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The Hedgeweek Interview: Cyril Julliard, CEO, Europanel Research & Alternative Asset Management. (ERAAM)

Cyril Julliard outlines the strategy and thinking that is driving the performance of Paris-based ERAAM's range of funds, and outlines plans for new launches.

HW: What is the background to your company?

CJ: ERAAM (Europanel Research & Alternative Asset Management) is the only French multi-management company dedicated exclusively to European-based hedge funds. Founded in 1998 by Cyril Julliard (myself) and Bertrand Van Houtte, ERAAM launched in May 1999 its flagship product Europanel Multistrategy, one of the first alternative asset management companies to become AMF registered in 2002.

In 2003 ERAAM launched one of the first French-regulated funds Europanel Multistrategies II and since then other products, like multimanager/ monostrategy contributing to its growth and success.

With eight years of experience in European hedge funds selection, ERAAM is a leading player in the French & European hedge fund market. Its unique network enables a direct access to the European hedge fund universe. ERAAM also offers its customers a range of off-shore products, AMF regulated funds, and tailor made multi-strategy or single strategy vehicles which can be dedicated.

The bank Quilvest, which manages over USD 6 bn including USD 1 bn invested in external Hedge Fund, selected ERAAM as a strategic partner for hedge funds selection in Europe and acquired in June 2005 a 17% stake in ERAAM.

ERAAM benefits from an optimal size in terms of AUMs ensuring an access to the best opportunities in the European hedge fund universe while maintaining a great flexibility in the investment process. Therefore ERAAM can keep high performance standards for its product range and stand out from the rest of the biggest European fund of funds through significant exposure to mid-size hedge funds with a limited involvement, thus not impacting ERAAM's reactivity. 

In 2006 ERAAM was awarded by FitchRating the best rating ever so far to a fund of funds in relation to its investment process. This confirms ERAAM's position Industry Leader. Overall, ERAAM's assets under management have increased in worth from EUR 18 million in 1999 to EUR 808 million in 2006.

HW: Who are your key service providers?

CJ: For its Luxemburg based Products, ERAAM uses Banque Privée Edmond de Rothschild as an Administrator / Custodian/ Sponsor and Deloitte &Touch as Auditor.
For its onshore French Regulated Funds of Funds (OPCVM de Funds Alternatives), ERAAM has chosen RBC Dexia as an Administrator and Custodian and Corevise as Auditor.

HW: Have there been any recent events such as launches or changes/additions to the management team?

CJ: We created in December 2005 another French Regulated Fund - Europanel Long Short II.

During 2006, ERAAM started to act as an Advisor for a large Pension Fund which makes the first development of ERAAM with United States.

As a result, since 19 January 2007, ERAAM is registered as an Investment Advisor with the U.S. Securities and Exchange Commission (SEC). This emphasises a new phase in the development of ERAAM overseas.

In January 2007, Pascale Leroux joined ERAAM as management committee member.

HW: What is your investment process?

CJ: There are four factors driving our investment process:

1. Experience of our management team:
The complementary nature of management committee members ensures that decision making is based on a proper understanding of even the most complex hedge fund strategies, covering a very broad range of asset classes.

The lengthy market experience of each of the management team members has made it possible to implement a pragmatic risk management approach, allowing for a suitable level of risk taking.

We believe the team's seniority is primordial as we always favour the qualitative aspect of our management process.

2. An independent and rigorous selection process:
As a management company regulated by the AMF in France and registered with the SEC in the United States and the CSSF in Luxembourg, ERAAM is independent in a way that guarantees the complete absence of conflicts of interest in the selection of hedge funds.

Our selection process is rigorous at both qualitative and quantitative levels. Our investment universe includes more than 1,500 hedge funds with strict investment criteria in terms of profitability and risk management.

Before being chosen, each hedge fund is subjected to three distinct analyses:

- A qualitative analysis (on-site visit) covering the key points: the management company's environment and changes thereto, the investment philosophy, the investment process and risk management and control… thus enabling us to give an internal rating.

- A quantitative analysis of past performance (weekly and monthly data) with the help of a proprietary statistics programme (quantitative regression of alpha and beta, identification of market risk factors) and of previous portfolios that managers may provide.

- Operational due diligence carried out by our compliance officer and risk controller, covering amongst others the management company, directors, custodian(s) and auditors.

These factors are then presented at a monthly management committee meeting with a view to establishing the eligibility and maximum weighting of the proposed hedge fund.

Once the investment is made, the operational risks to the plan, infrastructure and market are monitored. If necessary, this will lead to withdrawal from the fund. Of course, regular contact is maintained with managers.

3. Quantitative, adapted risk management:
The management committee constantly tracks the performance and strategy of funds selected, and consolidates the risks to funds of funds managed by ERAAM. If there is disagreement on the committee regarding certain consolidated risks or those taken by the individual hedge fund, a decision will then be taken.

4. Our tools:

- Proprietary statistical software, accessible to all ERAAM employees and connected to:

Eurohedge for the monthly performances of European hedge funds
Our middle office for the weekly performances of managers followed by ERAAM
Bloomberg for daily market data

- Proprietary analysis and risk monitoring tools, based on the transparency provided to ERAAM by the managers selected with regard to their portfolios.

All these tools make it possible for us to analyse precisely:

VAR and stress scenarios
Profit & loss allocation
Liquidity of underlying securities present in the selection's hedge funds.

HW: How has your fund of hedge fund/s performed?

CJ: Europanel Multi-Strategy achieved an annualised return of 11% per annum since its launch in 1999 with annualised volatility of 3.5% over the 36 months.

Regarding MonoStrategy funds of funds, our most sucecssful product Europanel Long/Short achieved a positive performance of 32% over the last 3 years with annualised volatility of 5% during that period

HW: How many funds/strategies are in your portfolios?

CJ: The portfolios are comprised as follows:

Global Macro
Diversified non CTA (Europanel MultiStrategies Limits 15% - 35%, Europanel Fixed Income Limits 10% - 40%)
CTAs [Trend Followers, Contrarian] (Eropanel Multistrategys Limits 0% - 5%)

Long/Short Equities
Market Neutral (Europanel MultiStrategies Limits 15% - 40%, European Long/ Short Limits 80% - 100%)
Beta Shorts
Long Bias
Variable Bias

Event Driven
Equity (Europanel MultiStrategies Limits 0% - 20%, European Long/ Short Limits 0% - 10%, Europanel Fixed Income Limits 0% - 20%)
Equity and Debt
Closed End F and Arb.

Convertible Arbitrage and Volatility Arbitrage
CB Arbitrage (Europanel MultiStrategies Limits 0% - 20%, European Long/ Short Limits 0% - 10%, Europanel Fixed Income Limits 0% - 20%)
Volatility Arbitrage

Fixed Income Arbitrage
G7, ABS (Europanel MultiStrategies Limits 15% - 35%, Europanel Fixed Income Limits 50% - 80%)
L/S Credit, CDO Arb
High Yield, Emerging

HW: Are you linked to any hedge fund indices or have you launched products linked to hedge fund indices or do you have plans to do so?

CJ: No

HW: What makes a manager/strategy special enough for you to select him?

CJ: We remain very pragmatic and do not have rules set in stone. However, our goal is to select the Top 50 best Hedge funds based in Europe.

In general, we want to make sure that the investment team has a kind of information edge versus its peers which makes its performance sustainable and that the investment team has experienced various cycles. In our selection, we would always favor niche players.

HW: What are your criteria for removing managers from the fund/s?

CJ: Resignation of key individuals or staff turnover will remain the first reason for removing managers. A down cycle in a strategy would also lead to scale down our asset allocation and to close positions with the weakest managers of any.

Last but not least, we are in a performance driven industry and the deterioration of track record due to too rapid and too large asset raising or just not apparent reason will also remain factor for redemption.

HW: How many managers do you have on the substitutes bench?

CJ: We constantly seek for news talents and last year we had a turn-over greater than 20%. Having over 300 managers meetings a year, finding new managers is not an issue. At any time we do have over 30 managers on the short list for potential investments.

HW: What events do you expect to see in your sector in the year ahead?

CJ: We expect to see more and more independent hedge fund managers to find ways to diversify their activity, towards traditional asset management products and become more institutional. The opening of capital to employees and to public through IPO will become a key to ensure the long-term future of such organization. As part of this process, some top investment banks have taken stakes in the most well established Hedge Funds.

HW: How will these changes/future events impact on your own portfolios?

CJ: These developments will make the hedge fund industry even more robust than ever. Such phenomenon will allow a larger client base to invest in Alternative Investment and will ensure the growth of the industry and of ERAAM as a consequence.

HW: What differentiates you from other managers in your sector?

CJ: ERAAM is exclusively focused on European-based HF managers and has a better knowledge of its investment universe

ERAAM recognises the advantages having a reasonable size. Having USD 1.1 bn of AUM, ERAAM benefits of high credibility, while allowing the investment team to keep its full flexibility and reactivity in its decision process.

The Investment Committee combines together five complementary expertises, for an in-depth understanding of the hedge fund universe. This allows a rigorous quantitative and qualitative assessment of underlying risks. The committee members also have complementary professional networks (up to 20 years of experience in various investment banks, including HF inception in London or Paris) and can get a direct & privileged access to source talented European HF managers (even closed to other investors).

ERAAM has also put in place an in- house tailor made risk management, leveraging regular security level transparency agreed with the vast majority of managers that ERAAM has selected.

HW: Some funds of funds have complained that managers are not taking enough risks in the current environment - what are your views on this and on risk in general?

CJ: In general, we want to minimize operational risk close to zero. Regarding the market risk exposure, population of managers seeking sustained returns, combined with strict risk management has emerged, making the overall industry more and more stable.

Overall, the industry doesn't use excessive leverage. More and more Hedge Funds do tend to reduce their capital allocation when there are very limited opportunities. The industry has learnt its lesson in 98 with the use of leverage.

HW: Are investors' expectations moving upwards and how do you deal with this?

CJ: Europanel Multi-Strategies is seeking to achieve Euribor +500bps with drawdown constrained to no more than 2%. Such products are a useful tool in terms of portfolio diversification for Pension Funds.

For investors looking for high returns but with similar risk profile, we aim to launch an onshore leveraged fund of fund which will borrow no more than 50% of its Net Asset Value.

HW: How do you distribute your products?

CJ: Being a Fund of Fund Boutique, the distribution is achieved via 'world of mouth' and partners' industry contacts with Private Banking networks, external Alternative Investment Distributors and Financials Institutions.

HW: Are you planning any further launches this year?

CJ: We expect to launch a French leveraged Fund of Fund and some thematic Fund of Funds: Eastern Europe Focus, Event Driven Focus and/or Credit Long/ Short.

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