Transparency key to fund solutions for institutions
Full transparency is not just important but central to the investment philosophy at Lombard Odier Investment Managers, which offers nearly a dozen internal single-strategy hedge funds with close to USD3bn in assets. The largest of the funds, which are marketed under Lombard Odier’s 1798 brand, is a global long/short equity-focused fund with USD1bn under management.
In 2008, the industry lost money because of correlation between asset classes and illiquidity surprises. Says Jean-Pascal Porcherot, head of Lombard Odier Investment Managers’ alternative solutions group: “At that time we said that having our own risk management was important, and that’s why we place a lot of emphasis on internally managed hedge funds and the systems that they require. It’s important that clients know what they’re exposed to at any given moment.”
Since 2008, many Swiss institutions have remained cautious about allocating to hedge funds. “Swiss institutions find themselves in a difficult situation,” Porcherot says. “Most of them see value in hedge funds, but views differ on the best way to obtain exposure to these products. Should they go direct and invest in a big single-strategy or multistrategy fund, or should they allocate to external managers, either directly or via a fund of funds? They see merits in both.”
To underscore its expertise and reassure institutional investors, Lombard Odier Investment Managers therefore requires the same level of transparency, control and risk management for its externally-managed hedge funds as it does for its 1798 range. Furthermore, external managers need to migrate to the bank’s managed account platform, the Alternative Managers Platform.
“Our 1798 product range, which is now four years old, offers full transparency, full control of our assets and strict risk management procedures,” Porcherot says. “We seek nothing less from external managers, which in general provide little transparency and limited details on their risk management. It makes no difference whether the portfolio manager is external or internal – they all have to work under the same constraints.”
This solution offers clients the real benefits of direct hedge fund investments along with full control of the assets. “You want your hedge fund managers to take risk and generate returns within predefined parameters that you can monitor,” Porcherot says. “You don’t want to take the business risk generally associated with allocation to external hedge fund managers. The Alternative Managers Platform meets these key criteria and addresses clients’ concerns about the liquidity and accessibility of their assets.”
Although US institutions have generally pioneered the migration away from funds of funds toward direct investment in single-manager funds, Porcherot believes Swiss institutions remain open to both options. Although early participants have already invested time and resources in internalising services previously offered by external advisors, many have not yet done so, and it is important to offer these investors exposure to hedge funds.
“Among the solutions on offer is hedge fund replication,” he says. “Some pension funds prefer to buy products that replicate the returns of a hedge fund universe via quantitative profiling of the past returns of the largest hedge fund indices.”
To meet such requirements, Lombard Odier Investment Managers offers a fund that provides ‘alternative beta’. “This product provides hedge fund-like returns to institutions seeking an open-ended, transparent and liquid fund that is Ucits-compliant,” Porcherot says. “It could also be a temporary solution for some while they decide how best to invest in hedge fund managers, either directly or through a fund of hedge funds.”
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