FACTOR INVESTING IN LIABILITY-­DRIVEN AND GOAL­-BASED INVESTMENT SOLUTIONS

A new approach known as factor investing has recently emerged in investment practice, which recommends that allocation decisions be expressed in terms of risk factors, as opposed to standard asset ...

Author(s):

Lionel Martellini

Professor of Finance & Director of EDHEC-Risk Institute

Vincent Milhau

Research Director - EDHEC-Risk Institute

A new approach known as factor investing has recently emerged in investment practice, which recommends that allocation decisions be expressed in terms of risk factors, as opposed to standard asset class decompositions. While the relevance of factor investing is now widely accepted amongst sophisticated institutional investors, an ambiguity remains with respect to the exact role that risk factors are expected to play in an asset-liability management investment process.

The main objective of this paper "Factor Investing in Liability-­Driven and Goal­-Based Investment Solutions" is precisely to contribute to the acceptance of factor investing by providing useful pedagogical clarification with respect to the benefits of factor investing within the liability-driven investing paradigm.

To this end, we draw an important distinction between the benefits of factor investing in the performance-seeking portfolio and its benefits in the liability-hedging portfolio. We also argue that adopting a factor investing lens offers new useful insights with respect to the improvement of the interaction between performance-seeking and liability-hedging portfolios. Overall, our paper can be regarded as a first step towards the introduction of a comprehensive investment framework blending liability-driven and factor investing, widely recognized as the two most significant advances in institutional money management over the last two decades

Type: EDHEC Publication
Date: le 02/03/2020
Research Cluster : Finance

See Also

#MyEDHECCommunity and beyond: Bridging the gap
News
- 31-07-2020
“One of the worst consequences of the Pandemic was on the job market - it saw a large...
Data modelling: testing is rule number one
News
- 31-07-2020
That is quite funny because two years ago, I had barely touched Excel and I had no idea...
The Chair relaunches its Diversity & Career study - Alumni, please contribute to this project!
News
- 30-07-2020
Since we are all different, this study intends to assess the relationships between...
#MyEDHECcommunity: Getting virtual career advice on Sustainable Finance trends
News
- 30-07-2020
“I have always been interested in Sustainable Finance but was often told it was a niche...