berg, global large cap equity portfolio manager at T Rowe Price examines the secular growth trends that have underpinned emerging markets and whether there is still an argument for exposure to these markets within a global equities portfolio.

Massachusetts-based consultant, NEPC, advises that clients allocate between 5 and 15 per cent to real assets - including commodities, TIPS and direct investments in real estate, energy and infrastructure. This article by consultant Edward O'Donnell examines the rationale, risks and potential returns of allocating to real assets.

As institutional investors have been hit hard by events of the past 18 months, there has been a surge of interest in the adoption of an additional, mid-term, time frame in which to provide investment targets. Watson Wyatt believes pension funds should allocate between 5 and 15 per cent of their risk budget to dynamic asset allocation.

Target date funds vary in their broad asset allocation, in their sub-asset allocation of the broader asset classes, and their implementation. This paper outlines some methodologies across providers, highlighting the different risks associated with the various strategies and illustrating the impact on performance over both a longer period, as well as a shorter, more volatile, period like 2008.

In this paper by Vanguard Investment Counseling and Research, the performance of active funds in the US and Europe during the seven bear markets since 1970 is evaluated, revealing that the performance of certain market segments relative to the broad market may contribute more to outperformance than manager skill.

In an environment where periodic illiquidity has become more frequent, Alan Dorsey and Juliana Davydov from Neuberger and Berman explore the risks associated with a new asset allocation approach and the use of managers with broader mandates.

Russell Investments' latest research argues some pension plans should consider a dynamic approach to strategic asset allocation that ties pension fund investing policy to changes in liabilities and a plan's funded status. For the full report click here

In early 2007, we started advising clients that we thought the next major investment opportunity would be in distressed securities. As the credit crisis has unfolded and the first ripples of this tidal wave have appeared, we have often been asked for our views on how to structure and fund these types of investments

After many years of extraordinary growth, China has clearly been adversely affected by the global economic recession. Its own economy is slowing rapidly, with declines in exports, property prices, and fixed investment. In response, the Chinese government. strongly motivated to maintain stability, is injecting large doses of fiscal stimulus and making other administrative efforts to revive economic activity.

Diversification is one of the few reliable 'free lunches' in asset markets. Nevertheless, investors do not always extract the best from the available benefits. Many portfolios still carry some concentrated risk exposures. And when diversification is pursued, it often occurs under the shotgun approach of increasing the number of return sources, albeit guided by a focus on correlation.

This report is the first of a two-part series that proposes a more rifle-shot approach to diversification. It suggests a general process for improving the asset class mix of an existing portfolio. The method involves identifying the underlying fundamental risks to which the portfolio is most exposed, the purposefully diversifying towards assets that address these risks.

Part B of the series discusses the hunt for excess returns.

We first published this document in November 2005 during a period of healthy markets and around the peak of the US housing bubble. The main conclusion from the note was that we had just been through an unparalleled period of returns in all asset classes.

This paper from the Neuberger Berman fund of hedge funds team analyses the near-term prospects of distressed investing and volatility arbitrage, offers observations on the importance of managing the beta profiles of long and short positions within long/short equity portfolios, and explores the effects of reduced competition on hedge fund managers.

Preqin has canvassed public pension funds and other investors in the US to examine the specific effects of the SEC's proposed rules relating to the introduction of the Advisers Act Rule 206(4)-5, on the private equity industry. The report includes key statistics on the use of  placement agents, the importance of private equity and other alternative investment funds using third-party marketing to the portfolios of public pension plans, and the size of the placement industry.

New research of hedge funds managers by Preqin shows it is clear the idea of a “2 and 20” fee structure is outdated and, although less succinct, a more accurate reflection would be a “1.63 and 17.21” formula.

The hedge fund industry faces a transformational crisis, precipitated by external market events and worsened by the industry's mixed record at meeting investors' risk and liquidity expectations as well as weaknesses in the hedge fund business model. Here, a full copy of the Casey Quirk/ BNY Mellon Hedge Fund of Tomorrow report, faces and embraces those challenges.

In his latest paper, professor of finance at EDHEC risk and asset management research centre based in France, Abraham Lioui, conducts an in-depth study of the recent decision to ban short selling, highlighting the quesionable reasons for the ban and the prejudices that weigh on those that short.

Activist investing is an investment approach whereby an investor seeks to influence the strategy of a company. Strategy may be very broadly defined to include acquisitions, divestitures, capital structure, dividend policy and board composition, inter alia.

We see two broad aspects of this strategy that may exist separately or together. First, activist investing may seek to remedy conflicts of interest in corporate governance. Secondly, it may be seen as a derivative strategy of value investing that attempts not only to identify undervalued companies, but also to engage those companies to pursue actions that will realize shareholder value.

We believe activist strategies should be considered as a part of investors’ equity portfolios.

Over the last 12 months global financial markets have undergone major corrections following, fundamentally, a break-down in the confidence and trust in the financial system as practiced by the Western world.

Along with this break-down we experienced a steep fall in US housing prices, the nationalization of financial institutions, the forced merger and/or failure of several large financial institutions in the US and Europe, and a global credit freeze.

The crisis has led us into an economic recession.

How do current market activities, regulatory changes and dislocations potentially impact the ability of hedge funds to prosper going forward? The huge changes occurring in the markets are having a significant impact on hedge funds, including short sale restrictions, disclosure requirements and the effective elimination of the investment banking model and its attendant impact on sources of funds to provide leverage and liquidity.

Current and potential hedge fund investors should be aware of changes in the market and should monitor investments closely, including asking additional questions of their hedge fund managers and gathering vital market and regulatory information. Fiduciaries should not take a “wait and see” approach, but should pursue key information in order to make prudent decisions.

Over the last several years, institutional investors have more than doubled their allocation, to over $110 billion, to financial products whose returns are linked to those of commodity indices.

Commodities may be attractive due to the low correlation between the returns of commodities and those of other asset classes, the high correlation of commodities returns with unexpected inflation, or the rising demand for commodities from fast growing emerging markets countries, such as China and India.

This paper is hosted by permission of www.ennisknupp.com

The unwinding of several high profile infrastructure funds in the recent past has prompted questions as to the performance of infrastructure assets/investments and the impact of the current credit markets, on the outlook for the sector.

Mercer remains positive on the long-term fundamentals for the infrastructure sector, especially in the emerging markets. Moreover, we believe that the credit crunch will likely provide the catalyst for differentiating between the capable and less capable managers.

This article examines the performance of infrastructure in the context of the state of today’s credit markets.

US investors have increased their sophistication in real estate investing – more private real estate, a greater risk appetite and use of synthetic investment tools. Rob Kochis and Christopher Lennon report.

One year ago, we published Investing in Climate Change: An Asset Management Perspective. We argued that the growing investment opportunities in climate change were driven by long-term mega-trends that would continue into the foreseeable future.

One year on, the absolute necessity to act now to mitigate and adapt to climate change is even more urgent, and the opportunities generated by the sector continue to increase. New evidence has established that carbon in the atmosphere has reached an 800,000 year high (see graph below).
The leading scientific research shows that we are careening towards the tipping point where average global temperatures are likely to rise by 2°C or more. Beyond 450 ppm CO2e, it is increasingly likely that a series of macro-climatic shifts will set up a self-sustaining cycle of rapid global warming. Without significant and immediate action, or some unforeseen miracle, this tipping point stands no more than 15 to 20 years away.

The drive towards a sustainable, low-carbon economy presents both risks and opportunities for commercial real estate investors. Here, we consider the potential impacts on rental income, capital value and future investment returns.

One of the great things about hedge funds is that they have provided a field day for academic researchers to write scholarly articles on their risks and returns. Yet, for all of this scholarship, a practical roadmap to hedge funds has remained elusive.

Until now.

Alternative asset investors, particularly hedge fund investors, must remember that investment performance of an asset manager should never be the sole or even primary consideration when making an investment decision. In fact, during recent years, qualitative factors have been the root cause of failure for nearly half of all hedge funds that have experienced forced liquidations.

This research by Mikael Haglund, founder of Swiss research firm Altevo Research, highlights the outperformance of Swedish long/short equity funds in the bear market of June 2007 to December 2008. It shows managing the beta and alternative betas as the most important parameters to focus on during adverse market conditions, and for managers that do not possess the skill and internal processes to do so, there is expected  to be consolidation and closure.

Head of beta research at RogersCasey, Cynthia Steer, contemplates the current invesetment horizon expressing fear that governance at the institutional level may have not changed swiftly enough to prepare for the new environment. In this paper "Warm-ups and Beyond: Survival lessons for 2010" she outlines some of the more profound macroeconomic themes which she believes are going to impact returns, asset classes, and institutions.

New research by the Pension Research Council at The Wharton School, University of Pennsylvania, examines whether  workers seeking higher returns can expect to do better than the CPF-managed default, by moving their money into professionally-managed unit trusts. The evidence is mixed.

A joint study by LIMRA , the International Foundation for Retirement Education and the Society of Actuaries into the effects of the financial crisis on how retired individuals with investable assets make decisions about investing their assets and purchasing financial products has found they are more risk averse and less confident post the crisis.

Investment managers are more bullish about markets with US large cap growth the flavour of the moment, according to the latest Russell Investment Manager Outlook, which among other findings shows the percentage of surveyed managers rating the market as fairly valued at the highest level since March 2007.

Investors can learn a thing or two from the human foibles displayed by Tiger Woods, according to new research by academics at the Wharton School of the University of Pennsylvania. The research refers, however, to his tendency to be too risk-averse when ahead for a putt, rather than his recently exposed sexual escapades. Woods and his fellow leading golfers in the world unnecessarily forego about one stroke per 72-hole tournament, which equates to a combined loss of $1.2 million in prize money for the top 20 golfers.

According to academic research analysed by the Mercer Responsible Investment business unit in its latest report, there is a growing engagement by the investment community in responsible investment, just as the link between environmental, social and governance issues and performance proves to be a positive relationship. Amanda White spoke with Helga Birgden, head of responsible investment, Asia Pacific about the research, and the growing awareness by managers that ESG factors are a genuine source of alpha.

A new KPMG report, “Renewing the promise: Time to mend relationships in investment management”, shows the investment management industry should work to rebuild trust with investors through a ‘back-to-basics’ client relationship approach, increase knowledge sharing, and bolster corporate governance and risk management transparency.

This paper, by senior research fellow at the Labor and Worklife Program at Harvard Law School, Aaron Bernstein, explores how pension funds can gather quantifiable, independently audited data on the risks posed by labor and human rights activities of global companies, that is analogous to financial information, and how investors can help facilitate the acceptance of such data.

This article by Kees Koedijk and Alfred Slager , published in the Rotman International Journal of Pension Management, presents the results of a global study of investment beliefs, and highlights the differences in how pension funds and commercial asset managers view capital markets.

This paper examines the risk-adjusted performance of the minimum-variance equity investment strategy in the US, confirming and providing robust inference concerning earlier findings that constrained minimum-variance portfolios do outperform a value weighted benchmark. The authors, from the Goethe-University Frankfurt and the International University, Rheingaustr, also highlight the high sensitivity of the constrained minimum-variance portfolios to the revision frequency and the imposed maximum portfolio weight constraints.

The latest research from the EDHEC Risk and Asset Management Research Centre's Samuel Sender examines the underfunded status of European pension plans and advocates risk management as the best management tool.

Gaining Ground is a report by Mercer, in conjunction with the World Bank’s International Finance Corporation, examining the integration of environmental, social and governance factors into investment processes in emerging markets. It includes the first ever rating on ESG practices in China, India, South Korea and Brazil.

Good companies to work for are also good companies to invest in, according to new research by Alex Edman of the Wharton School, University of Pennsylvania.
In a recent paper, Edmans says there is a direct positive correlation over the long term between employee satisfaction and stock market returns for the companies they work for. In fact, it’s a positive alpha of 4 per cent for his study of 100 companies between 1984 and 2005.

We study the possibility that, aside from standard sources of utility, investors also derive utility from realizing gains and losses on assets that they own.

We propose a tractable model of this “realization utility,” derive its predictions, and show that it can shed light on a number of puzzling facts. These include the poor trading performance of individual investors, the disposition effect, the greater turnover in rising markets, the effect of historical highs on the propensity to sell, the negative premium to volatility in the cross-section, and the heavy trading of highly valued assets.

Underlying some of these applications is one of our model’s more novel predictions: that, even if the form of realization utility is linear or concave, investors can be risk-seeking.

Peer comparison is not just something that nervous super fund trustees and investment managers do.

This research examines the effect of tail risk, or extreme risk, on pension funds, concluding that all extreme scenarios have an immediate negative impact that can significantly jeopardise the smooth functioning of a pension scheme, probably as much as the other non-extreme risks.

Pension funds in Australia allocate a higher proportion of assets to shares than pension funds in any other country, according to a survey which looked at the asset allocation of pension funds in selected OECD countries.

In seeking to minimise pension risk, many companies have chosen to freeze or close defined benefit pension plan in the hope such an approach might give them time to adjust and increase corporate value. In a recent article published in the Financial Analysts Journal, Brendan McFarland, Gaobo Pang and Mark Warshawsky examine the impact of freezing or closing a defined benefit plan on the sponsoring companies' market value.

Governments are among the few agencies that can help the private sector hedge against the increasing problem of aggregate longevity risk. David Blake, Tom Boardman, Andrew Cairns and Kevin Dowd from the Pensions Institute at Cass Business School urge governments to issue longevity bonds as soon as possible

The financial crisis has placed defined contribution (DC) pension provision firmly under the spotlight. The dramatic falls in fund values observed for most members during 2008 have been drawing attention to the risks inherent in DC pension provision and focusing attention on how employees, employers and plan fiduciaries can better manage their DC pension plans. In this paper, Watson Wyatt explores the future of DC governance.

In the US, defined contribution plans have grown in importance but are relatively new to economic and regulatory uncertainty. In an environment such as this, Watson Wyatt suggests specific practices for managing fiduciary liability and optimising plan value for participants, with the possible result of revising the plan’s investment structure.

This report from the OECD steering committee on corporate governance attributes a great deal of the financial crisis to failures and weaknesses in corporate governance arrangements.

The goal of the research was to drill deeply into the evolving forces in the industry and present a plausible picture of its future landscape, through both near-term and longer-term trends.

Our time horizon looked out towards 2020. We, however, acknowledge the considerable difficulties with longer-range forecasting given the increasing pace of change.

There is one word that captures the flavour of the next few years in the financial industry – complexity.

This paper examines the stock price impact of 163 announcements of Sovereign Wealth Fund (SWF) investments. We document an average positive risk-adjusted return of 2.1 percent for target firms during two days surrounding SWF acquisition announcements.

The announcement effect is both statistically and economically significant. A multivariate analysis shows that the degree of transparency of SWF activities is an important determinant of the market reaction, and both the SWF and the existing shareholders of the target firm benefit from improved SWF disclosure.

In addition, target firms’ profitability, growth, and governance do not change significantly in the three-year period following the SWF investment relative to a control sample.

These results are robust to a battery of tests. Overall, our findings suggest that SWF investments convey a positive signal to market participants about the target firm, increased SWF transparency is enjoyed by both the SWF and existing shareholders, and SWFs are passive investors.

The ongoing financial crisis has dealt a heavy blow to private pension systems. Between January and October this year, private pensions in the OECD area have registered losses of nearly 20% of their assets (equivalent to USD 5 trillion).

Defined benefit (“DB”) plans in the U.S. account for $2.3 trillion in assets and cover nearly 42 million plan participants, of whom over 20 million are active employees, according to the U.S. Department of Labor.1 Though shrinking in number, these traditional employee benefit plans remain an important part of the investment and retirement security landscape.

In the wake of the economic downturn, a 2009 survey of more than 100 UK pension schemes by the National Association of Pension Funds challenges the optimistic views reported in the association’s annual survey in July last year.