Mon, 14/05/2012 - 16:22
Could recommendations that Swiss pension funds should report underlying manager fees within the total expense ratio of funds of hedge funds negatively impact the Swiss market? It’s an issue that concerns the Edmond de Rothschild Group, which runs approximately USD10.4bn in alternative assets.
Banque Privée Edmond de Rothschild’s EDR Prifund Alpha range of 13 funds of hedge funds, seven of which are registered for sale in Switzerland, caters not only internally to private clients but increasingly to external institutions, which now make up about 30 per cent of its FoHF assets.
The bank’s flagship fund, EDR Prifund Alpha Uncorrelated, currently has USD2.65bn in assets under management, says Gilbert Hellegouarch (pictured), head of business development within the bank’s investment funds department.
“It’s a multistrategy fund that focuses on arbitrage, event-driven and multistrategy funds,” he says. “Fifty per cent of the portfolio is invested in these uncorrelated strategies.” Although the fund’s performance was slightly negative in 2011, its assets still grew year-on-year, suggesting that Swiss investors haven’t lost faith and interest.
The bank has an unrivalled heritage in the sector, having launched its first fund of hedge funds in 1969. Says Hellegouarch: “EDR Prifund Alpha Uncorrelated attracted the most assets in 2011 because of its 10-year track record. Last June, we reached the milestone of generating a 100 per cent return since inception.”
Swiss pension funds invest, on average, 5 per cent of their portfolios into hedge funds, a substantial proportion compared with other markets. Hellegouarch believes the fund’s size has helped attract inflows: “For funds of hedge funds, size does matter. Some of the inflow we saw last year was replacement flow from other FoHFs that had liquidity issues. It was a flight to quality and to liquidity.”
All the bank’s funds of hedge funds invest through pools of managers running the same strategy, a tool to manage allocations and to ensure diversification and liquidity at the FoHF level. “This pooling structure helped us get through the 2008 crisis,” Hellegouarch says. “Redemptions took place without putting the portfolios at risk – no gates or liquidations were applied.”
However, he is concerned that regulators have recommended that Swiss pension funds include in their annual report not only the total expense ratio of any funds of funds they invest in but also the fees of the underlying hedge funds. The better a FoHF’s performance, the higher the TER will be because of the impact of the underlying manager’s performance fees.
Says Hellegouarch: “It will have an impact on the industry. For our flagship fund, the institutional share class TER is only 0.93 per cent because of the fund’s size and because we don’t apply any performance fee. TERs that include fees of underlying funds should not be the primary concern when investing in FoHFs.”
The bank remains committed to the FoHF model and has developed an institutional-grade organisationalinfrastructure. “Someone who started investing in FoHFs recently might have good reason not to be happy despite the provider chosen, but someone investing for 10 years has clearly benefited and remains faithful to us,” Hellegouarch says. “It’s difficult to manage the current market volatility and the wide dispersion between the best and worst performing managers we saw last year if you choose to invest with managers directly.
“Last year we launched the first real estate Sicav in Switzerland, and we just launched the second sub-fund. Rather than rotating from one strategy to another, Swiss investors are looking for new solutions like this.”
Gilbert Hellegouarch is head of business development for the investment funds department at Banque Privée Edmond de Rothschild S.A.
Please click here to download a copy of the Hedgeweek Special Report – Switzerland Hedge Fund Services 2012
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