This working paper series is intended to facilitate discussion and encourage the exchange of ideas. Inclusion here does not preclude publication elsewhere. It is the original work of the author(s) and subject to copyright regulations. encouraging creative research

Edhec is one of the top five business schools in France owing to the high quality of its academic staff (90 permanent lecturers from France and abroad) and its privileged relationship with professionals that the school has been developing since its establishment in 1906. Edhec Business School has decided to draw on its extensive knowledge of the professional environment and has therefore concentrated its research on themes that satisfy the needs of professionals. Edhec pursues an active research policy in the field of finance. Its “Risk and Asset Management research center ” carries out numerous research programs in the areas of asset allocation and risk management in both the traditional and alternative investment universes. Copyright © 2003 Edhec 1 Abstract: While stock picking strategies are in principle meant to exploit evidence of predictability in individual stock specific risk, most equity managers, as a result of their bottom-up security selection decisions, often end up making discretionary, and most of the time unintended, bets on market, sector and style returns as much as they make bets on individual stock returns. In this paper, we show how portfolio managers in the Eurozone can benefit from using derivatives

While stock picking strategies are in principle meant to exploit evidence of predictability in individual stock specific risk, most equity managers, as a result of their bottom-up security selection decisions, often end up making discretionary, and most of the time unintended, bets on market, sector and style returns as much as they make bets on individual stock returns. In this paper, we show how portfolio managers in the Euro-zone can benefit from using derivatives markets to actively manage their asset allocation decisions in a systematic manner. Using a robust econometric process based on a non-linear multi-factor thick and recursive modeling approach, we report statistically and economically significant evidence of predictability in Dow Jones EURO STOXX 50 excess return. These econometric forecasts can be turned into active portfolio decisions and implemented via Eurex index futures to generate active asset allocation portable alpha benefits. We also show that adding active sector rotation decisions to asset allocation decisions allows one to significantly lower the portfolio volatility as a result of the benefits of bet diversification: We finally explain how active portfolio managers can benefit from using suitably designed Eurex option strategies as portable beta vehicles. In particular, option portfolios can be used to enhance the performance of tactical asset allocation programs by consistently adding value during the periods of low

Over the recent past, stylized facts have not yielded a synthesis regarding the predictability of returns for alternative investment assets such as hedge funds. Recent studies on alternative asset return predictability have added to the ambiguity. These studies suggest that classification prediction methods may dominate more traditional return-level prediction methodology. This paper examines the predictive accuracy of three alternate radial basis function neural networks when applied to the returns of thirteen Credit Swiss First Boston/Tremont (CSFB) hedge fund indices. We provide evidence that the Kajiji-4 RBF neural network dominates within the RBF topology in the prediction of hedge fund returns by both level and classification. The results also show that the Kajiji-4 method is capable of near perfect directional prediction.