EDHEC-Risk Institute: EDHEC-Risk Institute Research Insights
Posted: 1 August 2014 | Source: EDHEC-Risk Institute
It is my pleasure to introduce the latest issue of the Research Insights supplement to IPE, which aims to provide European institutional investors with an academic research perspective on the most relevant issues in the industry today.
We report on the results of a survey of European institutional investors conducted by EDHEC-Risk Institute on their perceptions and expectations with respect to the governance and transparency of indices. The survey shows that institutional investors are not particularly impressed by the current level of transparency in the indexing industry and reveals that end-users strongly support higher standards of index transparency.
The EDHEC-Risk European ETF Survey 2013 tells us that satisfaction with ETFs has remained at high levels across most asset classes. There have been increases in satisfaction for corporate bond, commodity, real estate and sector ETFs, but satisfaction rates for ETFs based on the most liquid ETF asset classes are far more consistent compared to those based on illiquid asset classes. Product development within certain asset classes has driven increases in ETF usage, notably within the real estate, hedge fund and infrastructure asset classes. More than a quarter of respondents already use products tracking ‘smart beta’ indices and more than an additional one-third of respondents are considering investing in such products in the near future.
We present a major review of the academic literature on high frequency trading. This review leads us to conclude that algorithmic trading has direct effects on market quality that are both desirable (increased liquidity for larger stocks and better price discovery) and undesirable (less liquidity in small caps and higher volatility for all stocks). Algorithmic trading also affects broader economic measures, again with desirable (lower co-movement of market variables) and less desirable (new equity capital is more difficult to access) results. This wide range of effects calls for a measured approach to regulation that considers all parties that have an interest in well-functioning equity markets.
In the realm of equity factor investing, we examine two particular issues pertaining to factor investing: the role of country indices in building a globally-diversified portfolio of market, value, size and momentum premia, and whether a dynamic portfolio strategy based on predictions of future risk could be used to avoid periods of low returns and high volatility in factor premia.