European asset allocators fall short of academic best practice

Investment managers in Europe fail to employ techniques that avoid generating overly-concentrated portfolios because of poor input estimation, and do not fully take into account extreme risks when constructing portfolios, according to research by the EDHEC Risk and Management Research Centre.

EDHEC found that European managers and investors acknowledged that their current asset allocation techniques fell short of the state of the art in portfolio management techniques, highlighting a gap between the academic and practical elements of funds management.

Further, feedback from practitioners found that 95 per cent shared EDHEC’s opinion that improvements must be made on the front of portfolio construction practices, in relative risk management, advanced portfolio construction techniques, and VaR calculation and covariance estimation.

Of the professionals responding, 86 per cent said that further education and effort on the part of investment managers are a highly importance means of closting the gap between real-world practice and ivory-tower research. But 79 per cent said that better explanations of the practical applications of academic research are also highly important.

EDHEC Business School is recognised as a centre of excellence for asset management and alternative investment research. In partnership with large institutions, the research centre brings together 45 researchers and implements six industry-sponsored programs and 10 research chairs focusing on asset allocation and risk management in the traditional and alternative investment universe.

The EDHEC Eruopean Investment Practices Survey, and the subsequent practitioner’s questionnaire was done in conjunction with Newedge, a brokerage affiliate of Calyon and Societe Generale.