Robert Bianchi

Hedge Fund Regulation and Systemic Risk

The global financial crisis (GFC) caused catastrophic losses in the highly regulated banking sector. In contrast, the largely unregulated global hedge fund industry navigated through the crisis relatively unscathed. As a consequence of the GFC, there is a tidal wave of opinion calling for reform of the global financial architecture, with a specific emphasis on tightened oversight of hedge funds. In this article, we consider the debate regarding the future of hedge fund regulation, building the case that regulatory reform to constrain excessive leverage must be applied in equal measure to all financial market participants, not just hedge funds. The challenge for regulators is to carefully craft a regime of transparency and disclosure that minimises the potential for systemic risk without jeopardising the financial innovation and entrepreneurship that are emblematic of the hedge fund sector.

Sustainable stock indices and long-term portfolio decisions

What is the long-term behaviour of sustainable stock index returns and the accretive benefits to portfolio diversification? We consider these issues through the prism of a long-term investor by replicating the risk and reward behaviour of sustainable stock indices from 1927 through 2010. We find that these indices exhibit long-term mean, variance and tail-risk characteristics that are commensurate with conventional U.S. stocks. We also reveal that recent performance appears worse than their performance over the long term. On the question of portfolio diversification, we find that only one of the three sustainable stock indices investigated dominates the efficient frontier. Our findings suggest that the stock screening process of these indices has important implications regarding the desirability of these investments for long-term investors.

A test of momentum trading strategies in foreign exchange markets: evidence from the G7

In this trading strategy study, we ask three questions: does momentum exist in foreign exchange markets? What is the impact of transaction costs on excess returns? Can a consolidated trading signal garner excess returns and if so, what is the source of such returns? Using total return momentum strategies in the foreign exchange markets of the G7 for the period 1980 through 2004, the answers from this study are as follows: we find evidence of momentum; however, such momentum appears transitory, particularly for longer lookback periods. As expected, transaction costs have a material negative impact on excess returns. Finally, a consolidated signal garners excess returns; however, a bootstrap simulation finds that the source of these returns is a function of autocorrelation.

The academy-profession nexus in CFA partner programs

Purpose – The purpose of this paper is to comprehensively review one example of academic-industry cooperation, namely, the partnership arrangements between the CFA Institute and universities around the globe. There is a scarcity of literature relating to academic-industry cooperation between the finance discipline and business. Design/methodology/approach – Relevant data were hand-collected and a comprehensive analysis of individual CFA partner programs was undertaken, including the geographical distribution of the programs and program characteristics and ranking of partners programs; the motivation for and approaches of universities toward the CFA Institute partnership and program design are identified. The general findings are validated with a detailed analysis of the CFA partner postgraduate programs offered in Australian universities. Findings – The research finds that the primary focus of cooperation between the CFA Institute and universities is the adoption of practitioner-relevant academic curricul...

The Pre-Holiday Effect in China: Abnormal Returns or Compensation for Risk?

This study examines the pre-holiday effect in the Chinese stock market. It provides new insights into the weak-form efficiency of Chinas equity market indexes. Using the GARCH (1,1) model, we find the pre-holiday effect in broad-based Chinese stock returns and in size, value and growth style indexes. Further analysis using a GARCH (1,1)-M model suggests that the pre-holiday effect at both market and industry/sector levels can be attributed to time-varying risk. We show the pre-holiday effect reflects abnormal returns in small-cap, large-cap and growth style indexes while this same effect reflects compensation for bearing risk in value stocks.

On the Responsible Investment Disclosure Practices of the World's Largest Pension Funds

Purpose - This study seeks to measure the level of responsible investment (RI) disclosure of the worlds largest pension funds. Design/methodology/approach - The public disclosure of environmental, social and governance factors by the worlds largest pension funds reflect their genuine commitment to this new investment paradigm. The UNPRI criterion is employed to measure the level of public disclosure. One hour was allocated to every asset owners web site to search and collect public information. Findings - Overall, the level of public disclosure of RI activities is not prolific. The study is negatively influenced by North American pension funds who dominate this sample. Public disclosure practices are positive for European funds. The size of funds under management positively influences the public disclosure and reflects their leadership role in the industry. Research limitations/implications - Limitations include: the largest pension funds are dominated by North American funds and reflect the impact of fund size. The results are from the largest pension funds and may not be representative of the entire industry; the positive findings from European funds reflect a material subset of the global asset owners; and, we do not engage directly with the funds in question. Measurements are sourced from public disclosure. Originality/value - The lack of public disclosure of RI by North American funds suggests that these institutions do not believe that it is important to investors. It suggests that these asset owners have not yet been exposed to the same influences as European funds. Given that North American funds together own substantial interests in listed corporations, they are much more important to influence than corporations.

The Diversification Delta: A Different Perspective

In a 2012 article published in The Journal of Portfolio Management, Vermorken, Medda, and Schröder introduce a new measure of diversification, the Diversification Delta (DD), based on the entropy of the portfolio return distribution. Entropy as a measure of uncertainty has been used successfully in several frameworks and takes into account the entire statistical distribution, rather than just the first two moments. In this article, the authors highlight some drawbacks of the DD measure and go on to propose an alternative measure based on exponential entropy that overcomes the identified shortcomings. The authors present the properties of this new measure and propose it as an alternative for portfolio optimization that incorporates higher moments of asset returns, such as skewness and excess kurtosis.

The Predictive Performance of Asset Pricing Models: Evidence from the Australian Securities Exchange

This paper considers the accuracy (or otherwise) of cost of equity estimates provided by a range of Australian asset pricing models on industry returns. The results suggest that a simple, constant-benchmark approach (fixed excess return of five percent per annum) provides the best forecast for the cost of equity capital for the various industry segments of the Australian Securities Exchange examined across the observation window. Our results from Australia corroborate U.S. findings regarding the disconnect between asset pricing models that provide the best ex-post explanation of asset returns and models that produce superior ex-ante predictions of the cost of capital.

5 – The Predictability of Risk-Factor Returns

Abstract: The debate on the effectiveness of return predictability continues in academia while industry practitioners maintain an insatiable appetite for new insights into the predictability of investment returns. Only recently has the focus turned to the predictability of risk factors. To date, this literature has been limited to only a few studies that focus on single-variable forecasting models. This chapter contributes to the literature by examining the predictability of risk-factor investment returns using combination forecasting techniques. The overarching objectives of this chapter are to examine whether individual forecasts of risk-factor returns can be combined to create statistically and economically significant forecasts.

Retirement Adequacy of Indigenous Australians: A Baseline Study

This baseline study examines the retirement adequacy of indigenous Australians. Using indigenous Australian demographic and employment data, we construct a forty years retirement savings profile. We employ simulation techniques to estimate the superannuation balance of a “typical” indigenous worker. The findings reveal that the retirement outcomes of indigenous workers are approximately 27 per cent lower than the average non-indigenous worker. We also provide baseline estimates of the gender gap in retirement outcomes for indigenous workers. We concede that improving indigenous lifetime outcomes is a significant public policy issue; one that requires many more policy levers than those available to financial economists.