Noel Amenc

Noel Amenc

Stuart Fieldhouse
Originally published in the March 2005 issue

Noel Amenc, Professor of Finance at the Edhec Business School, is a man who has the best of both worlds: a self-confessed stress-junkie who enjoys the opportunity his job offers to get under the skin of the business world as a neutral researcher, he can also indulge his love of sunshine by basing himself at the Nice campus of one of France’s most prestigious business schools.

A former specialist in microeconomic research, part of a French national team of economic researchers, he chose the south of France and the University of Nice because of his preference for the Mediterranean climate. But it was the quest for a more practical area of research that took him from economics into the world of business. “Fundamental research is something I love,” he explains. “These days people in the traditional French universities say: ‘I want to be a scientific researcher in the field of business or economics, but I don’t want to touch the business world because it’s dangerous for me. I want to be independent.’ I wanted to study business, to understand the consequences of my research, so I went to business school.”

It is this emphasis on the business world, and on the ways in which academic research can be of value to businesses, that has characterised Amenc’s ongoing work developing the Edhec Risk and Asset Management Research Centre since 2001.

At business school, he worked on two masters theses, one of which examined risk management in trading rooms. Coming to it in 1987, he found the environment ripe for work of this kind – there was plenty of interest in it from large players like UBS, JP Morgan and the Chicago Board of Trade. It impressed upon him the demand from the financial world for timely independent research and analysis. His other, earlier, masters work looked at portfolio management for private banks, and it laid the foundation for his ongoing work on portfolio strategy with Edhec.

Not content with academic work, Amenc has also swum in commercial waters, establishing his own software development company to write trading and risk management programs. He built it up to a €10 million business, which he eventually sold to Misys, in order to allow it to be developed internationally, whereupon he was invited to become the research director for Misys’ asset management business.

“When you run a company, you have a lot of stress, but it’s not stressful to be a research director, to be honest. It’s a cost centre. But I needed stress, so I decided to come back to university, to Edhec, to develop a research centre whose budget depends on demand from the market.”

Misys was one of the key sponsors of the fledgling asset management research centre at Edhec, committing itself to a five-year sponsorship agreement. It was the first of many institutions (amongst them Eurex, Société Générale, Euronext, BNP-Paribas, UBS, and BGI) to add their support to the school’s initiative. “I think Edhec’s strength is to be seriously connected with the industry,” Amenc explains.

Making the case of hedge funds

Amenc’s enthusiasm for the asset management world is obvious, but why focus on hedge funds?

“When trying to apply research to asset management, you quickly come to asset allocation, as it is one of the main topics,” he says. “If you have a good model for investment, you need a good vehicle for investment. If your vehicle is no good, then your model will be useless. A good vehicle should be decorrelated – if you have an asset allocation model, it supposes some degree of diversification. The reason why people choose to put money into hedge funds is for the diversification effect, and this is the reason why we have chosen to focus on the hedge fund universe. Trying to carry out asset allocation without using hedge funds is irrelevant.”

From his independent perspective, he can form some valuable opinions on where the hedge funds industry is heading strategically, and address many of the issues that are of concern to those already investing in them.

For example, the rapid proliferation of both single manager and funds of funds.

“I think this industry will suffer – or benefit, depending on where you are – from overcrowding,” Amenc comments. “You have a large number of funds of hedge funds that are not adding value, especially those unable to develop an asset allocation strategy, those which are only fund selectors. Now the market is more efficient than it used to be – investors can gain exposure to this market via platforms, or via consultants – so there is no obligation to turn to funds of hedge funds, who no longer have the same information monopoly that they had in the past.”

The alternative, he argues, is for funds of funds to propose asset allocation, or what Amenc describes as a “risk allocation strategy” across various hedge fund strategies. “A fund of hedge funds can offer optimum diversification while trying to deliver higher returns. We call that the beta benefits of hedge funds. This approach leads to constructing funds of hedge funds on the basis of strategy choices and optimisations that depend on the traditional assets held by the investors, or indeed according to their liabilities in the case of institutional investors. Alphas remain the principal sales argument in the alternative industry, and funds of hedge funds are now trying to compensate for a decrease in alpha by using a new alpha layer with tactical asset allocation across strategies. This is now possible with investable indexes. We’re now seeing the emergence of a new model of fund of hedge funds that is trying to deliver value across strategies rather than just across funds.”

Monitoring and due diligence is also becoming a barrier for new entrants, especially as fees are pressed downward. Amenc reckons smaller firms, with only two or three individuals carrying out due diligence tasks, will find it harder to function. A minimum critical mass in terms of assets under management will be required. “It is very difficult to meets the costs for proper due diligence without at least $300 million in assets under management,” he reckons.

However, he is also confident that hedge funds will continue to seek out opportunities for new strategies. Volatility arbitrage, for example, used to be founded on the convertible bond market, but there is scope, he thinks, for such strategies to make use of other underlying opportunities.

He doesn’t agree, however, with the critics who have worried aloud that too many managers are undermining the opportunities for some strategies to provide returns. “There is absolutely no academic evidence for that – only noise,” he laughs. “In fact, this has been an excuse provided by the funds of hedge funds to explain why they themselves have failed to provide good returns.” A lack of volatility in the markets, if anything, has been more of a problem for hedge funds he feels.

“The drop in the performance of hedge funds over the last two years can be very easily explained: it is because of their betas, rather than because the talent or arbitrage opportunities are being diluted, and it is absolutely normal. It is not because we have more hedge funds, but because the risks to which a large number of hedge fund strategies are exposed have been less well rewarded. Besides, there is still considerable potential in the industry. For example, you have a large number of long-only equity managers able to deliver alpha who can go to the hedge fund markets because they want the higher fees, and want to be free of the constraints.”

The study of risk

Currently, Professor Amenc feels many traditional fund managers are not making proper use of derivatives. Their core sales proposition is their ability to select securities, but at the same time they are still taking on too much risk by allowing their funds to suffer from market downturns. This brings him round to another favourite topic of his, risk management. It is no coincidence that part of the rationale for Edhec’s foundation of its asset management research centre is a better understanding of risk. Long-only managers, Professor Amenc feels, are not making full use of the risk management tools available to them.

“They can manage market risk if they want to – this is allowed. You can have a UCITS III fund with market risk hedging using futures. I think we will have in the future, in the mainstream asset management market, a core-satellite approach, using derivatives as the core of the portfolio, and stock-picking for the satellite. Few people are really improving their risk-return profiles using this core-satellite approach, although many are openly talking about it. It would be very interesting to see a new concept of the core being provided by a specialist in asset allocation, and the satellite within the portfolio coming from portable alpha, achieved by hedge fund investment.”

For the moment, he says, hedge funds are being viewed more as part of a satellite set-up. “But,” he says, “hedge funds can also be seen as candidates for the core part of the portfolio.”

A revolutionary concept, indeed, particularly from the perspective of large institutional investors, who still see hedge funds as esoteric entities, managed by over-paid refugees from the trading desks of the big investment banks, and with little role to play in their multi-billion dollar investment strategies.

“If you decide to put hedge funds massively into the core,” Amenc argues, “you are not looking for the top manager – you are looking for security, liquidity and ‘representativity’ of the beta. I suspect the next model of asset allocation across hedge funds will make use of strategy-based indexes selected for the quality of their beta compared with existing assets. In the satellite you would have the top alpha hedge funds, supposed to deliver outperformance for the global portfolio. If I were an investor, I would not be interested in investing in hedge funds that can outperform cash as a benchmark – this is not a serious proposition. I’d be interested in going into funds of hedge funds that can outperform a strategy benchmark, which probably would already include a hedge fund index.”

Edhec is currently in the process of finishing a research study, scheduled to be released in the autumn, on whether funds of hedge funds add value. From what Amenc has been saying, it should throw down the gauntlet to those managers previously used to using cash returns as their benchmarks. Competing against a hedge fund index, of course, would be an entirely different proposition.

The quest for a representative index

This does beg the question whether hedge fund indexes themselves are a good representative of the hedge fund universe. Given the amount of debate that has sprung up around their construction in recent months, it is a fair question to direct against an exponent of index-based investing in hedge funds. It is an issue Amenc is more than familiar with.

“We were probably the first to publish an academic paper on hedge fund index representativity issues,” he says. “We showed that they were not representative of the “normal” risks, and therefore returns, of the strategy, because they had been designed to compete against funds of funds.”

It is a simple process, he argues, to label an index with the brand of a recognised index-provider, and call it an index. But such products are being marketed on the basis of their performance, not their representativity of the universe. Are they real indexes, or just elaborate funds of funds? “They look at the past, at the performance of a section of funds, and they optimise the return of the index,” Amenc argues.

An example would be the convertible arbitrage strategy, where historically managers focusing on credit risk have produced superior numbers to those practising pure volatility arbitrage approaches. “It’s not representative of the universe of convertible arbitrage managers, it is representative of the best performance three years ago,” Amenc says. “They have been designed this way because the customer is looking for performance, the customer is making the market, but they don’t know what they want. They want to use an index, but they want performance. They have obliged the provider to do a bad job.”

Edhec’s own indexes have been constructed without any considerations of performance. They are now freely available, and have been designed to be used as a benchmark. They are based on an optimised universe of other indexes, and are soon to be joined by a series of five strategy indexes that should be investable. Because of this, Edhec will be using a hedge fund platform to provide the constituents, Amenc says.

“In fact, we haven’t created this to sell an index, we’ve created it as a tool for asset allocation. An index is not useful unless you have an asset allocation model. It was impossible to find very good investable indexes which have representative beta. It is not useful for an investor to be invested in an investable index, it is only important in that it can be used to build an asset allocation strategy. We have created these indexes because we think that it is difficult to invest in hedge funds properly and we feel that institutional investors need benchmarks of that kind to create their own asset allocation model.”

Hedge fund risk and the banking system

The opportunity can’t be passed up to get Amenc’s perspective on another big issue of the moment, the level of risk being taken on by investment banks with substantial prime broking operations, and those helping to provide leverage for structured products. As an independent specialist on hedge fund risk, he is ideally placed.

“If [investment banks] earn profits without risk, you will say their margins are too big,” he says. “If they earn profits with risk, you will say they’re taking on too much risk. It is very difficult to be an investment banker right now.

“If you look at the profits of investment banks, prime brokerage five years ago was an inefficient market. The cost of fund administration and brokerage was high because hedge fund managers were very wealthy. Their performance meant that they didn’t have to look at operational costs very closely and they could afford to pay high fees. Revenues from prime brokerage are decreasing, because managers are becoming more attentive to costs, hence the introduction of value-added services like cash and securities lending. This can be dangerous unless you have a sound risk policy. I think some investment banks are taking on more risk than acceptable via their prime brokerage activity. When they’re involved in normal lendingactivities, they’re very cautious about risk, but when they’re lending via their prime brokerage shops, I’m not sure that procedures are so robust. The prime broker is now not only an external operational services supplier, but is also a lender. This is a serious question.”

On the structured products side, the use of leverage is part and parcel of the quest for better performance: “People try to compensate because the return is not so high, but in such products, if you use leverage, you have to be sure the underlying asset is not also increasing the level of leverage, but normally, in this business, you won’t know. If you use leverage against a fund of funds, you won’t seriously know what the funds are doing, unless you’re the prime broker for all the funds, or you’re using managed accounts. You have a large number of investment banks providing leverage on funds of hedge funds, without using managed accounts, without respecting the investment guidelines which underlying funds are supposed to conform to.”

In Amenc’s view, there is plenty of opportunity for underlying funds to be acquiring leverage from multiple prime brokers, an accumulation of leverage without control. This is a good reason why investment banks should consider managed accounts, he thinks.

“Leverage is not a bad idea, it is great for use in controlled circumstances, when you can measure it properly. You have to be able to calculate the extreme risk of your funds, for stress testing and simulation. You need to know the positions of the fund, both balance sheet and off-balance sheet. When you are managing risk without liquidity, you have to integrate this into the cost of your risk and your leverage. The liquidity premium has not been researched properly yet – it is not a well-documented risk in the academic universe. It is also a risk which is difficult to examine independently of credit risk. Remember, LTCM was meant to be doing credit risk arbitrage but ended up as a provider of liquidity to illiquid markets, especially Russia. It is very difficult to have an independent analysis of the two risks.”

The ‘threat’ of standardisation

All this talk about benchmarks, risk management, and the use of core-satellite approaches to portfolio management also brings to mind the fear that some traditional investors in hedge funds have, a fear raised at a conference Edhec hosted in London last year, that the industry will become too standardised, that the emphasis on benchmarking will create a world where hedge fund managers feel as constrained by consultants and investors as their long-only cousins do, and where ultimately, the high returns they have been able to provide will become a thing of the past. Edhec’s research-driven approach, while on the one hand perhaps offering the large potential institutional market in Europe a handle on the hedge fund universe it badly wants, might at the same time remove the sense of freedom that has attracted many talented investment brains into this business.

“This is a question of the perception of the benefits of hedge funds,” Amenc says. “If you’re always thinking about alpha, or arbitrage, okay, probably. The more people in the arbitrage market, the less opportunity, then probably [this is true.] But if you think hedge funds are mainly beta, and that hedge funds are providing investors with a good price, and a normal reward for new risk, and NOT arbitrage, the more people you have, the better price you will have for the risk. It could be an advantage. However, if you go to a hedge fund for beta, the price of your asset management services will have to decrease dramatically. It is not acceptable to deliver a normal return with alpha recovery fees. If people are investing in hedge funds for diversification, it is unacceptable for asset managers to be paid such high fees.

“My view is that we’ll see more money flowing into the industry, but lower fees being charged. If we thought the demand would be driven by alpha, I’d say this industry would disappear. We’re going to see exactly the same phenomena as in the long-only universe: you’ll have trackers tracking the normal return of hedge fund strategies, with low costs, and you’ll have stars that can consistently add alpha charging high prices. But at the moment you have good and bad alpha managers charging high prices, and this is not normal: you can’t evaluate good managers without ratings, using only one-year returns. There is no statistical significance – you need at least three years.”

The market has to get serious, if institutions are expected to increase their investments, Amenc argues. Longer track records have to be made available. Institutions would like to invest more into hedge funds, because of the obvious diversification benefits. That case has been made well. Low interest rates, for example, have radically reduced the value of bonds as a diversifying instrument, even amongst the most conservative of institutional investors.

“They cannot use hedge funds for 20% of their global portfolios without considerations of risk control, representativity of the beta, and of course cost. You cannot expect [to have] poor reporting, Sharpe ratio reporting, on a large part of an investor’s assets. Volatility does not represent the reality of the risk of hedge funds. This population has to finish with this mythology of genius, which is very dangerous, and go with more institutionalisation. I am for more institutionalisation. I prefer lower fees and less outperformance, but more risk management and more representativity of the beta. The principle source of long-term return for portfolios, whether they include hedge funds or not, is strategic asset allocation, and strategic asset allocation is only about beta, it doesn’t care about alpha.”

To remain interesting as a thought-leader to the asset management industry, you have to continue to have new ideas. Like other academics studying the hedge funds industry, Amenc is refreshing for his honesty, and the insistence that, regardless of who sits on the advisory board, or who sponsors the research, findings have to be independent. If they’re uncomfortable for a sponsor, they have the option of omitting their logo on the final report, but the results should be left to stand.

The research effort is also one of the conditions for being successful. Researchers have to communicate and make their results known (and Edhec excels in this area), but they also have to continue to devote time to research. The right balance has to be found between two activities whose rhythms and success factors are often at odds. “I always have a spreadsheet in my head,” Amenc explains. This is the only way to make sure he has a fresh cycle of new research, he feels, new ideas that will be ready for consumption by both asset managers and investors in the future.

Edhec: background

Edhec Business School maintains campuses in the French towns of Lille and Nice, and with its 100 permanent professors and 3700 students, it can be considered the largest of the major French business schools. Established in 1906, it is rated as one of the top five businesss schools in the country, and is accredited by the Conférence des Grandes Ecoles Françaises as well as AACSB, Equis, and AMBA.

The Edhec Risk and Asset Management Research Centre carries out numerous research programs in the areas of asset allocation and risk management, for both the alternative investment and more traditional, long-only investment businesses. It has held as one of its core propositions the promotion of dialogue between the academic and business worlds, and has embarked on a number of core initiatives in order to achieve this.

As part of its aim to ensure that research is truly applicable in practice, it has implemented a dual validation system – all research work must be part of a research programme, the relevance and goals of which have been validated from both an academic and a business viewpoint by the centre’s orientation committee Programmes include performance and style analysis, indexes and benchmarking, and asset allocation and derivative instruments, amongst several others.

The Centre’s website, www.edhec-risk-com, has been launched with the aim of helping professionals to get access to its analysis and expertise in the field of applied portfolio management research. It includes the latest academic research, plus acting as the official site for the Edhec indices. The Centre has always maintained an ‘open source’ approach to its academic findings.

More in-depth consultation is available from Edhec Investment Research, which supports investment managers and institutions seeking to implement its ‘core satellite’ approach to investing.

Edhec-Risk Advisory is the Centre’s risk-focused consulting arm, which looks at risk management issues within the buy-side industry and offers fund managers and service providers a wide range of support in the area of operational risk, best execution, structured products, alternative investment due diligence, and the implementation of risk management systems.

The Centre is also the exclusive course provider for the CAIA association qualifications in Europe.


Noel Amenc

Teaching experience

1999 to present – Professor of Finance, Department of Finance and Economics, Edhec Graduate Business School, Nice

1986 – 1993 – Assistant, Assistant Professor and Associate Professor of Finance, Department of Accounting and Finance, Ceram Business School, Sophia Antipolis

1989 – Visiting Professor at the University of Stockholm

Non-teaching professional experience

1999 – 2004 – Misys Asset Management Systems, Director of Research, Sophia Antipolis

1994 -1999 – SIP, Founder and President, Sophia Antipolis

1991-1993 – SCBF (part of the France Telecom group), Advisor to the CEO, Paris

1985-1986 – University of Nice-Sophia Antipolis – Enterprise Administration Institute’s Microeconomics Research Centre, Research Engineer (technical and scientific research directorate), Nice

1984-1985 – French Navy Officer, Mediterranean Headquarters (in charge of tactical intelligence)



Gestion Quantitative des Portefeuilles d’Actions (1998) with V. Le Sourd, Economica, Paris

Théorie du Portefeuille et Analyse de sa Performance (2002) with V. Le Sourd,Economica

Edhec European Asset Management Practices Survey (2003) with A. Delaunay, J.-R. Giraud, F. Goltz, L. Martellini, Editions Edhec/Misys Théorie du Portefeuille et Analyse de sa Performance, 2è édition, (2003) with V. Le Sourd, Economica

Portfolio Theory and Performance Analysis (2003), with V. Le Sourd, Wiley

La Gestion Alternative (2004), with S. Bonnet, G. Henry, L. Martellini and A. Weytens


“Revisiting Core-Satellite Investing – A Dynamic Model of Relative Risk Management”, with L. Martellini and P. Malaise, in The Journal of Portfolio Management, Fall 2004

“Portable Alpha and Portable Beta Strategies in the Euro Zone – Implementing Active Asset Allocation Decisions Using Index Futures and Options”, with P. Malaise, L. Martellini and D. Sfeir, in The Journal of Portfolio Management, Summer 2004

“Measuring Performance: Benchmarks”, with J.-R. Giraud, in Funds Europe, September 2004

“Good for the goose…?”, in Global Investor Magazine, July/August 2004

“Measuring Performance: Alpha Analysis”, with J.-R. Giraud, in Funds Europe, July/August 2004.

“Portable Beta and Alpha in the Eurozone”, with P. Malaise, L. Martellini and D. Sfeir, in Funds Europe, June 2004

“Bond ETFs: The Natural Vehicle for a Core-Satellite Approach”, with J.R. Giraud, P. Malaise and L. Martellini, in Funds Europe, May 2004 “L’avenir de la multigestion en Europe”, with M. Vaissié, in Banque Magazine, May 2004

“Key Findings of the Edhec ‘European Alternative Multimanagement Practices’ Survey”, with J. R. Giraud, in Journal of Financial Transformation, March 2004

“Portable Alpha and Beta for Long/Short Equity Managers”, with P. Malaise, L. Martellini and D. Sfeir, in Hedge Fund Review, March 2004

“Respecting the Rules”, with J.R. Giraud, in Funds Europe, February 2004

“Core Portfolio, Specialist Satellites”, with L. Martellini, in Funds Europe, December 2003January 2004

“Comment gérer l’hétérogénéité des indices de hedge funds”, with L. Martellini and M. Vaissié, in Banque magazine, December 2003

“Les défis de la gestion alternative”, with F. Haas and M. Vaissié, in Revue de la Stabilité Financière, November 2003

“Shouldering”, with J.R. Giraud, in Funds Europe, November 2003

“Basel II: Forestalling Risk?”, with J.R. Giraud, in Funds Europe, September 2003

“Predictability in Hedge Fund Returns”, with S. El Bied and L. Martellini, in Financial Analysts Journal, September/October 2003

“Tactical Style Allocation – A New Form of Market Neutral Strategy”, with P. Malaise, L. Martellini and D. Sfeir, in The Journal of Alternative Investments, summer 2003

“An Integrated Framework for Style Analysis and Performance Measurement”, with L. Martellini and D. Sfeir, in Journal of Performance Measurement, summer 2003

“Benefits and Risks of Alternative Investment Strategies”, with L. Martellini and M. Vaissié, in The Journal of Asset Management, August 2003

“Hedge Fund Indexes: Building a Better Benchmark”, with L. Martellini and M. Vaissié, Risk Magazine, June 2003

“EDHEC Alternative Indexes”, with L. Martellini and M. Vaissié, in AIMA Journal, June 2003.

“L’allocation d’actifs au coeur de la réduction des coûts”, in Asset Management Magazine, avril 2003

“Diversification et risques des stratégies alternatives”, with L. Martellini and M. Vaissié, in Banque & Marchés, mars-avril 2003

“Quelle est la valeur ajoutée du gérant professionnel?”, Forum Entreprises, janvier-février 2003

“Quelle est la valeur ajoutée du gérant professionnel”, contribution aux Entretiens

de la Commission des Opérations de Bourse, 21112002

“Portfolio Optimization and Hedge Fund Style Allocation Decisions”, with L. Martellini, in The Journal of Alternative Investments, fall 2002

“Diversification et risques alternatifs”, in Gestion Alternative – Recueil d’Opinions, AFG-ASFFI, with L. Martellini, July 2002

“It’s Time for Asset Allocation”, with L. Martellini, in Journal of Financial Transformation, December 2001

“Innovations financières et comportements stratégiques des entreprises : L’émergence d’une stratégie financière pure”, with J. Huet, in Sciences de Gestion, January 1989

Chapters in Books

“Asset Allocation” (with L. Martellini) in Encyclopedia of Financial Engineering and Risk Management, Fitzroy Dearborn Publishers, forthcoming

“Indexing Hedge Fund Indices” (with L. Martellini and M. Vaissié) in Intelligent Hedge Fund Investing, Risk Books, 2004.

Conference presentations, working papers, conference chairs

“The Brave New World of Hedge Fund Indices”, with L. Martellini, working paper, Edhec/USC, 2002

“Methodology Applied for the Agefi Asset Management Awards”, with L. Martellini and D. Sfeir, working paper, Edhec, 2002

“The Alpha and Omega of Hedge Fund Performance”, with S. Curtis and L. Martellini, working paper, Edhec/USC, 2002

“Style Analysis and Performance Measurement”, with L. Martellini (proposed for Agefi ranking), working paper, 2002

“Evidence of Predictability in Bond Returns”, with L. Martellini and D. Sfeir, Edhec/USC, – 2002

“Tactical Style Allocation: A New Form of Market Neutral Strategy”, with P. Malaise, L. Martellini and D. Sfeir, working paper, Edhec/USC, 2003

“Desperately Seeking Pure Style Indexes”, with L. Martellini, working paper, Edhec/USC, 2003

“Evidence of Predictability in Bond Indices and Implications for Fixed-Income Tactical Style Allocation Decisions”, with P. Malaise, L. Martellini and D. Sfeir, working paper, October 2003