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James Williams, Hedgeweek

Closer investor-allocator alliances recalibrate the investment process

There can be no doubt that regulation is raising the costs of doing business for Swiss hedge fund managers. Any opportunity to consolidate operational costs with their service providers is surely welcome as revenue margins continue to get squeezed.

UBS Fund Services recognised this last year, when the revised CISA came into effect, and began to leverage its onshore administration services in Switzerland to help managers running both onshore and offshore fund structures; in effect acting as the primary hub.
Not only is UBS able to support managers in establishing the management company for a Swiss-domiciled product, but also with respect to risk management and legal support. It has a long history in providing effective governance, and with regulation and investor demands for transparency, having the right systems and controls in place is necessary.
“We are highly satisfied by the response we’re getting in the market,” comments André Valente, head of UBS Fund Services, Switzerland. “Our specialists are busy advising potential clients with respect to possible models and product structures and from our point of view, the investments we have put into the development of these capabilities were definitively justified.”
Swiss-based managers have two main objectives when working with their fund administrator: firstly, that they have access to a wide range of services at a competitive price. Secondly, that they are supported by an expert team with full comprehension of regulatory developments and their potential impact on alternative fund managers.
“UBS is a nice fit in view of our global remit,” comments Valente. “We have competence centres in the major alternative domiciles and a large network of specialists. We provide the full set of required multi-jurisdiction administration services, including advisory, product and legal development as well as white labelling. If you add our brand, substance, strong compliance approach as well as technological expertise, you get a credible value proposition.”
That ability for local managers to avail of a strong global network prompted BNP Paribas Securities Services to establish a depositary banking business in Zurich this January. With more than EUR900bn assets under depositary, the French bank is one of the largest depositary businesses in Europe.
By opening in Zurich, Swiss managers running local funds can benefit from its expertise in offering pan-European depositary services including cash monitoring, asset safekeeping and oversight; these are three core duties that any non-EU manager wishing to market their alternative investment fund into Europe via private placement will require an appointed depositary to perform under the AIFMD.
“The ability to offer fund servicing for Swiss-domiciled funds was the missing link in BNP Paribas‘ ability to propose to managers a combined fund servicing solution for key domiciles such as Luxembourg and Ireland. We are now in a unique position of having the ability to offer our clients fund servicing capabilities across all key fund domiciles. In line with local market trends, the ability to provide local depotbank services to managers handling Swiss-domiciled funds is critical to our strategy to service both asset owners and asset managers,” says Jeffrey Campbell, Head of Sales to Swiss Asset Managers at BNP Paribas Securities Services.
One depotbank mandate has already been won from one of Switzerland’s largest independent fund-of-fund managers with Campbell confirming that “we are currently in discussions with other managers interested in launching new Swiss fund products and we plan to launch at least two more Swiss funds before year-end”.
Dealing with the operational and regulatory complexities of fund management is par for the course for fund managers. There’s no getting away from it, but the more heavy lifting their custodians and administrators can do the better. What is becoming equally challenging, however, is remaining vital and effective to the increasingly sophisticated needs of institutional investors.
Now that Swiss managers are required to be licensed with FINMA, there is a distinct possibility that the amount of institutional money will increase to alternative fund managers. To succeed, a high level of customisation with respect to portfolio construction is needed by today’s fund manager. Performance remains a key requisite but transparency, outcome-based solutions and effective reporting are all being added to the mix.
Nicolas Campiche, chief executive officer of Pictet Alternative Investments, notes that the level of service clients now expect has dramatically changed.
“You need to provide more transparency and better reporting. Swiss regulation, for example, is requiring pension funds to publish the TER for all of their investments. It implies to aggregate all the fees charged by the underlying managers on a look-through basis. We’ve developed such a capability but it takes a lot of work,” confirms Campiche.
As for stipulating more precise investment outcomes, Alexandre Rampa, co-head of hedge fund investments at Syz Asset Management, notes that some larger clients continue to segregate their alternative assets into bespoke mandates and move away from commingled funds in order to have a more well defined portfolio.
“For example we manage an account for a large UK insurance company. They want a specific target in terms of excess returns over Libor and limited correlation to equities and fixed income.
“You can only do that in a bespoke mandate, not a commingled FoHF where different investors have different sensitivities. Portfolio design – understanding clients’ needs, constraints and target returns – is becoming very important and requires a specific approach and methodology that we’ve developed internally,” says Rampa.
Currently, Pictet Alternative Investments has seven commingled FoHFs with approximately USD2.5bn in assets and a range of segregated mandates with approximately USD5.5bn in assets. Campiche says that whilst the firm’s asset base has remained stable since 2008, “the mix has changed quite significantly with respect to the proportion of commingled assets versus segregated assets. In 2008, it was two-thirds commingled whereas today the opposite is true.”
“In 1991, when we started investing in hedge funds, we only managed customised portfolios; it has always been a significant part of our business. Today, some clients come to us to build a customised fund structure – maybe a Lux-domiciled SIF (i.e. a fund of one) – so having that internal capability is very useful,” adds Campiche.
Nicolas Rousselet, Managing Director and Head of Hedge Funds at Unigestion, which has approximately USD2bn in FoHF assets, believes that investors are still generally interested in multi-strategy mandates rather than specific strategies but want closer involvement with managers. They want, he says, to better control the investment process.
“The definition of multi-strategy has also changed. It used to be a case of having everything all the time. Now it’s a case of having anything at any time. A multi-strategy mandate might have exposure to ten strategies but rather than being invested in all ten at the same time they might only have exposure to five or six strategies at any given time.
“More opportunistic and less diversified; that’s how investors’ mindset has changed.”
Within that multi-strategy mix, investors are looking for new yield opportunities, especially within fixed income where the threat of inflation and rising interest rates in developed markets looms large. One alternative credit strategy gaining traction is private lending. As European banks pull back on lending to SMEs, institutional investors are stepping into the breach to originate loans; a pattern that has long dominated in the US where its capital markets are that much bigger.
“Hedge fund and private equity managers are starting to develop hybrid strategies that are going further out on the liquidity curve. This type of asset-based lending is never going to be a pure hedge fund activity because there is too much of a liquidity mismatch. It makes more sense to develop a hybrid structure with a three- to five-year liquidity lockup. At Unigestion we have brought both our hedge fund and private equity teams together to work on the design of an offering in the private debt space.
“We have a long list of potential managers we would be happy to work with and we are speaking to some institutions to see if and how they might wish to deploy capital in this space,” explains Rousselet.
Syz Asset Management’s Rampa says that private debt funds have the potential to capture double-digit returns but notes that whilst the market structure in Europe is starting to change (with respect to reduced bank loan origination) it will take time.
“It’s an interesting opportunity and we see this as a long-term trend. We currently have a couple of managers who are partly involved in this area but not 100 per cent of their book because of liquidity constraints. We have identified a series of big name candidates running debt funds that we might allocate mandates to this year,” states Rampa.
One strategy that seems to be garnering favour among Syz Asset Management’s investors is market neutral. The firm already runs a UCITS-compliant single strategy fund under its OYSTER range, which has returned 14.7 per cent over three years to the end of January 2014. In response to investor demand, earlier this year it launched a more aggressive version of the fund to give investors twice the leverage. Named the OYSTER Market Neutral Plus fund, it is managed by Giancomo Picchetto and Stefano Girola who also run the existing strategy out of the bank’s Lugano office.
One fund that is designed to protect investors, with respect to fixed income, in all weather environments (stable, inflationary, deflationary) is the Vontabel Fund – Absolute Return Bond managed by Paul Nicholson. The fund, which has grown to approximately USD450m in AuM, aims to produce investment grade-like returns “but in the event of deflation or inflation we aim to produce excess returns; that’s the value proposition,” says Nicholson.
This is achieved through running a series of flexible liquid strategies in credit, rates and FX to generate alpha in the fund; last May and June, for example, when equities and fixed income fell, the fund built a short position in credit by buying protection at a time when bond yields shot up from 1.6 per cent in May to 2.99 per cent in September.
“The trend following element to our investment strategy is key. As trends develop (i.e. credit spreads continue to tighten) we’ll stay long credit. Last summer the fund outperformed because of the strong trend that developed (rising spreads) and we went short. We tend to use medium-term trend signals. What that means is that if credit spreads start to widen our current long position in credit will start to see losses.
“The signal will, at that point, move from ‘long’ to ‘neutral’. Should the trend continue and strengthen, the signal will move from ‘neutral’ to ‘short’. What we don’t do is hold a long position if the signal is short; we aren’t contrarian investors,” explains Nicholson.
That ability to allocate to absolute return fixed income funds is becoming critical for investors who need strategies that can react both long and short to deliver potential outperformance and which provide genuine diversification in their fixed income allocations.
“Investors are looking for diversification if and when the rates and credit cycles turn. We are seeing continued inflows into the fund and I think that’s set to continue because the dilemma of low yields and tight spreads is not going to disappear. We offer an all-weather fixed income investment, which has the flexibility to adapt to changing market conditions,” opines Nicholson.
Unigestion also uses a quant process, primarily to overcome the deluge of data that has, in recent times, corrupted long-term investors into taking a more short-term view of investing. As Rousselet comments: “We try to maximise the good ideas; how much can we make on good ideas and how little can we lose on our bad ideas? When you pick hedge fund managers you need to be focused; you don’t have that many shots at getting it right. When you do, you really need to make it count.
“We integrate clients into our robust investment process. Investors are almost brainwashed by the amount of data today so we have a quant process that tries to address this problem. Not to provide answers but to equip us with the right questions to ask. It supplements our decision making process.”
Moving closer into the investment allocation process is helping institutional investors – both in Switzerland and globally – build closer relationships with asset allocators. Couple that with the greater level of transparency and regulatory oversight that alternative fund managers need to abide by and a quick reading of the tea leaves would suggest that institutional inflows into alternatives will become more meaningful. And also more targeted. 

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