RISKCONTROLLEDINVESTMENTSTRATEGIES-Indices.pdfVIP

NOVEMBER 2010 RISK CONTROLLED INVESTMENT STRATEGIES STOXX LIMITED 2/8 RISK CONTROLLED INVESTMENT STRATEGIES INTRODUCTION The recent financial crisis was the worst of its kind since the great depression of the nineteen thirties and has lead to a fundamental change in our understanding of financial markets and investment strategies. In particular, we observe two trends in the aftermath of the financial crisis: 1. The investment community has learned the lesson that markets are not always fully efficient and not fully rational as finance theory taught us the years before the crisis. In particular, systematically ill-posed incentive schemes within the financial industry and risk supervision models and procedures that were heavily based on optimistic assumptions and input parameters lead to an irrational level of risk taking across the investment community and to the development of asset bubbles. The recent two years were therefore dominated by a de-leveraging of the financial world and the definition of improved and more efficient risk supervision rules across the globe. 2. At the same time, the investment community has shifted from a mere return based thinking to a risk- return based assessment of investment opportunities. For instance, before the financial crisis the investment community was focused on choosing between different investment styles such as relative value, growth, momentum or deep value and investment research was heavily focused on determining which investment style outperform in certain market areas or points of time within the business cycle. However, after the financial crisis investment research has been extended or even focused on assessing the risks involved in different investment styles to derive investment strategies that use risk indicators as input variables