By Eric Bissonnier & Francesco Samson –
Institutional investors remain, to some degree, nervous allocating to bank-owned MAPs because of counterparty risk concerns. Admittedly, some are now using independent administrators, but LumX uses a completely open architecture. Explains Bissonnier: “We built our platform from an asset manager’s viewpoint. It’s not a profit centre for us, it’s a tool that has to be as efficient and flexible as possible. All the service providers we use are independent from each other.”
Samson says that complete platform independence achieves two goals: “Firstly, you avoid some of the conflicts of interest that might arise if you had economic interests in the platform. Secondly, by getting the best deal possible for each client it allows us to offer an economic structure for our clients.”
Platform independence is a clear benefit to large investors who want to build their own infrastructure solutions, and while Samson confirms that a few clients have taken this approach, Bissonnier states: “From what we’ve seen it requires USD1.5-2billion to allocate for it to make sense.”
Becoming better managers
Credit and distressed strategies are becoming a strategic focus on LumX and are likely to rise from one third to around half the total strategies going forward. In part this is due to good performance in 2012. But it’s also because credit strategies, in a managed account structure, are enhancing EIM’s portfolio management expertise thanks to the enhanced transparency the structure provides.
In offshore funds, if a credit manager suffers a drawdown and investors start redeeming, the lack of transparency means that investors like EIM will likely also redeem, even though it might unwise to do so.
“In a managed account, you can price the book every day so you know exactly what’s going on. That helps us make more informed decisions. Also, because we’re not commingled we don’t have to worry about other investors redeeming,” says Bissonnier. This is helping EIM to maximise returns in underlying strategies.
Building specific investment mandates
LumX allows EIM to approach managers with specific investment goals in mind. The objective here is not to constrain the manager’s trading style, but rather to build a solution that focuses purely on a sub-set of the strategy. This is easier for systematic strategies like CTAs.
Bissonnier illustrates the point by referring to an inflation solution they’ve built that will capture a downturn in US treasuries and bunds, noting that there are no funds in the market that offer such a solution.
“We chose a trend-following CTA. The solution is part of their overall implementation; we’re just using a specific part of it to capture the fall in US treasuries. We’ve done something similar for a long/short credit fund, building a solution that only captures returns from the short side of the book.”
Investing in emerging talent
LumX invests in a number of large managers, but given the alpha generation capabilities of smaller, emerging managers, that ratio is falling. In some cases, says Bissonnier, EIM will happily invest USD50million, even with managers only running USD50-100million in AUM because the managed account structure allows them to do so.
“Around 25 per cent of LumX is invested in these managers. Going forward, emerging managers will continue to represent a clear opportunity for the platform.”
Concludes Samson: “The platform is really a facilitator that enables us to capture the diversity of the hedge fund space in a controllable fashion, and then build solutions that leverage that diversity.”