Eric de Sangues outlines the investment process that underpins the hedge funds run by Geneva-based Avendis Capital.
Eric de Sangues graduated as an engineer from the Ecole des Mines in Nancy, France In 1998, he began working as a trader for ABC Arbitrage, a French entity specialising in proprietary trading, where he was in charge of developing equity arbitrage strategies on the European and American markets. One year later, he was appointed head of the trading department and was responsible for the management of ABC Arbitrage global portfolio. In addition to his role as CIO at Avendis Capital, Eric heads the fixed income and Credit team. He joined Avendis Capital upon its creation.
HW: What is the background to your funds?
ES: Avendis Capital was launched as a privately-held Swiss investment company in February 2001 by 4 partners. Initially its main business consisted of proprietary trading and advisory service in Geneva.
In 2002 the company diversified to investment management and launched three hedge funds. Avendis Enhanced Fixed Income, specializing in credit and correlation, was one of the world’s first correlation hedge fund.
The fund is one of a very few to invest exclusively in High Grade corporate credit using synthetic CDOs, it has a low correlation to other fixed income hedge funds and posted a cumulative return of 70.73% since its inception in September 2002.
The fund develops relative value strategies in the capital structure of synthetic static CDOs through 2 different approaches both quantitatively driven:
- Bespoke static Synthetic CDOs Tranches are used to build exposure to investment grade credit idiosyncratic risk. The fund is remunerated for buying this risk that is by nature overpriced by the market.
- Trading of Standard index tranches of iTraxxIG and DJ CDX IG. The strategy takes advantage of structural dislocations in the correlation market.
The strategy takes advantage of the increased liquidity of the Index Tranche market, to generate alpha through momentum and mean reverting relative value trades in the capital structure.
I am the leading manager of Avendis Enhanced Fixed Income, joined Avendis Capital upon its creation. Previously, I was heading the trading department of ABC Arbitrage a French entity specialising in proprietary trading.
The core members of the credit team are Yannis Bilquez, David Benichou and Marco Rigo.
Yannis Bilquez serves as the Chairman of the company; he began his career in 1992, as a trader with Crédit Agricole, Paris, on the derivatives desk. In 1993, he joined Grel SA, a French brokerage company, to develop fixed income activities. At the beginning of 1995, he was hired by Intermoney Financial Product in Lausanne, Switzerland, as a fixed income sales trader.
From 1996 to 1999, Yannis acted as Director of the Sales Department in Wargny SA, a French broker. In 2000, he was appointed Director of Finacor Group (a Crédit Lyonnais subsidiary) in Paris and London to set up an arbitrage desk as a separate unit. He created Avendis Capital in February 2001
Davis Benichou is a Fixed Income and Credit Derivative trader. He has a Bachelor degree from the University of Northumbria at Newcastle, UK, and a Master in Management from the Ecole Supérieure de Commerce Nice Sophia-Antipolis, France. He started with CDC Ixis Capital Market, Paris, in 1996 as an organised market trader. One year later, he joined the credit bond desk as a market maker. In 2001, he moved to a position of asset manager specialized in Credit bonds with EUR 1 billion under management at Oddo Asset Management in Paris.
Marco Rigo serves as Head of Quantitative Analysis. He holds a Ph. D. in Theoretical physics from the University of Geneva, Switzerland. After working a few years as a postdoctoral fellow, he started his career in finance in 1997. He became head of quantitative analysis at Monis Ltd, a British financial software firm specialized in convertible bonds, now part of Sungard.
The fund is domiciled in Cayman Island and is listed on the Irish Stock Exchange.
HW: Who are your service providers?
ES: Our fund administrator is Custom House Administration & Corporate Services Ltd; our prime Broker is Lehman Brothers International Europe; our auditor is KPMG; and, our legal Advisor is Quin & Hampson Corporate Services (Cayman Islands).
HW: How and where do you distribute the funds? What is the profile of your current and targeted client base?
ES: Avendis Enhanced Fixed Income focuses on qualified investors such as asset managers, Funds of Funds, Private Banks, Family Offices, insurance Companies and Pension Funds.
HW: What is the investment process of your funds?
ES: The fund employs very tight credit investment processes.
In the analytical phases, we identify pricing distortions in the capital structure of Index CDOs by using dedicated quantitative indicators and review market dynamics to explain the origin of these distortions. Opportunities are identified with respect to risk metrics and desired exposure, adequate hedging ratios are identified, entry point, stop levels and target returns are set. At this stage the trading tactic is drawn
Thereafter, we stress test the position in terms of credit spread, jump to default and implied correlation exposure, we evaluate the impact of the position on the portfolio in terms of risk parameters.
The strategy is submitted to our investment committee, which eventually modifies the strategy to cope with the guidelines defined by this investment committee.
Finally our structured credit sub-investment committee reviews the transaction, eventually asks for some strategy amendments or further analysis, approves / refuses the strategy. Structured credit sub-investment committee reviews existing portfolio and current market conditions and decides on required strategy adjustments.
HW: How do you generate ideas for your funds?
ES: Trading ideas are generated jointly by the trading and the research teams in Avendis. They rely on a set of quantitative indicators and on fundamental credit analysis.
HW: What is your approach to managing risk?
ES: We have designed an extensive suite of risk monitoring tools that enable us to decompose risk metrics at the issuer level. Knowing very accurately the different sets of risk parameters at any point in time, we manage our exposure at 4 main levels:
- Credit spread risk
- Single name spread risk
- Jump to Default
- Correlation risk
We adjust and readjust these exposures constantly we apply stress test on these three main parameters on a daily basis in order to avoid or limitate loss at the fund level in case of market wide disruptions.
HW: Has your performance been as per budget and expectations?. Do you expect your performance or style to change going forward?
ES: We estimate our performance was very good last year compared to the peer group. The investment style has not changed since inception four years ago and we do not expect it to change in the foreseeable future.
HW: What opportunities are you looking at right now?
ES: We identify numerous opportunities in Index tranches markets.
HW: What events do you expect to see in your sector in the year ahead?
ES: We expect to see liquidity increasing and more market participants.
HW: How will these changes/future events impact on your own portfolio?
ES: They will make our trading more efficient and provide more opportunities.
HW: What differentiates you from other managers in your sector?
ES: A few elements sets us apart in the Credit / Structured finance space:
- We have a very quantitatively driven approach
- We focus solely on Investment grade corporate credit based on the fundamental conviction that there is structural mispricing in this space.
- We have one of the longest and most consistent track record having incepted the strategy in very early days.
HW: Do you have any plans for similar/other product launches in the near future?
ES: We plan to launch structured products such as CPPI transaction based on similar strategies.
