Pierre Baudard, managing director of Oddo Alternative Investment, says the group’s new merger arbitrage fund benefits from the management team’s strong knowledge of the mid- and small-cap equity universe, which represents a significant part of the fund’s portfolio and makes possible a more diversified spectrum of between 60 and 120 positions.
GFM: What is the history and background of your company, principals and funds?
PB: Founded in 1849, Oddo & Cie is an independent, family-owned financial firm based in Paris, and has two major businesses, investment banking and asset management. Oddo Asset Management is a wholly-owned subsidiary of Oddo & Cie, and currently employs 99 people. The firm manages EUR15bn in 70 investment vehicles, mainly in equities, balanced management, multi-management and convertible bonds.
The Orsay Merger Arbitrage Fund focuses on merger and acquisition arbitrage in developed equity markets worldwide, regardless of capitalisation size. The fund was launched May 31 this year and seeded by the Oddo group with EUR100m.
The fund’s three portfolio managers previously managed investments on a proprietary basis for Banque d’Orsay, using merger arbitrage strategies since 1998. Oddo bought Banque d’Orsay from Westdeutsche Landesbank in 2010. The team applies the same strategy in the new fund.
Christian Fleury has been head of Banque d'Orsay’s M&A arbitrage team since 1998, having previously overseen the implementation of this strategy at Schroder Wertheim, then Donaldson Lufkin & Jenrette. Karin Benguigui joined Banque d’Orsay in 1999 as an M&A arbitrage trader, having previously worked for the equity departments of State Street Global Advisors then Donaldson Lufkin & Jenrette. Sofiane Cheraba, who joined Banque d'Orsay as an M&A arbitrage trader in 2006, was previously a trader at ABN Amro.
The original team has been strengthened with an assistant portfolio manager, three compliance officers and risk management professionals, and one investor relations specialist. The Alternative Investments department is headed by myself.
GFM: What is the structure of your fund?
PB: It is an Irish Qualifying Investor Fund, structured as an umbrella fund, and the various share classes are listed on the Irish Stock Exchange. The investment manager is registered with the France’s Authorité des Marchés Financiers and with the Irish Financial Authority.
GFM: Who are your main service providers?
PB: Legal counsel is Matheson Ormsby Prentice, our prime broker is Goldman Sachs, the fund’s administrator is Bank of New York Mellon and its auditor is Deloitte, all in Dublin. We expect to have two prime brokers in the future.
GFM: What is your distribution strategy and targeted client base?
PB: The fund currently has three shareholders and EUR102m in assets under management. We expect our clients to be mainly pensions funds and family offices from countries and regions where investors are eager to invest in hedge funds, such as Switzerland, the UK, Scandinavia and the Middle East. A 70:30 split is anticipated between institutional and private clients should be 70/30. As the fund’s capacity is limited, we don’t expect to use distribution channels other than direct contact between Oddo Asset Management and investors.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
PB: Spreads on existing and new offers widened in July and August, enabling us to build several large positions at attractive levels. No deal in the portfolio was cancelled, and deals set to close in the first weeks of August did close as expected. Furthermore, announced new deal flow has remained significant. Globally, we expect this period to see the low downside capture of the strategy versus equity markets.
GFM: Please describe your investment process.
PB: The investment universe consists of all announced mergers and acquisition of stocks listed in developed equity markets. Once an offer is made public, the portfolio managers analyse the terms of the offer: tender or share exchange, conditions of approval, type of acquirer, voluntary or mandatory, friendly or hostile, in order to assess timing, regulatory, financing, shareholder and any other risks.
The team then estimates the length of time to close, and evaluates the risk/reward of the deal and the price at which it is worth setting up a position. If the investment decision is taken, the target position size is determined, and price orders are given.
New flow is constantly monitored to reassess deals’ risk/reward characteristics. Positions may be sold before completion of the deal if the risk/reward balance becomes less attractive, or in the event of a deal failure. The portfolio is hedged against currency risk only.
GFM: What is your approach to managing risk?
PB: The first level of portfolio risk management is embedded in the fund management process, by permanent monitoring of each deal and all related news and regulatory filings. Independent risk management consists of two people, including Jérôme Aubourg, who previously monitored risks of proprietary trading at Banque d’Orsay and who reports directly to Oddo Asset Management’s chief executive, Guido Mundt.
Four guidelines – individual positions capped at 10 per cent of net asset value, S&P industry groups limits, a list of eligible countries limited to markets with legal and operational reliability, and not holding more than 5 per cent of a company – are monitored daily.
At the portfolio level, Riskmetrics and specialist internal merger arbitrage risk modelling tools are used to calculate standards risk measures as value at risk and ex-ante volatility or to conduct stress tests. Long exposure is limited to 300 per cent of the equity, while the gross exposure, comprising both long and short positions, is limited to 400 per cent.
GFM: How has your fund performed?
PB: The fund delivered 1.29 per cent in June and 0.65 per cent in July. We have not set an objective since it depends on market conditions, but we expect to return upward of 8 per cent annually.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
PB: We expect a rise in the number and total value of new deals, since companies are cash-rich.
GFM: How will these developments affect your firm and the performance of your fund?
PB: The fund’s capacity is directly related to the volume of merger and acquisition activity. Depending on this volume, our capacity is between EUR200m and EUR500m.
GFM: What do investors currently expect from managers, and how do you deal with those expectations?
PB: Investors expect operational excellence, which we believe we achieve through the quality and independence of our providers and the independence of our compliance and risk functions, as well as identification of potential conflicts of interests.
We also believe investors need transparency and liquidity. The fund fulfils this requirement, as we invest only in listed equities, and we have aligned redemptions rules to the portfolio liquidity, including the absence of side-pockets.
Finally, investors need to understand what they invest in: we will not invest in other strategies. If the deal flow diminishes, we will close the fund to new investors and return money to existing ones rather than explore unknown strategies. Furthermore, sticking to M&A arbitrage offers lower correlation to equities than event-driven funds, a characteristic welcomed by investors.
GFM: What differentiates you from other managers in your sector?
PB: We offer strong knowledge of the mid- and small-cap universe, which represents a significant part of the portfolio. Our larger universe allows us to be more diversified, with 60 to 120 positions most of the time.
GFM: How do you view the environment for fundraising over the coming 12 months?
PB: It is challenging, since ours is a new fund.