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Investment managers lack sufficient knowledge to manage risk optimally

Date: Wednesday, March 11, 2009
Author: Hedgeweek.com

Current practice in the investment industry fails to draw on widely-published and freely-available techniques in portfolio management techniques, according to the Risk and Asset Management Research Centre at French business school Edhec.

Following the publication last year of the Edhec European Investment Practices Survey, the centre issued a call for reaction seeking feedback from the industry on the report's findings and ways to improve portfolio construction.

Asked for the reasons behind the insufficient application of portfolio construction research to practice and for ways out of the current situation, more than half of the responding industry professionals see the level of knowledge within their profession as the main barrier.

Ninety five per cent of the practitioners who responded share Edhec's opinion that improvements need to be made to portfolio construction practices. Even though the recent events in financial markets are likely to increase investors' needs for portfolio construction that take into account extreme market scenarios for various asset classes, investment managers do not fully take into account extreme risks when constructing portfolios.

They also fail to employ techniques that avoid generating overly-concentrated portfolios because of poor input estimation.

Eighty six per cent of the professionals responding to the questionnaire report that further education and effort on the part of investment managers are highly important in closing the gap between real-word practice and academic research.

The Edhec European Investment Practices Survey was produced with the support of Newedge, a brokerage affiliate of Calyon and Société Générale.