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Interview with Larry Jones, Head of Portfolio Management, Alternative Solutions at AXA Investment Managers

AXA Investment Managers is an active, long-term, global, multi-asset investor focused on enabling more people to harness the power of investing to meet their financial goals. By combining investment insight and innovation with robust risk management, AXA IM has become the chosen investment partner of investors worldwide.

With approximately €669 billion in assets under management (AUM) as at end-September 2015, AXA IM employs over 2,300 people around the world and operates out of 28 offices in 21 countries. AXA IM is part of the AXA Group, a global leader in financial protection and wealth management.

  1. Please share with our readers a bit of background on the AXA IM All Weather strategy, the type of investors you cater to and your overall investment philosophy.

    The program has been running for 11 years. Investors are various institutions such as insurance companies and pension funds. The investment philosophy has four key pillars: focus on alpha, a concentrated portfolio of high conviction positions, capital efficiency and deep dive due diligence.
  2. In 2015, the AXA IM All Weather strategy has outperformed both the Eurekahedge Fund of Hedge Funds and the Eurekahedge Fund of Hedge Fund Multi-Strategy indexes. In what ways was the fund’s strategy able to weather a volatile 2015?

    Our managers generally weathered the volatile conditions but also prospered. We select managers based on several criteria; the key is our assessment of forward looking skills based returns which we call alpha. Typically our managers exhibit very low beta profiles (typically 0.1 or less for risky assets, both forward and backward looking). This profile enables them to sidestep most of the effects of risk off episodes. A second factor is that we have close to zero exposure in selected strategies such as CTAs, commodities and emerging markets. Thus, we have been able to avoid the downside volatility from exposure to these strategies. Thanks to our ‘all weather’ approach to portfolio positioning, the majority of our managers were able to continue to deliver steady returns throughout 2015 despite the challenging market environment.
  3. What is the average number of funds which you allocate to? Can you walk us through the operational and investment due diligence process when allocating to a certain fund? How frequently do you rebalance your portfolio, and what is the minimum fund size which you allocate to?

    The program is typically invested in about twenty funds and managed accounts. The due diligence process is extensive and results in three separate assessments – strategy, operations and risk. Deep dive on site visits are conducted by senior personnel. Investment and risk personnel all have a background in derivatives trading. Operations personnel have background in legal, accounting and. The average annual turnover is approximately 20%.
  4. We understand that AXA IM considers allocating to start-up hedge funds as well. Given how smaller funds are finding it a challenge to survive in a difficult capital raising environment, can you share with us some of your success stories vis a vis talented managers that you seeded?

    We have had success in allocating to managers with AUM in the €$500 million to €$750 million range. On a selective basis, managers of this size are large enough to have proper institutional processes and systems yet still have capacity to grow. We do not actively seek out smaller managers or managers with very limited history.
  5. Can you share with us your exposure across various regional mandates? How has your regional exposure evolved over the years?

    Our regional exposures have been fairly consistent. Typically we allocate to the Americas, to Europe and Asia. We do not target regional weights. The regional allocations will be the result of finding quality ‘all weather’ managers wherever they have their offices.
  6. With reference to Asia, what is the breakdown of your allocations across various country mandates? What is your overall view on Japan and China in particular and do you plan to maintain or increase your allocations into Asia Pacific?

    We think the opportunity set in Asia is good; as and when we identify Asian managers according to our rigorous criteria we could increase allocation to managers in the region.
  7. In terms of strategic mandate, we notice that the fund has substantial allocation towards long/short equities, relative value, macro and fixed income strategies in your overall portfolio. Do you target any particular exposure levels when allocating across hedge fund strategies? What factors determine the breakdown and evolution of your exposure across the various strategic mandates?

    We have a strategy limit structure which controls exposure to any particular strategy. We review opportunity sets across sub-strategies and this influences the direction of research. After this, the decision process is primarily bottom up. That is, we do not target a particular weight to a strategy. If our sourcing and screening processes identify an outstanding candidate fund, full due diligence is triggered. After this the fund could be approved. After investment, the strategy weight would increase as a consequence. The most important criteria is the risk/reward profile of the candidate fund forward looking. The strategy classification is of secondary importance.
  8. Do you maintain certain target ratios across the different asset classes, for example; 60% equities, 20% fixed income, 20% commodities? Given that long/short equities are a big contributor to your portfolio; do you select managers with a certain sectoral exposure in mind?

    We do not maintain target ratios across asset classes. As the majority of our managers are alpha focused, net exposures to asset classes are very low. We do not target having exposure to an asset class such as commodities, for example, just because the asset class is different. This is not a sufficient reason in our eyes to have exposure. Our equity long/short exposures are almost all low net or market neutral, across discretionary and quantitative. We generally do not select sector specialists. We have some exposure to platforms in which sector portfolio managers are aggregated. We prefer this diversified approach.
  9. How do you manage your overall risk when allocating to different regional and strategic mandates, especially during periods of market stress when the broad portfolio is especially susceptible to drawdowns? Does your fund allocate to ‘crisis specialist’ tail-risk protection and long-volatility strategies as well? If yes roughly what percentage do such strategies make up of your overall portfolio?

    Because of our careful control of portfolio net beta, the broad portfolio is much less susceptible to significant drawdown compared to the industry. The risk management is therefore pre-emptive as it must be when allocating to hedge funds with quarterly redemption terms. The correlation amongst all the invested managers is low and the portfolio correlation to risky assets is low. We do not allocate to dedicated tail risk protection managers. Each manager is viewed with respect to risk/reward characteristics as a distinct investment.
  10. What are some of the regulatory challenges that you are facing and do you have worries regarding increasing compliance-related costs impacting your overall profitability? What are your preparations in anticipation of the AIFMD regulations, especially in relation to accessing funds that are domiciled in locations which do not currently have an AIFMD passport?

    Compliance related costs are increasing but the size of our business is such that this cost could be easily absorbed. We have a team dedicated to anticipating and monitoring AIFMD regulations and we meet the requirements.
  12. In the recent years, fund of hedge fund investment vehicles have come under scrutiny regarding their double fee structure. However, the AXA IM All Weather strategy charges relatively lower management and performance fees. Could you comment on your fee structure relative to the industry average of 1% management fee and 10% performance fee?

    Partly as a result of the double layer of fees issue, fund of hedge fund management fees and performance fees are coming down across the industry. Our priority is to ensure that investors receive good value for our services. We tend to also be able to offer a competitive schedule because of our economies of scale.
  14. Please share with our readers your medium-term outlook for the overall market? Which regions are you more bullish on and how do you plan to reflect this into your allocation in the portfolio?

    Our medium outlook is cautious. There is uncertainty surrounding the pricing of assets in the scenario that central banks remove the support of Quantitative Easing and very low interest rates. We expect this uncertainty to remain for an extended period. Therefore we intend to maintain a profile of very low beta to risky assets.
  16. Which hedge fund strategies are you more optimistic about in 2016? Do you plan to increase or decrease your allocation to any of your particular strategic mandates in the near future?

    The strategy weights could change based on our assessment of evolution of opportunity sets and our discovery of new managers. It is likely that our three largest buckets will continue to be quantitative equity market neutral, discretionary equity market neutral and multi-strategy. However our process is deliberate and turnover is fairly low; therefore allocation changes will be incremental.
  18. On a final note, in an era where investors are discontented with hedge fund returns, a fund of hedge fund model with its added fees would seem to face a tough challenge as an investment model. In your opinion, what is the future of the fund of fund industry and what kind of innovations do you think are necessary to ensure the competitive appeal of the multi-manager model?

    Hedge fund selection is a skill. When done well it can require hundreds of hours of sourcing, screening and deep dive analysis conducted by experienced personnel. The performance difference between a well-managed fund of hedge fund and a hedge fund index can be hundreds of basis points. Investors who acknowledge that they do not have the manpower or experience to bring to this task will continue to outsource this effort. Our expectation is that fund of hedge funds will maintain their market share at approximately 25% of the hedge fund industry.



Contact Details
Larry Jones
Head of Portfolio Management, Alternative Solutions
AXA Investment Managers
+44 20 7003 2124