an academic and professional review

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1 n 131 July-August 2014 ISSN euros revue-banque.fr an academic and professional review ARTICLES 5 What Maximum Fees Should Investors Pay to Active Fund Managers? Chekib EZZILI, NATIXIS, France, and Patrice PONCET, ESSEC Business School, France 17 How Does the Market Price of the Corporate Sponsor React to Socially Responsible Fund Introductions? Jonathan PEILLEX and Loredana URECHE-RANGAU, CRIISEA, University of Picardie Jules Verne. 30 Pricing, Hedging and Assessing Risk in a General Lévy Context Abdou KÉLANI, Center for Financial Risks Analysis (CEFRA), EMLYON Business School, France, and François QUITTARD-PINON, EMLYON Business School, CEFRA, France. 43 The Performance Implications of Business Group Affiliation for Small Businesses Anaïs HAMELIN, LaRGE, Université de Strasbourg & EM Strasbourg Business School In partnership with Association française de finance

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3 Instructions to Authors Editorial line Bankers, Markets and Investors aims at publishing short and innovative research articles in the areas of banking, financial markets and investment with relevant practical application for investors. The purpose of the journal is to create a bridge between academics and professionals, by publishing articles that have direct relevance to those working in the investment field. We seek short articles, forward looking and rigorous, written in a style accessible to professional readership. The themes of the journal include the following: portfolio choice, investment management, institutional investors (pension funds, sovereign wealth funds, insurance, mutual funds ), individual investors and household finance, behavioral finance, alternative investments (hedge funds, private equity ), derivatives and structured finance, liquidity and transaction costs, socially responsible investment, funds and corporate governance, regulation and financial risk management. Strategic Committee Francis Candylaftis, BNPP Investment Partners Bernard Dumas, INSEAD Thierry Foucault, HEC René Karsenti, ICMA Denis Kessler, Scor André Levy-Lang, Paris Dauphine University Bertrand de Mazières, EIB Theo Nijman, Tilburg University Tom Steenkamp, Robeco Mike Wright, Imperial College Business School Submission information Any manuscript submitted for review must be original and not currently submitted for publication in another journal. Articles should be less than 20 pages double spaced (ideally 15 pages including graphs and notes). Shorter articles are also welcomed. Authors should provide an abstract of no more than 150 words. Research published should be of interest to a sophisticated readership of investment practitioners and academics interested in practice-oriented type of research. Articles should be written in a style accessible to professional readership. Theoretical developments should as much as possible be relatively limited in the text (only the main results should be presented, details of the demonstrations should be left in the appendix). An empirical application of the results is encouraged. Two versions of the manuscript (blind and with author s names) should be sent to hauvette@ revue-banque.fr Editorial board Managing Editor: Marie Brière, Amundi, Paris Dauphine University, Université Libre de Bruxelles Founding editor: Jean-François Boulier, Aviva Sanvi Avouyi-Dovi, Banque de France Philippe Bertrand, IAE Aix and Kedge Business School Bruno Biais, TSE Zvi Bodie, Boston University Alain Chevalier, ESCP Europe Philippe Desbrières, IAE Dijon Nicole El Karoui, École Polytechnique Antoine Frachot, GENES, ENSAE Edith Ginglinger, Paris Dauphine University Christian Gourieroux, CREST, Toronto University Ulrich Hege, HEC Georges Hübner, HEC Management School, University of Liège Monique Jeanblanc, Evry University Lionel Martellini, Edhec Kim Oosterlinck, ULB Patrice Poncet, Essec Sébastien Pouget, TSE Flavio Pressacco, Udine University François Quittard-Pinon, EM Lyon Michael Rockinger, HEC Lausanne Ronnie Sadka, Boston College Stephen Schaefer, LBS Ariane Szafarz, ULB Nizar Touzi, École Polytechnique Bas Werker, Tilburg University Bankers, Markets & Investors 18 rue La Fayette Paris revue-banque.fr/bankers-markets-investors Managing Director: Valérie Ohannessian General Secretary: Pierre Coustols Subediting: Alain de Seze (54 17) ; Christine Hauvette (54 10); Emmanuel Gonzalez (54 12) ; Alexandra Démétriadis (54 18) and DESK Subscription: REVUE BANQUE 18, rue La Fayette Paris Gladys Hypolite Tel. : Fax : service.abonnement@revue-banque.fr CPPAP n 0618 T Printer: SPEI (Pulnoy, France) Copyright deposit 2 nd quarter According to French Law (loi du 11 mars 1957 sur la propriété artistique et littéraire) no part of Bankers, Markets & Investors articles may be reproduced in any form or by any means without prior written permission of Revue Banque SARL. 2 Bankers, Markets & Investors n 131 july-august 2014

4 Book review INTRODUCTION TO RISK PARITY AND RISK BUDGETING Thierry Roncalli, Chapman1Hall/CRC Financial Mathematics Series, In this book, Thierry Roncalli provides a timely and comprehensive analysis of Risk-budgeting portfolio management techniques and risk-based investment strategies. Risk budgeting portfolio construction approaches, such as risk parity, have dramatically gained in popularity after the global financial crisis of 2008, as investors have become increasingly focused on capital preservation and risk management, but also due to the pitfalls of the traditional modern portfolio theory. Indeed, numerous empirical studies have documented the ex-post inefficiencies of the market-capitalization indexes, as well as the lack of robustness of the Mean Variance Optimal portfolios. As a consequence, the asset management industry has increasingly relied on alternatives to the Mean-Variance efficient portfolios, with an emphasis on the risk-budgeting solutions: in the multi-asset space for more robustness in the strategic asset allocations; in equities as alternatives to market capitalization benchmarks which are heavily biased towards overvalued stocks and sectors as emphasized by the high exposure to technology-related stocks during the dotcom bubble. To quote the author, since the 2008 financial crisis, risk management as become more important than performance measurement for institutional investors. Yet, despite the apparent simplicity of the risk parity concept (e.g. be well-diversified in risk not in capital), practitioners still face difficulties when implementing risk-budgeting solutions, due to some methodological issues and the lack of a unified treatment of risk-based portfolios. This book fills this gap and aims to help investors in designing their risk-budgeting policy allocations. Much of the book s content builds on previous research materials conducted by the author at Lyxor. Here however the major topics are brought together and organized consistently in a unified setting. The book is mainly divided in two parts: (1) theoretical foundations and practice of modern portfolio theory and risk budgeting approach and (2) applications of risk parity to specific investment universes (equity, fixed-income, alternatives and multi-asset). The first part which is the stronger of the two, lays out the foundations of the risk budgeting approach. After presenting the shortcomings of the traditional portfolio theory and the Euler s linear risk decomposition principle, the author then dives into the main properties of the risk parity portfolios, in particular their existence, Mean-Variance optimality and robustness to estimation errors. Using the volatility risk measure the author compares and contrasts the risk/performance characteristics of popular risk-based investing strategies such as the Equal Risk Contributions (ERC), the Equally Weighted (EW) and Minimum Variance (MV) portfolios. The author also considers additional portfolio risk measures such as the Value-at-Risk and the Expected Shortfall. While the Gaussian hypothesis leads to re-introduce in an elegant manner the expected returns in the Value-at-Risk and Expected Shortfall cases, the use of non-parametric specifications then leads to a natural extension of the risk parity framework to Non-Gaussian distributions. The author also confronts the challenges of a naïve implementation of the risk budgeting approach on asset classes. Because risk parity portfolios are not invariant to duplication risk (e.g. sensitivity of the asset allocation to the universe definition), risk budgeting portfolios that are balanced in terms of asset s risk contributions can lead to very unbalanced solutions in terms of factor s risk contributions. The author shows mathematically how it is possible to build risk-balanced portfolios by risk budgeting factors instead of assets. The second part deals with specific applications of the risk budgeting approach to asset classes, such as equities, bonds, and alternative investments. In the first section, the author compares the Equal Risk Contributions (ERC) indexation strategy with other popular smart beta or alternatively weighted indexing equity solutions, such as the Minimum Variance (MV), the Maximum Diversification (MD) and the Equally-Weighted (EW) portfolios. In the second section, the author provides an extensive treatment of risk budgeting for fixed-income portfolios, including how to model interest and credit risks and conduct sensible risk parity allocations for sovereign bonds. This section is especially useful because risk budgeting is not as fully developed in fixed-income as in equity. The last sections of the book consider applications of risk parity to alternative investments (commodities and fund of hedge funds) and multi-asset classes. This is where the author s expertise shines through with contributions that go from the analysis of the rebalancing bonus of a commodity investment strategy to the incorporation of active views in a multi-asset risk parity framework, not to mention the incorporation of non-gaussian risk measures in a fund of hedge funds context. Introduction to Risk Parity and Risk Budgeting is a timely and comprehensive analysis of risk parity portfolios. Although the book mathematical treatment could appear slightly too developed for some readers, yet no other book is comparable to this one in depth and breadth. Thoroughly researched, this book makes a unique and valuable contribution to the science and art of portfolio construction. I highly recommend this book to professional investors as well as academics and students who want to gain serious insight into risk-based asset allocation issues. Emmanuel JURCZENKO ESCP EUROPE and QMI ejurczenko@escpeurope.eu bankers, markets & investors n 131 july-august

5 Abstracts What Maximum Fees Should Investors Pay to Active Fund Managers? 5 Pricing, Hedging and Assessing Risk in a General Lévy Context 30 Chekib EZZILI, NATIXIS, France, and Patrice PONCET, ESSEC Business School, France We develop a model in which investors can invest directly in the market at no cost or delegate their portfolio decisions to better informed active fund managers against fees. We derive the maximal fee an investor should pay and characterize it in terms of information differential or, equivalently, alpha. For example, the fee should be less than 6.60% if alpha is 6.83% over two years, and less than 51.9% if it is 73.3% over 5 years. Our simulation results are consistent with the empirical evidence we report on a large subset of active US mutual funds. JEL Codes: G15; G23; G18. Keywords: Portfolio Delegation; Alpha; Information Differential; Enlarged Filtration; Active Mutual Funds. How Does the Market Price of the Corporate Sponsor React to Socially Responsible Fund Introductions? 17 Jonathan PEILLEX and Loredana URECHE-RANGAU, CRIISEA, University of Picardie Jules Verne This paper studies the impact of a Socially Responsible (SR) fund launch on the market price of the corporate sponsor promoting the fund. Our evidence suggests that while overall the introduction of a SR fund does not increase, on the short run, the market value of the corporate sponsor, the market reaction to such announcements evolved through time from very skeptical in the early stages of the SR funds industry to positive over the most recent years. Moreover, SR funds launching during periods of market stress is more rewarding than the same strategy under normal market conditions, while the introduction of multiple funds simultaneously also leads to a short run increase of the market value of the corporate sponsor. JEL Codes: G14; G21; G23. Keywords: Corporate Sponsor; Ethical Finance; Event Study; SR Funds. Abdou KÉLANI, Center for Financial Risks Analysis (CEFRA), EMLYON Business School, France, and François QUITTARD-PINON, EMLYON Business School, CEFRA, France The goal of this paper is to suggest a general approach for risk management by allowing jumps to occur in the underlying of a European contingent claim. It gives a unified methodology for pricing, hedging and computing the standard risk measures, namely the Value-at-Risk (VaR) and the Conditional Tail Expectation (CTE). The core of the paper shows that such quantities as prices, hedging ratios and standard risk measures can be expressed as an integral form articularly suited for the calculation by FFT, simply by changing the integrand. The method can be applied as soon as the characteristic exponent of the Lévy rocess is known. The suggested unified method is easier to implement than the numerical solution to PIDE and faster than Monte Carlo simulations. It gives a powerful tool to practitioners who want to price and control risk of European derivatives in a non-gaussian setting. JEL Codes: G22; G11. Keywords: Hedging Strategy; Pricing Embedded Option; Lévy Processes; FFT. The Performance Implications of Business Group Affiliation for Small Businesses 43 Anaïs HAMELIN, LaRGE, Université de Strasbourg & EM Strasbourg Business School This paper explores whether the benefits and costs of affiliation with a business group (BG) are influenced by firm and BG size. We explore this issue empirically using a unique data set on French small businesses ownership. Our results show that affiliation with a BG has a positive influence on small businesses performance. Moreover, we observe that the benefits of BG affiliation diminish with firm size, which is consistent with the fact that the benefits of BG affiliation increase with information imperfection. Finally, we find that the size of the BG moderates the relationship between firm affiliation and firm performance. This paper contributes to the literature by showing that organization size influences the performance implications of affiliation with a BG. Our findings might appeal to practitioners in the private equity and banking sector, as they point out that affiliation with a BG is a component of value creation in small businesses. JEL Codes: G32; G34; L25; L26. Keywords: Business Group; Small Business; Performance; Size. 4 bankers, markets & investors n 131 july-august 2014

6 What Maximum Fees Should Investors Pay to Active Fund Managers? CHEKIB EZZILI Equity Derivatives Trader NATIXIS, France PATRICE PONCET* Professor ESSEC Business School, France This paper examines the portfolio delegation issue from a relative advantage viewpoint. Investors who delegate their asset allocation decisions to professional managers against compensation fees assume implicitly that the latter either have access to superior information or possess better capabilities to handle common knowledge, or both. [Goetzmann et al., 2003] for instance found that, in extreme cases, the global (regular plus performance) fees earned by fund managers could represent up to 30 or even 40 percent of the fund s net asset value. According to the same study, rational investors should expect that the fund earns an additional risk-adjusted return (alpha) in the range of 200 to 500 basis points to compensate for these fees. The required positive alpha could stem from some privileged access to private information through, for instance, prime brokers. More likely, it is fostered by items in a long list of comparative advantages: better judgment, superior data gathering and processing abilities, knowledge of more efficient proprietary models, a location closer to where the action is, a more aggressive and consistent research effort, superior analytical and computational skills, and more time and effort devoted to scanning market opportunities. We sum up thereafter the ability to include and process common information more efficiently under the general wording skill(s). The portfolio delegation issue is complex and can be tackled from various angles, which explains why the extant literature is voluminous. For example, many studies focus on the optimal design of the contract binding investors and their fund manager. For instance, [Admati and Pfleiderer, 1997] in a one-period setting and [Ou-Yang, 2003] within a dynamic framework analyze the issue of what would constitute an appropriate benchmark. [Goetzmann et * Corresponding author:finance Department, ESSEC Business School, Avenue Bernard Hirsch, BP 50105, Cergy Pontoise Cedex, France. poncet@essec.fr Tel.: The authors gratefully acknowledge helpful comments and remarks from Sami Attaoui, Monique Jeanblanc, Abraham Lioui and Marouen Messaoud and thank Marie Brière and an anonymous referee for insightful corrections and suggestions. al., 2003] express alpha as a function of the manager s abilities and the contract s implicit incentives. [Carpenter, 2000] and [Basak et al., 2007] evaluate the impact of incentive fees on fund performance and find in particular that some asymmetric schemes encourage the manager to take reckless risks, since then she has much to gain and very little to loose. Other studies focused on the relationship between fund performance and cash inflows or outflows, such as Berk and Green (2004) and [Hugonnier and Kaniel, 2008]. Finally, there is some scant literature regarding the general equilibrium analysis of asset prices with both direct investors and compensated managers, as in [Cuoco and Kaniel, 2011]. At the mathematical level, all the aforementioned studies assume away any informational discrepancy between managers and investors. A managed fund s outperformance, or alpha, is essentially left unexplained and is therefore implicitly attributed to vaguely defined factors such as its manager s intrinsic abilities. In contrast, one main contribution of this paper is to explicitly model management skills by letting the direct investor and the manager have different information sets. A decisive advantage of the mathematical approach we use is that it is compatible with both an interpretation as genuine superior information and an interpretation in terms of better skills. 1 The latter is precisely what seems to us to motivate portfolio delegation in the first place. We solve the manager s and the investor s optimization programs by combining the classical approachs of [Karatzas et al., 1986] and [Cox and Huang, 1989] in complete markets and results by [Amendinger, 2000] and [Grorud and Pontier, 2001] relative to enlarged filtrations. In effect, the superior skills possessed by the manager are formalized by a larger filtration (information set) than the one the investor is endowed with. For technical reasons, we use the formalism of continuous time, and for tractability we assume that both the manager and the investor have log utility and that the compensation fee is proportional to the fund s net asset value. It is optimal for the investor to delegate his portfolio decisions if by so doing he achieves an expected utility of terminal wealth at least as large as the one he could attain by directly investing in Bankers, Markets & Investors nº 131 july-august

7 September-October 2010 ISSN euros revue-banque.fr Alexis GUYOT, Euromed Management Abraham LIOUI, EDHEC Business School and EDHEC Risk Institute Samir ABDERRAzEk SRAIRI, king Saud University Anton GRAnIk, Reims Management School Philippe ROzIn, Université de nanterre and IAE de Lille Edith GInGLInGER, Université Paris-Dauphine William MEGGInSOn, University of Oklahoma Presse Séminaires Édition Librairie Internet In partnership with association française de finance Bankers, Markets & Investors ABONNEMENTS 2014 Je choisis l abonnement à BANKERS, MARKETS & INVESTORS coché ci-dessous : DÉCOUVERTE 1 MOIS : 1 n o + accès online France (TTC) Étranger Quantité Total Offre réservée non renouvelable 70,00 75, AN : 6 n os + accès online France (TTC) Étranger Quantité Total Institutionnel (adresse professionnelle) 615,00 640, Individuel (adresse privée) 310,00 330, LA BIBLIOTHÈQUE NUMÉRIQUE (1) France (TTC) Quantité Total Abonnement annuel 1 compte 165,00... Abonnement annuel 5 comptes (2) 625, TOTAL (TVA : 2,10 % incluse sur le tarif France) (1) Réservé aux abonnés à une des revues du groupe. (2) Au-delà de 5 comptes, nous consulter (bibliotheque@revue-banque.fr). Société... Nom... Prénom... Fonction... BANKERS, MARKETS & INVESTORS Cahier de recherche financière appliquée 150,00 le numéro n 108 Bankers, markets investors an academic and professionnal review articles 4 the impact of Ownership structure and control mechanisms on transaction costs: an empirical study of Firms listed on the euronext Paris stock exchange for the Period between 2004 and the impact of the 2008 short sale Ban on stock returns 31 efficiency of the saudi Banking sector: a Data envelopment analysis approach 47 Financial News and Volatility of Underlying securities in the Pharmaceutical sector FOcUs ON 56 the evidence On Privatization around the World Service... Adresse... Code postal/ville...pays... Code TVA (pour les pays de la CEE)... Téléphone...Télécopie... (indispensable)... En application de la loi du 6 janvier 1978, les informations ci-dessus sont indispensables au traitement de votre commande et sont communiquées aux destinataires aptes à les traiter. Elles peuvent donner lieu à l exercice du droit d accès et de rectification auprès de Revue Banque. Vous pouvez vous opposer à ce que vos nom et adresse soient cédés ultérieurement en le demandant par écrit au secrétariat général de Revue Banque. à retourner au SERVICE ABONNEMENTS REVUE BANQUE 18 rue La Fayette Paris Tél. : 33(0) Fax : 33(0) service.abonnement@revue-banque.fr Règlement à l ordre de La Revue Banque par chèque par carte bancaire* n Date limite de validité : _ / _ Notez les 3 derniers chiffres du cryptogramme visuel (au verso de votre carte) : _ * Sauf American Express et Diner s Club. Le règlement sur l étranger est à joindre impérativement à la commande et doit être effectué en euros, par chèque payable en France, net de frais. Pour les virements bancaires et CCP, nous consulter. DATE et SIGNATURE BMI13 Vos abonnements se poursuivent on line sur revue-banque.fr Feuilletage, accès illimité aux archives de Bankers, Markets & Investors À SAVOIR > Bénéficiez du CIR (Crédit d Impôt Recherche) pour financer votre abonnement. Nos contenus indispensables à la recherche et au développement ouvrent droit au CIR. + d infos sur revue-banque.fr

8 BANKERS, MARKETS INVESTORS An academic and professional review The Challenges of Managing and Regulating Pensions: the French System in a European Perspective DATE: October 24th, 2014 LOCATION: Auditorium of SCOR 8.30 AM 9.00 AM Coffee and welcome of participants 9.00 AM 9.15 AM Welcome address 9.15 AM AM SESSION 1 The French pension system and the new European regulatory framework for pension provisions AM AM Coffee break AM PM SESSION 2 How European countries are reforming their pension system? Designing new retirement products and adequate regulation AM 1.30 PM Lunch 1.30 PM 2.30 PM SESSION 3 Managing assets for long run pensions under regulatory constraints 2.30 PM 3.30 PM SESSION 4 Opportunities and risks in illiquid / alternative asset classes 3.30 PM 4.00 PM Break 4.00 PM 5.00 PM SESSION 5 Reporting and communicating to beneficiaries 5.00 PM Closing address 5.15 PM 6.00 PM Cocktail OBJECTIVE This pension workshop will investigate new issues about pension management in France under the new European directives (EIOPA). Pension Funds and retirement institutions are facing new risks and challenges related to the rapid increase in life expectancy, the financial crises and the lack of trust in financial institutions. Many European countries underwent important reforms of their pension system, increasing the retirement age, creating reserve funds, introducing supplementary funded schemes or relaxing the guarantees provided to beneficiaries. Moreover, the regulation of pension providing institutions is evolving. Solvency II regulatory framework has been finalized and will be applied in January 2016 for all European insurance companies. A similar framework is currently discussed for occupational retirement provisions by EIOPA. The objective of this workshop will be to understand the implications of new European regulation for French pension providers (insurance companies, caisses de retraite, mutuelles, etc.) and the particular challenges the French pension industry will have to face. SPEAKERS The workshop will include the participation of Pablo Antolin (head of Private Pension Unit at OECD), Jean-François Boulier (managing director, Aviva Investors Europe), Karine Berger (member of the French Parliament), Jean-Michel Charpin (member of the French Pension Council), Hans Fahlin (CIO of AP2 in Sweden), Elsa Fornero (professor at Turin University, former minister of labor in Italy), Theo Nijman (professor at Tilburg University). TARGETED AUDIENCE Representatives of pension funds, retirement institutions, large companies, insurance and asset management companies, academics, pension fund administration and public sector officials, trade unionists, members of international organizations, regulators. INFORMATION & REGISTRATION contact@revue-banque.fr IN PARTNERSHIP WITH