Hedge Funds Review European Single Manager Awards 2016
Hedge funds always have strategies but it is rare for something to come along that is significantly different. La Française Investement Solutions's LFIS Vision – Premia Opportunities fund is a complex risk premia strategy executed through three "families" of.
The three elements of the risk premia strategy are academic premia (plain vanilla instruments), implied premia (derivatives) and liquidity/carry premia on liquid assets (cash and derivative instruments). The fusion of these three creates a fund able to capture alpha through long and short positions across multiple asset classes, creating a mix that is beginning to interest a range of investors.
Guillaume Dupin, senior portfolio manager and partner at La Française Investement Solutions (LFIS), believes investors should be attracted to this new spin on risk premia.
By adding in implied and the liquidity/carry premia elements, he has created a fund able to continually invest across a range of assets in any type of market environment. At the end of April, the fund was up more than 5% while its peers, using only the academic risk premia approach, were either down by a couple of per cent or struggling to bring in a positive performance number.
Describing how the three elements works is a gargantuan task. Dupin, who is also head of absolute return strategies at LFIS, is an engineer by training and comes from Crédit Agricole CIB where he was global head of equity derivatives structures and flow trading. He also worked at Societe Generale Corporate & Investment Banking as an equity derivatives proprietary trader in charge of volatility activity.
This banking experience sits well within the LFIS format where a strict investment process is executed by an experienced portfolio management team.
"Generating alpha is not an easy thing: to implement this dense strategy you need different portfolio managers who are all experts and you need also a ‘unique' set-up with an ability to trade a wide range of instruments and underlyings, an ability to trade over the counter through Isdas/CSAs and with a good access to all counterparties to see all the different flows and opportunities" explains Dupin.
"We have a robust pricing and risk management infrastructure that is pretty similar to ones you could find within investment banks and less often within the asset management [industry]," he adds.
The reason he gives for the fund's positive performance so far this year is directly related to the diversification and de-correlation of three performance engines of the strategy.
"When one ‘family' delivers, another may be flat or even negative. But three ‘families' losing at the same time is rare. They are de-correlated by construction," he says.
"Having all three losing would be a ‘weird' world and I am not expecting it to last too long; it would be a temporary re-correlation, otherwise it would say that the world has changed and that some sub-strategies would potentially not be eligible anymore due to the fact that the rationale would not be there anymore," adds Dupin.
Thousands of trades
This is a challenging strategy with many moving parts. The portfolio is executing thousands of trades. While implementation of the implied and liquidity/carry premia are ultimately discretionary, the trade ideas are quantitatively generated.
Put simply, the implied premia are premia on implied parameters including volatility, correlation, dispersion and dividends. Asymmetries are used to balance risk and return.
This part of the strategy uses relative value structures, buying volatility that is deemed cheap and selling volatility that is rich between assets of the same class or different classes.
Within this family, dispersion strategies are also used – for example, the volatility of an index versus the volatilities of the different elements of the index and the volatility spread between customised baskets.
In addition, relative-value strategies between equity index implied dividends and spots are used to capture alpha.
Premia are identified through a combination of market research and portfolio manager expertise. The quantitative screening of the statistics throws up the implied premia and the discretionary and tactical overlay avoids exogenous events, such as geopolitical risks.
Within the liquidity/carry premia, arbitrage strategies are used. This element is designed to capture the discount embedded in the prices of assets because of the inability of market participants to hold them.
This part of the portfolio invests only in liquid assets and does not try to capture illiquidity premia, but to extract risk premia with no exposure to the underlying assets at maturity.
The entire portfolio has an equal risk contribution foundation with a discretionary overlay. A volatility budget preserves flexibility in case of risk aversion while the risk budget allocation among the premia gives the same risk allocation for each premia, taking into account correlation without over-emphasising it relative to volatility.
This produces a highly diversified portfolio and avoids concentration.
Tactical allocation is used to tilt the risk budget towards premia that can act as tail hedges during stressed periods. The specific criteria for this allocation for academic premia are the drawdown/volatility, macro indicators and other elements. Implied premia looks at the Sharpe ratio, while liquidity/carry premia tracks duration, capital consumption and drawdowns.
Correlation between the three premia families is not statistically significant, reducing overall portfolio volatility to around 5% compared with a target annualised volatility of 7%, although the aggregate volatility is over 25%.
In essence, LFIS Vision – Premia Opportunities is a market-neutral, multi-strategy fund with multiple drivers of diversification and de-correlation giving all-weather performance through a robust investment process.
La Française Global Investment Solutions
One of the newest groups to enter the hedge fund scene is La Française Global Investment Solutions (LF GIS). Established in 2013, LF GIS already has assets of $6.9 billion (at May 31, 2016). This is an aggregated figure including assets under management by La Française Investment Solutions (LFIS) and assets originated and structured by La Française Bank, Paris.
Its rapid growth as the alternative investment and solutions arm of French insurance group La Française can be attributed to an interesting combination of investment banking expertise and asset management know-how.
The co-founders, CEO and chief investment officer Sofiène Haj-Taieb and Arnaud Sarfati, CEO of LF Bank, between them have more than 30 years of experience in investment. Haj-Taieb has developed a number of financial innovations that contributed to Societe Generale Corporate & Investment Banking (SG CIB) where he was a deputy head of global markets. Sarfati, also a veteran of SG CIB, has a background in the equity derivatives market and also spent time in the cross-asset solutions division of the bank.
Together they have put together a senior portfolio management team that is designed to offer something unique to the investment community. The two want to run LF GIS as an institutional asset management boutique, putting the emphasis on innovation.
"Our DNA is to combine technical investment banking expertise with asset management know-how. When we began building hedge fund strategies, we benefited from our investment banking and cross-asset background. We have built a hedge fund approach around this combination," says Sarfati.
"We wanted a differentiated hedge fund business that would not just compete against the biggest houses. We have a strong academic and quantitative background and are experts in derivatives. We have this capability whether in equity or credit so we can find the best way to be exposed in an asset class through cash or derivatives and implement a strategy in the best way," Haj-Taieb adds.
Under alternative investments, the firm offers multi-strategy credit and absolute return premia, a market-neutral, multi-strategy, multi-asset allocation to a broad range of de-correlated risk premia.
Solution funds include hedge equity, which gives investors an asymmetric exposure to equity markets using a systematic hedging approach, something that is particularly useful under Solvency II rules, and an enhanced long-volatility fund that takes positive exposure to implied volatility with the aim of delivering higher returns in periods of rising risk while reducing the cost of carry. In addition, LF GIS also offers customised solutions blending its asset management expertise with cross-asset capabilities to fit specific investment objectives and constraints.
"We are in general more agnostic about products. Our major concern is performance and, whatever the complexity or nature of the product, we emphasise risk management," says Sarfati.
LF GIS offers hedge funds in either a Ucits or specialised investment fund (Sif), a regulated, operationally flexible and fiscally efficient multipurpose investment fund regime for an international, institutional and qualified investors.
Both believe that through these two vehicles LF GIS can address a large spectrum of investors.
At present, the main client base is in France but the firm expects to expand into continental Europe, where there is demand for Ucits and absolute return vehicles. Continental investors are wary of the "hedge fund" label but are looking for liquid hedge fund strategies that have a strong risk management element.
"There is a convergence between traditional and hedge fund asset management, that's what we mean when we talk about absolute return," explains Haj-Taieb. "For clients, performance tends to be the first criteria as is having a product that matches their liquidity requirements. When providing liquid hedge fund strategies, it is the responsibility of asset managers to ensure the robustness of the strategy and capacity to deal with liquidity," he adds.
By this, he means the investment focus is on understanding risk rather than the way performance is attained.
As a hedge fund provider and specifically in the premia products, they believe LF GIS is providing investors with risk-adjusted performance that is needed across the spectrum.
In France, they believe there is a "huge" market for flexible funds, which are basically long-only products. But northern Europeans, particularly pension funds and insurance companies, are closer to the UK, US and Canada in sophistication of understanding more complex products. So the focus for marketing initially will be Europe then spreading into the UK and eventually the US and - mainly French-speaking - Canada. Before entering the Asian markets, LF GIS wants to "confirm" its brand. "Once we feel strong in terms of branding we will go outside [Europe] and into the US and Asia," confirms Sarfati.
"I think when we are ready to go to the US, pension funds will understand our approach which is very academic, very quantitative. We expect demand in the US to be high," adds Haj-Taieb.
Meanwhile, LF GIS believes the dictates of Solvency II, and particularly its emphasis on position transparency, will serve the firm well. There is a focus on aggregating risk factors on different strategies to give a clear view and this is something LF GIS can provide in its Ucits and Sif structures.
Through these two vehicles LF GIS says it is able to provide a high level or performance with controlled risk that is still an attractive investment compared to the capital charge levied by Solvency II.
In fact, controlling risk is very much at the centre of LF GIS. While the risk depends on the strategy of the fund, the firm uses its own internal models to manage this element daily. This is where the experience of the co-founders in derivatives is even more useful. "Clients are surprised by the level of technology we use," says Sarfati. This is something that they are more used to seeing in large investment banks. "When we meet clients and explain what we do and show them how we do it, the feedback from them is good," he adds.