The Hedgeweek Interview: Stéphane Galzy, Lead Portfolio Manager, IXIS European Events: Positive outlook for European event-driven opportunties
Stéphane Galzy discusses the current ideas and event-driven strategies on which IXIS European Events is focusing.
Stéphane Galzy joined IXIS Asset Management in 2002 as a senior Portfolio manager in the alternative investment team. Prior to joining the firm, he was responsible for the Pair Trading desk at Banque CPR (1996-2002) where he held various positions, first as a Japanese then European Equity Proprietary Trader, then as a European Pair Trading Fund Manager. Stéphane began his career in 1989 with SG Warburg Securities as Head of a Market Making team. In 1991, he became Director of the Equity derivatives department. From 1994 to 1996, he was with Global Delta Management as Founder and Chairman. Stéphane Galzy is a graduate of the French business school Ecole des Hautes Etudes Commerciales (HEC) with a major in Finance.
HW: What is the background to the fund?
SG: IXIS European Events is a Luxembourg-registered fund launched on July 31, 2003. I am the lead manager of the fund and have over 18 years experience in Alternative investments and prop trading. My team of 3 other managers (Frédéric Babu, Sébastien Guerin and Xavier Martinot) and myself have been with the fund since its inception, and the three senior members of the team worked together prior to joining IXIS Asset Management. The fund had EUR 64 million under management at year end 2005.
HW: How and where do you distribute the fund? What is your current and targeted client base?
SG: Our targeted client base is primarily, although not exclusively, European investors. As with other single-strategy hedge funds, we target investors such as fund of funds, private banks, family offices and institutional investors. Christie Austin, our Marketing Manager is responsible for distributing the fund, in conjunction with the IXIS Asset Management sales force.
HW: What is the investment process of your fund?
SG: We seek to capture temporary market inefficiencies in pricing securities created when listed companies face or are likely to face a change in their corporate life. We have a wide event mandate, both traditional merger arb and pre-event, in order to address different market cycles. The returns are achieved through idea generation, as we follow a market neutral strategy with low net exposure. The process is intensively research-driven. Although our universe is the largest European publicly traded stocks, with some exposure to mid-caps, we do not invest in companies that we do not know or have not met the management. In order to do so, we work closely with IXIS Asset Management's buy-side equity research team of 9 analysts.
The majority of the strategies are long event, although we may short an event if we don't have confidence in a deal. To keep the fund market neutral, each long event has a corresponding short position(s), which in general is in the same sector. Our overriding philosophy is one of value, and once we identify an event, we will not invest if it does not meet our valuation criteria. Once the investment decision is made, we may invest from 2% up to 12% of the portfolio in a strategy. These positions are scaled into and out of, and our trader may trade these portfolio positions within guidelines to provide a third source a value-added to the fund and also to minimize the impact of short term market fluctuations.
HW: How do you generate ideas for your fund?
SG: Ideas are generated from our proprietary research and also from the team's extensive knowledge of the European equity markets. IXIS Asset Management's size in the European long-only equity market (EUR 32 billion), give us a unique access to senior management from the companies in our universe. These executives come to our offices and the Event Driven team sits in on the research meetings with the buy-side team and has the opportunity to ask questions that are specific and pertinent to our program. We only invest when there is a catalyst. We then use our proprietary decision-making tools to help us with the relative valuation analysis. In the merger arb approach, we make use of extensive contacts in the legal and regulatory arena.
HW: What is your approach to managing risk?
SG: The portfolio's risk is controlled both at the strategy and the portfolio level. At the strategy level we scale in and out of positions, use trading and may enhance the risk/return profile through the use of options. But to begin with, an important criteria for us is the liquidity of a stock/and or the availability of borrow which helps in controlling the risk of a strategy.
At the portfolio level we have portfolio construction guidelines both to control the risk and to ensure a well-diversified portfolio, including a target leverage (gross) for the portfolio of 2.5x - 3.5x with a max of 5x. We also have sector (max 20% in one sector) and position (max 12% in any one strategy) limits. In addition, IXIS Asset Management has extensive risk management, compliance and back office resources that provide a second level of controls for the fund and minimize the operational risk to the investor.
HW: How/against what do you benchmark the performance of your fund?
SG: We target absolute returns and thus do not look at our performance against a benchmark, however, we do look at the performance of our competitors and the major Event Driven indices.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
SG: Performance has generally been in line with expectations and we target a consistent 10% return over a market cycle. We do not plan to change our style or our philosophy of value investing…we will not invest in overbought strategies or stocks.
HW: What opportunities are you looking at right now?
SG: We are looking at some interesting opportunities in Continental European Mid-Caps.
HW: What events do you expect to see in your sector in the year ahead?
SG: We expect to see a lot of change in ownership in the year ahead, intensive asset restructuring activity, a good level of IPO activity and a return of trade buyers.
HW: How will these changes/future events impact on your own portfolio?
SG: These should be positive for the portfolio. The appearance of new types of assets/stocks/sub-sectors in Continental Europe particularly, where the indices are still dominated by traditional blue chips will give us more opportunities to invest and to maintain a reasonable diversification, with strategies across all sectors. In addition, the return of trade buyers to the market gives us a greater visibility in terms of valuation.
HW: What differentiates you from other managers in your sector?
SG: First and foremost, our competitive advantage in research is what sets us apart from other managers in the sector. We have the senior executives of the leading European companies coming to our offices, sometimes several times a year. I meet directly with these executives in conjunction with our buy-side research analysts. I highly value the close working relationship that the Event Driven team has with our analysts and it is key to our success.
We also are different from major US and even UK managers because we have a special knowledge of Continental Europe and its unique and often complex cultural and regulatory environment. This often leads us to look at deals from a different perspective, which is diversifying for the client.
HW: Do you have any plans for similar/other product launches in the near future?
SG: We are looking into the opportunity launch a more aggressive version of the strategy, less constrained in terms of its market neutral position.
(Stéphane Galzy was interviewed on 20 February 2006)
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