Best diversified FoHF over $500m: Axa All Weather

Axa avoids big hedge funds that leave footprints in illiquid markets

Larry Jones, Axa Investment Managers

Hedge Funds Review European Fund of Hedge Funds Awards 2015

"We want the funds to perform in any potential environment," says Eric Lhomond, global head of alternative credit and alternative solutions at Axa Investment Managers (Axa IM), and it is fair to say that Axa IM's All Weather strategy has. The strategy won three awards at the Hedge Funds Review European Fund of Hedge Fund Awards: it was judged best diversified fund of hedge funds (FoHF) over $500 million over one, three and 10 years. Axa IM also won the best institutional FoHF provider award.

The strategy targets absolute returns for its investors and instead of forecasting macroeconomic conditions and then selecting funds, it aims to generate returns in any macro environment. As a result, it has a relatively low turnover of managers. Each year, it reallocates approximately 20% of its portfolio to different managers.

"I think it is very important in today's world to avoid mistakes," says Lhomond. The strategy's managers therefore prize high conviction and high due diligence. It invests in 20–25 funds, which is fairly concentrated relative to other FoHFs. The largest fund it invests in makes up a tenth of the portfolio and the 10 biggest funds represent about 70%. If funds are a sizeable proportion of the portfolio, fund-pickers will be more cautious investing in funds, the thinking goes.

The fund invests in medium-sized managers, being warier of the pitfalls of small and big hedge funds respectively. Lhomond worries about information leakage for hedge funds managing tens of billions of dollars. "When you're big, people talk about your trades and your positioning, and you can get picked off [by dealers]. It's harder," he says.

All Weather therefore tries to invest in small-name, nimbler global macro funds. A large proportion of the fund's returns this year came from global macro, where Axa IM's managers were able to avoid most of the crowded trades. The strategy's allocation to global macro funds was 13%. Its biggest allocation was to equity market-neutral strategies, both quantitative and discretionary.

Another factor that Lhomond tries to avoid is too big a concentration of the investment decision and/or the risk-taking in the hands of one or two people in the fund. The ability to demonstrate an analytical approach is also important. "Especially in the macro space, it's all too easy to read the Financial Times in the morning and put on the trade in the afternoon," he says. "You want the investment process to be based on much more than that." He also frets about a "herd mentality in the macro sector" that makes investing there challenging.

Strategies with the lowest possible beta are prized, which means that trend-following managed-futures funds are out. Lhomond has little faith in their ability to time markets so as to avoid losses. Arbitrage strategies are favoured, particularly as regulation is making markets less efficient and banks are being driven from their traditional roles as dealers, he thinks.

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