Focusing on liquidity has been at the heart of Lyxor's success in Europe this year. The French exchange-traded funds (ETFs) provider has shown resilience in the midst of extremely volatile and sharp market conditions with the launch of more than 50 new funds, and the hiring of Simon Klein from Deutsche Bank as head of Lyxor and Nizam Hamid from iShares as his deputy.
Lyxor, the ETF subsidiary of Société Générale, has consistently been among the top three providers for more than 10 years, having listed its first ETF in 2001, and with more than €30 billion of assets under management (AUM), it has sustained its position as the leading equity ETF provider, as reported on exchange with a market share of 30.5%.
"We have focused on integrating technicality with innovation and giving investors liquid access to asset classes that are normally very difficult to trade," says Nizam Hamid, head of ETF strategy and deputy head of ETFs Europe at Lyxor in London.
In an attempt to capture long-term volatility, Lyxor launched its Lyxor ETF S&P Vix Futures Enhanced Roll, offering investors optimal ways of holding long-term volatility positions while mitigating the cost of carry. The ETF reflects the performance of a systematic dynamic exposure to Vix futures - effectively the S&P 500 Vix futures are invested in medium-dated futures to reduce any carry costs in a normal market environment, and strategy switches its exposure to short-dated futures when volatility spikes. When volatility corrects itself, the index switches its exposure back to medium-dated futures. The switching signals rely on the comparison between the Vix index and its short-dated moving averages.
"There have been some exchange-traded products linked to volatility in the past, but you could essentially lose 90% of your investment just because of the cost of carry, so every time you would roll your position," says one asset manager in London. "Lyxor has been very evolutionary in how it has focused on liquidity and tradability of volatility."
It took Lyxor 18 months to formulate the index with Standard & Poor's. In terms of performance, it has been up 83% since its launch in April 2011 to-date, and already has more than €50 million in AUM.
"We have an optimal way (or as optimal as you can get, given the available futures) of having volatility exposures, so you are always long volatility, but it is a mix between holding short- and long-term futures to maximise the carry, and that is the real benefit to clients," says Hamid.
"Clients are expecting quality, and that is why it took us so long; we wanted to make sure liquidity remained intact at all times and performed well," says David Escoffier, head of global equities and derivatives solutions at Société Générale in London and chairman of the Supervisory Board of Lyxor. "This ETF really goes to the DNA of SocGen, because we are able to leverage using the expertise of each of our trading in getting to the root of the liquidity in volatility and figuring out how to hedge it."
Lyxor has also opened up opportunities in developed and emerging markets by expanding its range of single-country funds across Europe and Asia, with an inclusion of sovereign bonds, Thailand and Indonesian equity markets, as well as leverage and inverse German and Italian bonds.
The firm's open-traded, unfunded model allows investors to choose from 45 different counterparties when trading Lyxor ETFs. The fund itself owns physical assets, which are held in a fully segregated account.
"We don't lend out any of those securities, but to achieve those index returns, there is an index swap done directly with Société Générale, but the point is that you do have physical assets in the fund," says Hamid.
Lyxor's model has developed a strong name in the ETF landscape. "The beauty of its swap model is that it allows you to provide clients with access to markets where, if you insist on being a purely physical provider, this actually isn't feasible," says a London-based asset manager.
"Our flexible model has become a real benefit to end-clients," says Escoffier. "We give investors the best of both worlds, integrating the asset management model used in physical replication, as well as the fully integrated synthetic model."
The ETF provider has also been creative this year in the assets it takes when creating for redemption. "The majority of firms will only take cash when it comes to creation for redemption. We take cash, futures, other ETFs, baskets of securities. We aim to be as flexible as we can when it comes to managing that process and that trade," says Hamid.
Seventy-five per cent of Lyxor's market activity is with other authorised participants. "It shows our clients are able to deal with a wide range of counterparties," says Escoffier. The team that heads its ETFs is part of the bank's global equities division.
Lyxor has also been able to address the issue of counterparty risk by showing the swap level daily on its website. The ETF provider has a daily reset, which typically targets to have zero counterparty risk. "That is certainly ahead of where the regulators want the industry to move, and certainly ahead of our competitors," says Escoffier.
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The week on Risk.net, December 2–8, 2016Receive this by email