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Vendredi 21 Mars 2014

EDHEC-Risk Institute survey documents unmet institutional investor requirements for transparency of indices


Between August and November 2013, EDHEC-Risk Institute surveyed 109 institutional investors from across Europe, including Europe’s largest pension and reserve funds, insurance and provident institutions and their asset management subsidiaries, to document their expectations and requirements with respect to index transparency and take stock of their perceptions of, and the extent of their support for, the main directions of the ongoing regulatory debate on indexing and financial benchmarks.



Among the key conclusions of the resulting study, “Index Transparency – A Survey of European Investors’ Perceptions, Needs and Expectations”:

• Investors consider the provision of index transparency to be logical and indispensable. An overwhelming majority of respondents (85.2%) identify transparency as the best mitigator of conflicts of interest and only 12% view good index governance as sufficient to deal with these conflicts.

• Transparency is currently inadequate and seen to be so by investors. Only around a third of respondents are very (4.6%) or somewhat satisfied (30.3%) with the current level of transparency in the indexing industry. This perception is consistent with EDHEC-Risk Institute’s observations since, with a single exception, the index providers analysed as part of the study do not give access to the historical constituents of the indices, and for a significant number of smart beta indices, the methodologies described do not allow the indices to be replicated. Ultimately, 79.8% of respondents consider that the adequate level of index transparency is one allowing for historical (43.1%) or historical and live (36.7%) replication and only a tiny number (2.8%) are satisfied with disclosures designed to impart an understanding of the objectives and key construction principles of indices.

• There is a strong conviction that the rise of strategy indices makes transparency even more important (77.1% vs 11%) and that opacity undermines the credibility of reported track records (80.8% vs. 17.4%), in particular for new forms of indices.

• Transparency does not harm the interests of index providers because it develops trust and accelerates the adoption of new indices. It does not lead to free services and lack of revenues. There are legal and contractual tools to defend index providers against the unauthorised use of their methodologies and data. In addition, the European regulator, ESMA, has limited the transparency of constituents and weightings to the periods preceding the last rebalancing, which avoids front running and enables providers to conserve their replication service business. Transparency should not be monetised through opacity as it is a precondition to the proper selling and suitable uses of indices.

• Investors give very strong support (70.6% vs. 21.1%) to the proposal that ESMA’s transparency rules should be extended to non-UCITS products and mandates.

According to Noël Amenc, Director of EDHEC-Risk Institute and CEO of ERI Scientific Beta, “Transparency guarantees the efficiency of an index market that is becoming increasingly complex and sophisticated. The market needs to form opinions by sharing information and expertise. It is difficult to accept index providers conducting most of their marketing either with the idea of being a market reference, in the case of cap-weighted indices, or with simulated historical track records of outperformance, in the case of smart beta indices, without giving markets the means to check and question the representativity or the outperformance.”

A copy of “Index Transparency – A Survey of European Investors’ Perceptions, Needs and Expectations” can be downloaded via the following link:
docs.edhec-risk.com/mrk/000000/European_Transparency_Survey.pdf

About EDHEC-Risk Institute
Since 2001, EDHEC Business School has been pursuing an ambitious policy in terms of international research. This policy, known as “Research for Business”, aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results. Among these areas, asset and risk management have occupied privileged positions, leading to the creation in 2001 of a major research facility: EDHEC-Risk Institute. This institute now boasts a team of over 95 permanent professors, engineers and support staff, as well as 48 research associates from the financial industry and affiliate professors.

EDHEC-Risk Institute is located at campuses in Singapore, which was established at the invitation of the Monetary Authority of Singapore (MAS); the City of London in the United Kingdom; Nice and Paris in France; and New York in the United States. The philosophy of the institute is to validate its work by publication in prestigious academic journals, but also to make it available to professionals and to participate in industry debate through its Position Papers, published studies and conferences. Each year, EDHEC-Risk organises three conferences for professionals in order to present the results of its research, one in London (EDHEC-Risk Days Europe), one in Singapore (EDHEC-Risk Days Asia), and one in New York (EDHEC-Risk Days North America) attracting more than 2,500 professional delegates.

To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access to its website, www.edhec-risk.com, which is entirely devoted to international risk and asset management research. The website, which has more than 65,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC-Risk’s analysis and expertise in the area of applied portfolio management research. Its monthly newsletter is distributed to more than 1.5 million readers.

EDHEC-Risk Institute also has highly significant executive education activities for professionals. In partnership with CFA Institute, it has developed advanced seminars based on its research which are available to CFA charterholders and have been taking place since 2008 in New York, Singapore and London. EDHEC-Risk Institute has an original PhD in Finance programme which, in addition to its highly selective residential track for young talents worldwide, has an executive track for high level professionals who already have master’s degrees from prestigious universities and significant industry experience. These professionals are looking to go beyond their usual activities in order to develop research on the concepts that are relevant to their occupation. Complementing the core faculty, this unique PhD in Finance programme has highly prestigious affiliate faculty from universities such as Princeton, Wharton, Oxford, Chicago and CalTech.

In 2012, EDHEC-Risk Institute signed two strategic partnership agreements with the Operations Research and Financial Engineering department of Princeton University to set up a joint research programme in the area of risk and investment management, and with Yale School of Management to set up joint certified executive training courses in North America and Europe in the area of investment management.

Building on its experience in the area of beta analysis and creation, EDHEC-Risk Institute has also created ERI Scientific Beta, which aims to be the leading provider of advanced beta for the investment industry. This initiative is based on all of the research conducted by EDHEC in the area of indices and benchmarks.
edhec-risk.com



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