Strategies need to exhibit a structural competitive edge
LOIM, 1798 Alternatives | 1798 Fundamental Strategies Fund: Best Multi-Manager Hedge Fund (Multi-Strategy) – Lombard Odier Investment Managers established its own alternatives business, 1798 Alternatives, in 2007 and is headed up by Jean-Pascal Porcherot (pictured). Since inception, its AUM has grown to USD4.9 billion within liquid alternatives and hedge funds. More specifically, USD0.9 billion is held in a multi-strategy product that invests in a range of equity, relative value, tail risk, and event driven strategies across a number of investment styles.
At 1798 Alternatives, the focus is identifying fund managers in niche strategies and supporting them by providing an institutional class infrastructure, as well as helping with vehicle structuring, capital (seed, private bank, distribution), risk management oversight and institutional credibility (in the eyes of investors).
“In addition to finding top investment talent, we are firm believers that strategies need to exhibit a structural competitive edge,” explains Porcherot. “We often find that many strategies demonstrate cyclical tailwinds to their return profile, leading to confusion between investment talent and attractive returns over a relatively short-term.”
He says a key part of the firm’s investment process is to understand what structural edge our strategies may have and how resilient and robust those sources of alpha are over various market environments.
“We believe smaller, more niche managers are better positioned to deliver alpha in the current market dynamics,” continues Porcherot. “One example of the structural edge we seek are lower capacity strategies that face little competition in niche market segments that have high barriers to entry. We also like strategies that emphasise trade construction around arbitrage opportunities or ones that have some informational edge due to innovation.”
Porcherot uses a sport analogy to explain the firm’s approach to manager selection. “I would say we like to pick division I players and have them play in division III games,” he says. “We are in it to score goals. We do not look to hire a portfolio manager who will make front page headlines for calling out the next big market bubble. We love pedigreed managers that have proven track records in a less competitive market segments and attract little attention.”
The 1798 Alternatives house style is typically not to invest in directional strategies. In that respect, this year’s volatility has had a minor direct impact on the portfolio.
“Most of our long/short strategies are predominantly dependent on idiosyncratic factors. Our relative value strategies tend to be very different from the classic approach: buy long lower quality less liquid, short higher quality more liquid, gaining carry and seeking convergence. We seek mis-pricings so extreme that we can structure trades that behave more like options, yet tend to have no negative carry. We can do this because markets tend to be more and more siloed. As a result our best month ever was March as many of these ‘options’ became profitable,” confirms Porcherot.
Porcherot stresses the importance of fostering a culture of collaboration between its portfolio managers as a hallmark of its success, to date.
“Rather than an environment where PMs feel threatened to hide secret alpha, we try to promote constructive discussion to help them find incremental alpha from sharing their edge and information with each other. For example, we recently had a group call to share their outlook on the US election and how to best hedge a tail event.
“Culture starts at the recruiting stage, but we also seek to create an environment that rewards collaboration,” Porcherot concludes.
CEO of 1798 Alternatives, LOIM
Jean-Pascal Porcherot joined the firm in 2009 and became CEO of 1798 Alternatives at LOIM in 2014 and a limited partner of the Lombard Odier Group in 2018. His previous roles include: managing director in the equity capital markets team at Deutsche Bank; M&A specialist in the TMT sector at Lazard Frères. He began his career in 1997 as an M&A analyst at JP Morgan. During his investment banking career, Jean-Pascal advised numerous businesses, private equity funds and governments across Europe.
Jean-Pascal earned a master’s degree in financial markets from ESSEC/Pierre et Marie Curie in 1995 and he holds a degree in engineering from Ecole Nationale Supérieure des Télécommunications in Paris.