Fabrice Cuchet is the CIO of Alternative Investment & member of the EXCO at Dexia Asset Management. The Alternative Investment department at Dexia Asset Management has been responding to institutional investor demand for alternative investment for over 15 years through a broad range of more than 30 funds including 22 UCITS, covering 15 different strategies and managing around €4.4 billion.
Delivering positive returns which are uncorrelated from the markets amid a succession of crises with almost zero visibility is a real challenge facing alternative investment fund managers. It is the real-life stress tests that make the top-flight fund managers stand out by delivering the goods and creating added value for their clients.
‘Opportunistic’, ‘flexible’ and ‘reactive’ have been our key words during this period. We have profited from the opportunities which have arisen while being very flexible and reactive in our investment rate.
Although our funds, managed with an intermediate performance objective and volatility, performed generally better than our peers’, we did not have enough visibility to raise investment rate to higher levels. In general, we remained rather cautious in our investments, especially in Europe.
Among the most successful strategies of 2011 we can mention our credit strategies (including Long Short and Total Return), our quantitative strategies (such as Index Arbitrage and CTA) and our global macro profiles, all of which lived up to our clients’ expectations.
Almost halfway through 2012, we are observing continuing interest for uncorrelated strategies like CTAs and Market Neutral approaches from institutional investors, as was the case toward the end of 2011. Investors are also showing an appetite for more opportunistic strategies such as High-Yield Corporate Credit, which benefits from the liquidity-injection policies adopted by the Central Banks and the relatively good health of issuers. Event driven strategies which are sustained by the positive trends on risky assets are also among the successful strategies of 1Q2012.
The unrelenting market stop-and-go is proving costly in terms of risk management for many actors, and some fund managers are losing performance points in this exercise. We at Dexia Asset Management have always covered our different risks through various channels and have always had a dedicated and independent team on our alternative side, checking daily that at any given moment the fund respects pre-established internal limits in terms of, for example, exposure, VaR, stress test and liquidity.
Over the years, we have enhanced our risk management philosophy in some funds through the implementation of risk budget allocation per strategy, per position, or by adjusting stop-loss policies at position and fund level. We have also put a special focus on tail-risk management with, for example, options and volatility products, to hedge extreme drops. There has been no change for our All-Weather strategies such as Index Arbitrage or CTA’s which behaved greatly through the crisis.
To be clear about one thing, UCITS funds are not miracle products that deliver the same returns as hedge funds while offering more liquidity and less risk. The main impact is on liquidity, and the liquidity of some strategies depends on how liquid the underlying assets are, and how well calibrated their strategies are. That is why not all strategies are suited to UCITS, which require a certain minimum liquidity. Alternative managers must ensure that, even during periods of stress, they are able to provide liquidity, and that requires special expertise. Other strategies continue to be impacted by the eligibility of the products (commodities, loans, etc.) There is minor additional impact in terms of diversification and leverage.
The main cost is liquidity. Like all other forms of risk, liquidity risk must naturally be remunerated with additional returns over the medium term. As is widely known, some hedge funds occasionally invest in illiquid assets in an attempt to capture the ‘liquidity premium’, i.e., the excess return that would compensate the investor for the lack of liquidity in their positions. Newcits, which by their very nature can invest only in liquid assets and strategies to match the liquidity they offer to their clients, are unlikely to capture this liquidity premium. Various quantitative studies by Dexia Asset Management have shown that their average returns are 3% below those of hedge funds.
We experienced inflows in our index arbitrage strategy where we have a soft close at €1.8 billion (US$2.35 billion). We also had inflows in our Long Short Credit, CTA’s and Risk Arbitrage funds. It has been tough to collect in continental Europe as inflows have been more active in Germany. Funds exposed to non-European assets are more attractive due to the European sovereign crisis. In general investors are focusing in regulated funds, UCITS regulated ones are the most requested.
At company level, Dexia Asset Management S.A. (France) deals with asset management and focuses primarily on alternative fund management mainly for institutional investors as they comprise almost 90% of our clients (as at end-2011); the remaining 10% are high net worth investors. Regarding our UCITS funds, the figures are more or less the same as those for the company. Our alternative non-UCITS offer is mainly concentrated in our Funds of Hedge Funds, where main investors are private bankers.
We have not been impacted by the regulation as we are used to managing funds in a regulated environment with high transparency for more than 15 years now.
They are granted a variable remuneration linked to the performance of the underlying funds via performance fees. There is no change for us as an above-threshold deferred bonus was already in place before the new regulations were applied.
Clearly yes, many smart and experienced people are looking for jobs. We are also receiving many applications from London.
In the current context, we remain flexible and extremely vigilant in our investment approach, as there is still a long way to go. In Europe, there are persistent peripheral sovereign debt fears, particularly in Spain. The ratings agencies are increasingly concerned by the absence of growth in Europe resulting from the austerity measures applied in most European countries. If the European situation worsens, the ECB could cut its base rates and deploy unconventional measures to support the markets. Furthermore, the implementation of a growth pact is looking increasingly likely, with the EIB as the European body which would issue infrastructure loans.
Our outlook is cautious and volatile as our funds are suitably positioned to capture market value while seeking to limit downside; but it is often accompanied by a period of stress.
- The last 12 months have witnessed various trends in financial markets from significant volatility across the board to a bull run in equity markets. How did you approach this investment environment and how did the different funds perform?
- Which investment themes were more successful in the last six months of 2011 and in 1Q2012?
- Could you shed some light on how you manage risks across different funds during different market conditions? Have your risk management structures changed over the years especially in light of 2008 and the European debt crisis?
- A large number of your funds are UCITS compliant structures; do the UCITS regulations have any restrictive impact on implementing your strategies (in terms of instruments, positions size, liquidity management etc.)?
- Do you feel that there are additional expenses to maintain UCITS compliant status and if so, how much impact do they have on performance?
- The last year has seen a tough asset raising environment especially for European funds, how have your funds fared in terms of attracting capital? Which funds have proved to be the most popular to investors in terms of strategy and geographical focus? How about in terms of UCITS and non-UCITS compliant funds?
- Can you provide a rough breakdown of the different classes of investors (HNW clients, institutions, funds of hedge funds, etc.) that invest in your UCITS compliant funds and the non-UCITS funds respectively?
- What has the impact been of the new regulations on the functioning of your fund? How do you foresee the amount of stress laid on tightening regulations across the hedge fund industry to affect your fund?
- How are the different fund managers incentivised – do you see any impact of new regulations on how different managers will be compensated?
- With finance professionals leaving bank in the wake of new regulations, has it become easier for you to recruit good quality talent?
- With your experience in fixed income investments, can you share your opinion on the outcome of the European debt situation?
- Can you share with us your short and medium term outlook on global markets?