Hedge Funds Review European Fund of Hedge Funds Awards 2015
"We're not going to buy managers just to fill a strategy," says Stéphane Julen, portfolio manager for Credit Suisse. The company's Prima Multi-Strategy Fund won best Ucits-compliant FoHF at the Hedge Funds Review European Fund of Hedge Funds Awards. Manager talent and finding the right fit for Ucits is more important for Credit Suisse than top-down strategy selection.
Equity long/short therefore makes up around 45% of the portfolio, which yielded its rewards over the year. These funds had low beta and high alpha, with a high proportion in European equities. Alpha has been easier to find in Europe, thinks Julen, as the eurozone pulled out of its quagmire and a differential emerged between high and low-quality equities. Higher volatility proved helpful too.
Macro and managed futures comprise around 28% of the portfolio and relative-value strategies – mostly equity market-neutral – make up 13%. Fund managers have sought to raise exposure to relative value, but within Ucits limits. "We have worked a lot to find different other strategies, especially in the relative-value side," says Julen. He notes it is difficult to find Ucits-compliant relative-value funds.
He is under no illusion about the sometimes restrictive nature of Ucits regulations, saying there is "plenty to be done", although plans for a more derivative-friendly Ucits VI appear to have been dropped. Blocks on Ucits funds trading commodity futures are the main problem, thinks Julen, with leverage ceilings being less of an issue.
Managed-futures firms can gain exposure to commodities through exchange-traded funds and equity managers can still trade in commodity firms. Shorting mining equities has been profitable for Prima Multi-Strategy Fund's stock-pickers, for example. What is more, using maximum value at risk measures, it has funds that are able to go 10-times leveraged.
Despite a few structural quibbles, Credit Suisse's alternative funds unit has seen increasing demand for liquid alternatives over the past few years. "Some of the managers we work with have extremely successful non-Ucits compliant funds, and we assist them in tailoring their strategies to a regulated, liquid structure. By partnering with managers during the establishment phase of new funds, we are able to benefit from a range of preferential terms on behalf of our clients," says Ryan Bennett, alternative products specialist.
Julen nevertheless thinks it important to perform operational and legal due diligence on Ucits funds. "We do the same due diligence that we do for Cayman vehicles," he says. "Ucits gives you the feeling that everything is highly regulated and there's no risk, but we did come across funds which we couldn't approve." Some funds had gateways that violated Ucits rules; others employed managers who were flagged up in Credit Suisse's background checks.
"Just do the research: you'll find it. It's a question of doing the hard work," says Julen. He spoke of one fund that failed to pass Credit Suisse's approval, despite having an interesting investment strategy, because there were "significant issues" with the management team. "Some of our peers have it in their portfolio, but it's not something you could easily miss," he says.