| Study : Trackers can be an efficient tool of active management |
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| 04/04/2004 | |
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Trackers are not only good for passive management. A team of academics of the Edhec business school, Lille, France, found that bond trackers are an efficient and cheap alternative to direct active management. The academics responsible for this study reported that trackers, which are traditionally used in passive management strategies to mimic closely a reference index, can be used by institutional investors in order to better frame their investment process and their risk control within an active management strategy. According to researchers at Edhec's Risk and Asset Management Research Centre, it is possible to place non-directional or directional bets on variations in interest rates by using the new trackers on the 3-5 year and 10-15 year maturity indices of the EuroMTS index, which tracks eurozone sovereign bonds. The EuroMTS trackers allow the implementation of a core-satellite approach to bond portfolio management by allowing for a minimization of management costs. In order to obtain that result, researchers at Edhec devised a "dynamic core-satellite management technique, maximising the part allocated to active management whilst guaranteeing a maximum level of negative tracking error", the press release said. This method adapts the portfolio insurance technique to the core-satellite approach by using the cushion method, which can double the portfolio's alpha creation potential, whilst at the same time guaranteeing a minimum performance equal to 95% of that of the benchmark. "Our conclusion is that ETF's ease of use and cost-efficiency allow investors to implement state-of-the-art management practices, without necessarily having to deploy the extensive human resources and large material infrastructures needed for a similar level of sophistication in the management of individual bond portfolios", argued the authors of the research. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it |
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