April 28, 2011
Nicolas Papageorgiou is one of three co-authors of the paper entitled A Constant Volatility Framework for Managing Tail Risk, which recently won the prestigious 2010 AIMA Canada – Hillsdale Research Award (ACHRA). The annual award, with a cash prize of $10,000, is presented to Canadian academics, practitioners and students to encourage and recognize the quality of applied research in the field of alternative investments. The winning paper was chosen by an independent adjudication panel consisting of leading faculty from Canadian universities, and the prize was awarded by the Alternative Investment Management Association – Canada (AIMA Canada) and Hillsdale Investment Management.
The winning paper, published in both French and English, presents a new approach to managing tail risk. It was written by HEC Montréal Finance Professor Nicolas Papageorgiou and Alexandre Hocquard and Sunny Ng, respectively Portfolio Manager and Director of Alternative Strategies at Brockhouse Cooper Asset Management.
The authors’ research shows that the failure of strategic asset allocation as the sole risk management technique can largely be attributed to the fact that volatility is not stable over time and historical correlations between asset classes tend to break down during periods of market stress. Conventional tail-risk hedging techniques such as the use of options, swaps, and other insurance instruments can be costly and implicitly create a drag on portfolio performance. In response, the authors demonstrate that investors can better manage tail risk and improve risk-adjusted returns by seeking to maintain a constant level of volatility.
An abridged version of the paper will be published by Canadian Investment Review.