Koris international - 2014 European Institutional Risk-Based Investing Survey

Koris International
2014 European INstitutional
RISK-BASED INVESTING survey
FOR INSTITUTIONAL AND PROFESIONAL INVESTORS ONLY
In partnership with

Koris International | 2014 European Institutional Risk-Based Investing Survey | December 2014
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Summary
Introduction
key Findings
The Respondents
Use and Perception of Risk-Based Investing Approaches
The Specific Case of Systematic Loss Control Strategies
references
About Koris International

Koris International would like to thank all institutional investors that participated in the first
Koris International 2014 European Institutional Risk-Based Investing Survey.
Over 70 CFOs, CIOs, CROs and other senior decision makers across 12 European countries
took part in this online and telephone survey, representing pension funds, insurance firms,
family offices, corporates, endowments and other institutional investors.
We recognise that this year investors have received numerous requests to complete surveys.
Bearing this in mind, we kindly thank these institutions for taking the time to share with us
some invaluable insights regarding how they comprehend and manage the investment risk.
Finally, we would like to thank our partners, who helped us in reaching their institutional
client base, and our colleagues for their sound contribution.
We hope you will find the survey of interest and look forward to pursuing discussions
regarding investment risk practices with you.
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Jean-René GIRAUD
CEO and co-Founder
INTRODUCTION

Key findings
Institutions say “Managing investment risks first and foremost”
Almost 9 out of 10 institutional investors surveyed define their asset allocation using risk-based
approaches, whether entirely or limited to certain buckets. It should not come as
a surprise given the increased resources the financial industry invests in sound risk
management practices.
Board’s decision key in adopting risk-based investing approaches
Despite tightening regulatory requirements, 62% of organisations state that the rationale
behind adopting a risk-based investing approach relates to their board’s decision. The risk
awareness among board members has risen significantly in recent years as much as the
importance of CROs within institutions.
Controlling the maximum drawdown and the volatility comes first
Institutional investors seek to control as much a direct downside risk measure (58% mention
the maximum drawdown) as an indirect one (56% cite the volatility). While the first enables
capturing the tail risk, the second (empirically) provides serious hints when it exhibits
significantly increasing levels.
No ‘perfect’ strategy to control risks but hedging overlays offer broad possibilities
It is commonly agreed that the diversity of investment risks an institution faces generally
requires combining several strategies to efficiently hedge them. Nonetheless, 42% of investors
favour the numerous risk mitigating possibilities offered by hedging overlay approaches.
Risk awareness = Frequent risk monitoring
Nearly half of the respondents monitor their portfolios’ risk at least on a weekly basis whereas
only 17% do so four times a year or less. Whether driven by internal or external factors,
institutions are more and more incentivised to better assess the various risks they face.
ETFs / Index funds and derivatives best suited for systematic loss control strategies
A little less than half of the informants consider ETFs / Index funds as the most appropriate
investment vehicles to incorporate within systematic loss mitigating solutions. Exchange-traded
derivatives are mentioned by 35% of investors in this regard, about twice the figure
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for OTC derivatives.

Koris International 2014 European Institutional Risk-Based Investing Survey was undertaken
between September 29th and October 15th, 2014. During this period, 74 decision makers from 12
countries representative of the main European institutional investors (pension schemes, insurance
firms, family offices, corporate treasuries, endowments / foundations and other institutions) have
kindly contributed to our online and telephone survey. This publication incorporates responses
from European institutions that collectively manage EUR 250bn.
Geographic Breakdown
27%
Of the respondents, we notice strong participation from two countries: France and Switzerland
with 27% and 26% respectively. The other informants are based in the United Kingdom (14%),
in Benelux countries (11%), in Germany (8%), with the remaining being based in Italy, Nordic
and other European countries (14%).
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Industry Breakdown
4%
5%
5%
8%
11%
14% 26%
France
Switzerland
United Kingdom
Benelux
Germany
Italy
Nordic countries
Other European countries
49%
9%
30%
5%
4%
3%
Pension scheme
Insurance company
Family office / Multi-family office
Corporate treasury
Endowment and foundation
Other
the respondents

Pension schemes and insurance companies make the bulk of participants, respectively
representing 49% and 30% of the overall institutions polled. The remaining institutions
that participated in our survey include family offices / multi-family offices (9%), corporate
treasuries (5%), endowments / foundations (4%) and other organisations (e.g., state
investment companies, pension administrators, etc. 3%).
Pension Scheme Breakdown
Focusing on the sub-sectors for pension plans that provided responses, defined contribution
(DC) schemes represent around half of the total. Defined benefits (DB) plans roughly account
for a third and hybrid plans take the remaining share. DC schemes are gaining ground in
Europe, and elsewhere, as a growing number of public and private sponsors cannot bear
anymore the burden of final salary pension schemes. According to the European Insurance
and Occupational Pensions Authority (EIOPA), 58% of pension plans in Europe are DC based,
including 17% of ‘DC with guarantees’.
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Insurance Company Breakdown
11%
53%
36%
Defined Contribution (DC)
Defined Benefit (DB)
Both DB and DC
14%
27%
32%
27%
Composite
Life / Pensions
Health
P&C

When it comes to insurance companies, the split is quite even among composite, life /
pensions and health with slightly less than a third for each sub-category. P&C insurers are
less represented, accounting for 14% of the insurance firms polled.
Assets under Management Breakdown
The institutions that participated in our survey have average assets under management
(AuM) of approximately EUR 4bn. Large investors are significantly represented among the
respondents with two third of the institutions holding more than EUR 1bn and 35% more
than EUR 2.5bn.
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Average Target Asset Allocation for Pension Schemes
35%
31%
16%
12%
5%
40%
30%
20%
10%
0%
Greater than €2.5bn
Between €1bn and €2.5bn
Between €500m and €1bn
Between €250m and €500m
Less than €250m
3% 2%
3%
5%
18%
29%
40%
Fixed-income
Equity
Real estate
Other (Balanced funds, commodities etc.)
Hedge funds
Money market instruments
Private equity
Pension schemes are free of any Solvency II like regulation for the moment. Yet, the IORP II
Directive that will comprehend the amended / new requirements they will face may bring
some surprises. Instead of focusing on the ‘three pillars’ of pension plans (i.e., fixed-income,
equity and real estate), having a closer look at hedge funds is not without interest.

Indeed, one may wonder whether the 3% average allocation to hedge funds would persist in
the coming months given the quite poor performance exhibited recently (as of 31/10/2014,
the HFRX Global Hedge Fund Index is down by -0.5% year-to-date versus +10.4% for the
S&P 500 NTR). To illustrate this, most have in mind some event driven funds that posted
substantial losses (i.e., double digits) after the failure of a number of tax inversion deals,
especially AbbVie finally removing its offer to buy Shire. Moreover, it is worth mentioning
that a portion of long / short equity funds equally yielded pronounced negative performance
as they did not perceive soon enough the growth-value rotation that occurred in the second
quarter of 2014.
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Average Target Asset Allocation for Insurance Companies
58%
8%
11%
15%
6%
2%1%
Fixed-income
Equity
Real estate
Money market instruments
Other (Balanced funds, commodities etc.)
Private equity
Hedge funds
Prior to the Solvency II implementation date (January 1st, 2016), we notice the relatively high
average level of equity holdings for insurers polled. Given the punitive charges imposed by
the Solvency capital requirements on stocks, excluding so-called “strategic participation”, it
would be of interest whether the allocation to this asset class remains the same in a year’s
time, a few months before day one.

Use and Perception of
Risk-Based Investing
Approaches

Use and Perception of Risk-Based Investing
Approaches
It is commonly accepted among institutional investors that taking risks is pivotal in meeting their
long term return objectives. However, investing in non-risk-free assets, though their “nil riskiness”
can be much discussed (cf Eurozone sovereign debt crisis), without adopting a robust risk
management framework may yield serious disenchantment when markets tumble. The aftermath
of the Lehman Brothers collapse has definitely changed how institutions regard investment risk.
Unsurprisingly, a vast majority of the survey participants (almost 90%) define their asset
allocation using a risk-based approach, whether entirely or limited to certain buckets. Another
7% are not yet implementing risk-driven investment strategies (e.g., minimum variance, VaR /
CVaR target or hedging overlay) but are willing to do so.
Putting risk at the forefront when allocating assets instead of expected returns only is
gaining popularity among European asset owners and is reflected here. Given the difficulty
of estimating returns, even more in the current market’s environment, it should not come as
a surprise.
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Do you use a risk-based approach when defining your asset allocation?
61%
28%
7%
4%
Yes, on your entire asset allocation
Yes, on certain portions of your asset allocation
No, but you are willing to do so
No, you only focus on expected returns

70%
60%
50%
40%
30%
20%
10%
0%
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Rationale behind the use of an investment approach based on risk
62%
24%
10%
4%
Board / Investment committee decision
Regulatory requirements (e.g., capital requirements)
Client pressure or requirements
Other
Mentioned by 62% of respondents, the board / investment committee decision comes
comfortably first in the reasons why their institutions have implemented an investment
approach based on risk. As we have seen an increased involvement of boards in understanding
and addressing risk over the years, it seems to be a logical step. Indeed, the rising importance
of risk management in organisations is well corroborated by the significant resources they
devote to the risk department (staff and technology) and the key role occupied by CROs
who, more often than not, directly report to their CEOs. The recurring market bubbles and
subsequent bursts may have just achieved convincing companies to focus first and foremost
on risk.
To a lesser extent, regulatory requirements are another reason motivating the adoption of
risk-based approaches for 24% of participants. The unprecedented wave of regulations in the
21st century has yielded significant changes in the ways businesses operate and European
institutional investors are not immune. Especially hit, insurance companies have little more
than a year to comply with the Solvency II regulatory requirements. Pension schemes will
be subjected to (the still much discussed) IORP II in the forthcoming years once a consensus
is reached among involved parties. Both regulations state the protection of members and
beneficiaries / policy holders as the utmost objective yet solely Solvency II as for now imposes
stringent risk-based capital requirements.
Mostly faced by family offices and private banks, client pressure appears a less important
driver, cited by 10% of investors. However, risk awareness seems to have made its way to
wealthy clients with more and more requiring to understand how investment solutions
control risk, especially the drawdown risk, prior to considering whether or not to invest.

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Which risk measure are you aiming to control?
Several answers possible
58%
56%
17%
8%
60%
50%
40%
30%
20%
10%
0%
Maximum drawdown
Volatility
Tracking-error
Other
Initially used by proprietary traders and derivative fund managers, the maximum drawdown
has now gained popularity among institutional investors. Relatively easy to understand,
aiming to measure the loss (absolute or relative) suffered by a given portfolio or bucket
allows capturing the tail risk unlike volatility, though extreme levels are a strong hint. The
investors that took part in our survey placed maximum drawdown as the main indicator they
are willing to monitor (almost 60%). An interesting empirical fact is that controlling the loss of
a portfolio also generally (but not systematically) results in containing its volatility, the latter
having proved higher throughout down cycles.
Obviously, volatility is all but abandoned by institutional investors, with 56% of our survey
informants seeking to control this risk measure. Volatility peaks we have recently experienced
can prove particularly damaging as they usually come along with pronounced drops in asset
values. Having to soundly balance cash inflows and investment revenues with cash outflows
to beneficiaries / policy holders, institutions understandably want to have an overall variance
as little as possible without impairing their ability to meet return objectives. It is worth noting
that different volatility measures exist: ‘basic’ variance estimates, the most widely used in
the financial industry, does not distinguish between positive and negative returns, whereas
semi-variance estimates only consider the deviations below the mean or a set target (e.g.,
below zero).
Lagging behind is the tracking error (cited by fewer than 20% of respondents), which is a
measure simply consisting of an estimate of the standard deviation of excess returns with
regards to a given benchmark. Recent developments in the financial industry, such as Core-
Satellite approaches where the Core is made of safer assets, often passive vehicles, and

the satellite seeks to generate alpha via active strategies, strongly incite pension schemes,
insurers and other institutions to unleash the tracking error constraints put on active
managers. However, one must not overlook that this indicator is very much considered
by a number of investors allocating to ETFs / Index funds (especially those holding such
instruments for short term purposes).
Other risk measures firms aim to control principally include credit risk in that they can
only invest in notes, bonds or asset backed securities benefiting from a minimum rating.
Corporates allocating their cash reserves represent the majority of institutions falling in that
category. They very often establish investment guidelines prohibiting investing in securities
rated below A- (long term) and A-2 (short term) as they seek to optimise their cash balances;
their core business does not entail managing financial assets.
Which risk-based approach have you implemented within your portfolios?
There is a wide set of investment approaches based on risk control and we consider three
categories: static risk optimisation, derivatives and dynamic-risk control. It should nonetheless
be mentioned that derivatives ‘alone’ are not restricted to a specific strategy. In fact, they can
be only used as investment vehicles to implement a specific strategy (e.g., through a target
VaR solution or a hedging overlay)
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Static Risk Optimisation
A static risk optimisation program relies on a single-period model and is based on the
assumption that optimal portfolio weights are constant over time. To this end, the rebalancing
process has to be determined at the managers’ discretion. Moreover, it must be noted that the
strategies considered within this category (‘smart betas’, max. Sharpe ratio etc.) are assumed
to use a static approach, as illustrated in the academia, yet they can also be implemented in
a dynamic fashion.

28%
27%
24%
14%
7%
30%
20%
10%
0%
Minimum variance
Maximum diversification
Markowitz (max. Sharpe ratio)
Risk parity
Other
Investing in smart beta strategies has increasingly been embraced by institutional investors
as they are willing to diversify their exposures from the over-concentration features inherent
in traditional indices (i.e., price or market cap weighted). Three techniques belonging to the
smart beta fields are mentioned by the survey respondents: minimum variance (used by 28%),
maximum diversification (27%) and risk parity (14%). Individually, such strategies may face
prolonged periods of underperformance relative to their cap-weighted index universe (e.g.,
S&P 500 min variance strategy vs. the S&P 500 Index). Carried out potentially to mitigate this
risk, 5% of investors declared allocating to solutions using several risk factors (e.g., quality,
momentum and volatility). Furthermore, as the Markowitz approach (maximisation of the
Sharpe ratio) is still common place in the active management field, it is logically cited by a
quarter of participants.
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Derivatives
Derivatives are very flexible instruments able to hedge a significant number of specific
risk exposures (without potentially costly divestments): inflation, currency, interest rates,
volatility, longevity, tail risk etc. Traded on exchanges or over-the-counter (OTC), they consist
of a large range of instruments: Options, credit default swaps, total return swaps, futures
forwards and swaptions among others.

42%
25%
50%
40%
30%
20%
10%
0%
Hedging overlay
(interest rate risk, FX risk, inflation risk etc.)
Structured products
Partly reflecting the large proportion of pension schemes and insurers that took part in this
survey, hedging overlay strategies appear as the most commonly utilised when it comes to
controlling risks with derivatives (implemented by 42% of investors). As a reminder, overlays
designed for hedging purposes are strategies that employ derivative instruments to offset
certain portfolio exposures, whether partially or entirely. In addition to usually preventing
divestments (i.e., selling an asset or a portfolio), hedging overlays offer a wide range of risk
mitigating possibilities (e.g., currency, inflation, interest rates, volatility or tail risks). They
may appeal to many institutional investors other than their main users, pension plans and
insurance firms, and are mostly put into effect via futures, forwards and total return swaps
(linear payoff structure) and options (asymmetric payoff structure).
A structured product is generally a pre-packaged investment strategy created by the
combination of at least two vehicles (e.g., one or several securities, index products,
derivatives, etc.) in order to adjust the underlying assets’ initial risk and return structure. Of
the investors surveyed, a fourth claimed using structured strategies, which, by definition,
can be tailored to a large set of asset classes and specific risk criteria. Indeed, some products
offer risk mitigation via principal protection (e.g., zero coupon bond combined with a call
option) or collar strategies (e.g., equity index floor protection financed by a cap on the upside
gains). However, structured products can be very costly and somehow opaque; they may
incorporate leveraged / short, hard-to-price underlying assets and ‘exotic derivatives’.
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Dynamic-Risk Control
Dynamic-risk control can be referred to as a multi-period risk optimisation. Using constantly
updated data, dynamic-risk control programs aim to determine the portfolio’s optimal asset
allocation in the subsequent period (i.e., post rebalancing, triggered by objective pre-set
criteria) as it assumes the probability distribution of asset returns and risk factors vary over
time conditional upon information availability.

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30%
25%
21%
8%
30%
20%
10%
0%
Target volatility
Dynamic loss control strategies
(e.g., portfolio insurance techniques)
Target VaR / CVaR
Target tracking error
Controlling the variance of a portfolio remains determinant in most investment decisions
as confirmed by 30% of respondents implementing target volatility strategies. A strategy
following a target volatility approach will move from risky assets (e.g., stocks) to safer assets
(e.g., government and investment grade bonds) in order to achieve the desired volatility
level. To a much lesser extent, 8% of informants replied using target tracking error strategies.
To a certain extent, the rise of passive investing (from 8% of Global AuM in 2003 to 15% in
2013, according to the Boston Consulting Group) has probably led to target tracking-error
approaches being less praised by investors assuming an index vehicle delivers a return more
or less equal to the underlying index minus the expense ratio1.
The target VaR / CVaR (employed by 21% of investors) is a more advanced risk control
technique as it enables gauging the potential absolute or relative loss a portfolio may suffer
within a given likelihood and horizon. As a reminder, the Value-at-Risk measures the potential
loss in value of a portfolio over a defined period for a given confidence interval. On its end,
the CVaR estimates the expected loss in excess of the Value-at-Risk. Some target volatility
strategies aim at approaching a long term volatility level deemed optimal with regards to the
underlying assets. The rationale behind Target VaR / CVaR approaches is always to ensure
that the risk inherent in the fund remains below the target set ex ante (no one willing to
experiment higher potential loss above what is considered as ‘acceptable’).
Mr Jean-Louis Blanc, director at Caisse de Pensions Bobst Mex SA, a private Swiss DC pension
scheme, tells us that “The risk framework implemented by our institution, and defined by the
Board, aims to control the drawdown risk with the use of consolidated reporting. As such, it is
based on a quantitative risk measurement, inherent in our strategic allocation, and on an annual
risk ceiling in compliance with the return target. The risk approach we have chosen is a target CVaR
(Conditional Value-at-Risk) with a 95% confidence level over a one-year horizon.” Moreover, he
adds that, “The investment committee assesses the diverse tactical asset allocation opportunities
according to its market views based on a set of indicators (e.g., European and US key rates, PMI
levels, market valuations, etc.) while keeping a close watch on the scheme’s risk exposure.”
1 Readers may refer to Bonelli (2014) which discusses this specific issue.

The fact that dynamic loss control strategies have been adopted by one fourth of institutions
surveyed is of particular interest. Such strategies aim to limit the absolute or relative loss a
portfolio may suffer. The drawdown estimates enable rebalancing the portfolio with a view to
ensure the risk budget is preserved and the money allocated in a risk efficient fashion. Lastly,
institutional investors have benefited from much sounder dynamic loss control strategies
with regards to the portfolio insurance techniques that appeared in the eighties. The several
pronounced drawdown episodes we have experienced in the past years may be a driver for
dynamic loss control strategies to be more widely adopted.
30%
20%
10%
0%
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How often do you monitor the risk of your portfolios?
32%
26%
25%
14%
3%
Monthly basis
Daily basis
Weekly basis
Quarterly / Semi-annual basis
Annual basis
Monitoring the risk of investment portfolios is a challenging task that requires institutional
investors devoting significant financial, technological and human resources. Increasingly
demanding regulatory requirements coupled with fast-paced market environments have
strongly incentivised financial actors to better, and more regularly, assess the risks to which
they are exposed to. Of the companies surveyed, 51% admit watching their portfolios’ risk
at least every week, whereas only 17% do so four times a year or less. In between, 32% of
informants monitor risk on a monthly basis, also a rather famous rebalancing frequency.
Furthermore, risk monitoring can obviously range from ‘basic’ observations (e.g., volatility,
tracking error or maximum loss suffered on a given period) to more complex projections
(e.g., yield curve or CVaR).
Consultancy firms are frequently involved in the risk monitoring and assessment of
institutional portfolios. Indeed, “The risk exposure of our pension scheme is evaluated quarterly
by an independent external consultant who produces a report for the investment committees,” says
Mr Blanc of Caisse de Pensions Bobst Mex SA. He continues, “Then, the exposure determined
by the consultant is compared with our risk ceiling (CVaR with a 95% confidence level over a one-year
rolling horizon), hence enabling the investment committee to take allocation decisions.”

Moreover, prudential regulations such as the Solvency II Directive may have a significant
impact on the nature and frequency of risk controls implemented by institutions. Mr Alban
Jarry, Head of Solvency II Program at La Mutuelle Générale, the third French mutual insurance
company, tells us that “Own Risk and Solvency Assessment (ORSA) becomes the reference document
in risk management for insurance firms. Aimed at firms’ governance and supervisory authorities, it
provides a clear picture of current and forecasted risks.” He adds, “In general, Solvency II second
pillar facilitates the analysis of the risks inherent in an entity as it is based upon decision and
monitoring processes. As such, it enables producing bespoke indicators for the governance.”
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The Specific Case
of Systematic Loss
Control Strategies

The Specific Case of Systematic Loss Control
Strategies
Systematic loss control strategies are rule-based mechanisms aiming to hedge the potential
(absolute or relative) loss of a portfolio / bucket. To do so, investors may use specific hedging
overlays, portfolio insurance strategies or structured products.
Drawbacks of systematic loss control strategies perceived
It is commonly accepted that the timing of rebalancing is a key parameter for preserving
a portfolio’s value. Of the investors polled, 45% regard the bad rebalancing timing as the
main drawback weighing on systematic loss control strategies. Readjusting the asset mix
when markets are stressed (e.g., significant price drops in one or more asset classes) can
significantly damage the potential benefits of asset allocation / security selection decisions.
Either calendar-based (e.g., monthly basis) or risk-based (e.g., trading bands), portfolio
rebalancing carried out in overbought / oversold markets may bring important costs (mainly
opportunity and transaction costs) if not designed with sufficient care.
Weak participation to the upside is also mentioned as a major disadvantage of such strategies
(cited by 42% of respondents). Controlling the potential loss a portfolio may endure via rule-based
approaches implies giving up a portion of the upside gains (e.g., versus a market index)
to enable a downside protection. Nonetheless, the amount given up must be ‘acceptable’
(according to each institution’s specific needs) as benefiting from asymmetric payoffs is the
main reason why investors chose systematic loss control strategies.
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45%
42%
24%
21%
14%
50%
40%
30%
20%
10%
0%
Bad rebalancing timing
(e.g., buy high / sell low in oscillating markets)
Weak participation to the upside
Possibility of being locked up in cash
(e.g., risk budget fully consumed)
Systematic approach lacking of
‘human rational thinking’
Other

The fundamentals of risk-driven investment strategies, limiting losses, may rely upon a risk
budget (e.g., a level of VaR or maximum drawdown set ex-ante) to determine the allocation to
the performance assets (e.g., equity). The inherent mechanism incorporates a reserve asset
(e.g., cash or derivatives used to diminish the exposure to an underlying portfolio) whose
role is to ensure the respect of the risk control objective. When ill-conceived, systematic
loss control strategies can end up being ‘crystallised’ in the reserve asset if the risk budget
becomes fully consumed, a downside mentioned by 24% of participants.
Would a systematic approach enjoy greater efficiency if supplemented with ‘human rationale
thinking’? A fifth of the institutional investors that participated in this survey tend to believe it
would. ‘Blindly’ following a model’s decision to increase risk when markets are ‘overbought’,
for instance, may not be the wisest decision. Notwithstanding, should human choices get the
upper hand on a rule-based loss control strategy, it could not be labelled ‘strictly systematic’.
To investors wanting the “best of both worlds” (i.e., an approach based on systematic and
discretionary processes), well-designed hybrid strategies may be an appealing option.
Which vehicle(s) would you use to implement systematic loss control strategies?
As discussed before, Exchange-Traded Funds (ETFs) and index funds are increasingly used by
institutional investors willing to easily and at little cost benefit from the returns of a wide set
of indices / strategies. Of the respondents, 45% regard those vehicles as the most appropriate
when it comes to implementing systematic loss control strategies. On the one hand, long-only
ETFs, the overwhelming majority of such instruments traded in Europe, may be a particularly
good fit for structured products and portfolio insurance strategies. However, the latter need
to incorporate a reserve asset (e.g., cash or low-duration / zero coupon bonds) in order to
control the potential absolute or relative loss. On the other hand, inverse or short ETFs can
be used to hedge a given portfolio’s risk exposure. It is worth noting that only a few of those
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15%
8%
18% 17%
35%
45%
50%
40%
30%
20%
10%
0%
ETFs / Index funds
Exchange-traded derivatives
OTC derivatives
Active funds
Securities
Other

specific instruments are available in Europe and are not as heavily traded as their US peers,
hence providing an insufficient liquidity for most European institutions.
Not only are derivative flexible instruments able to possibly hedge even very specific
risk exposures but they also can provide a synthetic exposure to a given asset class etc.
Among the investors surveyed, 35% consider exchange-traded derivatives (ETD) as very
suitable instruments for rule-based strategies mitigating losses, whereas 18% mentioned
OTC derivatives in this regard. When trading ETD, the clearing house acts as a central
counterparty, thereby mitigating the consequences should one counterparty (the buyer or
the seller) defaults. Conversely, the counterparty risk is inherent in OTC derivative contracts
– even if the vast majority of financial firms establish a list of authorised counterparties
following due diligence. In addition, it may cause serious harm should this risk materialise
(e.g., when it collapsed, Lehman Brothers participated in more than 900,000 outstanding
derivative contracts involving 8,000 different counterparties).
Centralised derivatives are most fit for institutional investors willing to hedge, or synthetically
replicate liquid exposures, and mostly include options and futures on interest rates,
currencies and equity indices. Regarding OTC derivatives, they offer investors a wider range
of instruments covering almost any asset class: ‘vanilla’ or non-standard underlying assets.
Notwithstanding, it must be noted that the European Markets Infrastructure Regulation
(EMIR) will impose mandatory clearing to certain ‘basic’ OTC contracts (e.g., basis swaps,
fixed-to-float interest rate swaps or untranched Index CDS, for two indices). Broadly
speaking, derivatives can be employed in hedging overlays, portfolio insurance strategies
and structured products.
Active funds are evoked by 17% of the informants as particularly suited instruments for
systematic loss control mechanisms. The rationale for investing in such funds, money market
funds apart, is the desire to generate alpha yet they may also constitute a cheaper, more
efficient and liquid alternative to Delta-1 products covering certain asset classes (e.g., high-yield
bonds or emerging market debt). Active funds would be likely to be employed within
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portfolio insurance strategies.
Finally, securities are the vehicles the least mentioned as being tailored for systematic risk-based
strategies controlling the loss. Combined with derivatives, they are typically used in
structured products (e.g., an investment grade bond coupled with a call option). Moreover,
they may also be employed to synthetically replicate an index with few constituents (e.g.,
such as the SBI Domestic 1-3Y CHF) and implemented in portfolio insurance strategies, a less
likely outcome though.

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Blommestein, H. J. The Debate over Sovereign Risk, Safe Assets, and the Risk-Free Rate: What are
the Implications for Sovereign Issuers? Ekonomi-tek Volume / Cilt: 1 No: 3 September / Eylül 2012, 55-70.
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with regard to OTC Derivatives Transactions.
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Mantilla-Garcia, D. (2014). Dynamic Allocation Strategies for Absolute and Relative Loss Control.
Working Paper, EDHEC Risk and Asset Management Research Center.

about koris international
Koris International (“Koris”) is a duly registered financial investment advisory firm dedicated
to designing and developing dynamic asset allocation models controlling the drawdown
risk. The company operates with a team of 14 professionals, with backgrounds in the asset
management industry and academia, and benefits from the latest advances in financial
engineering.
Located in Sophia-Antipolis in France (head office) and in London, Koris is wholly owned by
its founders and has been operating for 12 years with key players in the asset management
industry through an ‘advisory’ business model entirely dedicated to asset allocation.
Koris offers solutions that meet the needs of asset management companies, private banks
and institutional investors throughout Europe. These advanced quantitative techniques are
designed to satisfy investors’ appetite for better risk control.
The strategies developed are implemented by renowned partner investment managers (Bank
of America Merrill Lynch, Lyxor AM, Rothschild & Cie Gestion, Fédéris GA, Banque Bonhôte
& Cie, etc.) via ETFs, index funds, securities, active funds, futures, total return swaps as well
as liquid alternative investment strategies through managed accounts.
27
w w w.koris - intl.com

For more information,
please contact the authors
Jérôme Malaise
Institutional Client Solutions
Gauthier Leibenguth
Marketing & Sales
Koris International
Espace Saint Philippe - Immeuble Néri
200 Avenue de Roumanille
06410 Biot, France
46 New Broad Street
London EC2M 1JH
United Kingdom
jerome.malaise@koris-intl.com
+33 (0) 4 88 72 88 41 / +44 (0) 7584 654 827
gauthier.leibenguth@koris-intl.com
+33 (0) 4 88 72 88 36
Important Information
These materials (“Materials”) have been prepared by Koris International (“Koris”) for informational purposes only. The Materials are intended to serve solely as a summary of survey responses provided
to Koris by European institutional investors that took part in Koris International Institutional Risk-Based Investing Survey 2014 (the “RBIS Survey”). The number of European institutional investors
polled for these Materials is small relative to the size of the European institutional investor marketplace, and these Materials are not intended to summarise the views of the European institutional
investor marketplace at large. Furthermore, the information presented in these Materials does not represent any assumptions, estimates, views, predictions or opinions of Koris.
These Materials have not been verified for accuracy or completeness by Koris, and Koris does not guarantee these Materials in any respect, including but not limited to, their accuracy, completeness or
timeliness. Information for these Materials was collected and compiled during the stated timeframe. Past performance is not necessarily indicative of future results and Koris in no way guarantees the
investment performance, earnings or return of capital invested in any of the products or securities discussed in the Materials. These Materials may not be relied upon as definitive, and shall not form
the basis of any decisions contemplated thereby. It is the responsibility of the recipients of these Materials (and the information therein) to consult with their own financial, tax, legal, or equivalent
advisers prior to making any investment decision.
These Materials do not constitute, and shall not be construed as an offer to sell, an investment advice or a recommendation on specific investments by Koris.
ORIAS n° 13000579 (www.orias.fr).
Koris International is a Financial Investment Adviser registered under No. D011872 by the CNCIF, Association approved by the French financial markets authority (AMF).

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