Hedge funds drawn to France despite stringent regulation

Paris-based hedge funds are a small but diverse group increasingly gaining recognition. Madison Marriage speaks to new and established France-based hedge funds on the Gallic environment for alternative managers

Most of the Parisian investment management community is based in the 8th arrondissement, not far from the commercial centre of the Champs-Elysées and Place de la Concorde.

They have resisted the French financial world’s shift towards its newly established business centre, La Défense.

While La Défense now plays host to major institutions from Société Générale to Électricité de France (EDF), a handful of hedge funds stayed behind, quietly operating a range of different strategies.

Parisian hedge funds are united by their minority status, but divided by the variety of their strategies.

They are small in number and their time well occupied tackling the difficult investor and regulatory environment in France.

Orsay Merger Arbitrage is relatively new to the Parisian hedge fund scene, having launched in June 2011.

The hedge fund was seeded with €100m by Oddo Asset Management, a subsidiary of Oddo & Cie, which bought out Banque d’Orsay in October 2010.

It runs a merger arbitrage strategy based on the proprietary trading activity previously run by the bank for 13 years.

Christian Fleury is head of the fund’s investment team and was head of the risk arbitrage desk at Banque d’Orsay since 1998.

With 19 years of trading experience, he has analysed more than 15,000 mergers since the beginning of his career. 

According to Fleury, there was never a question of basing the fund anywhere but Paris.

The Orsay team was already based in Paris following Banque d’Orsay’s acquisition. Fleury says it is common for asset managers just starting their careers to work in London, primarily because the salaries are higher, but they often move back to Paris when they have a family and want to send their children to French schools.

Risk control

Although Orsay Merger Arbitrage has adopted the Irish qualified investor fund (QIF) structure, Paris remains its number one location, as the French market regulator AMF allows France-based funds to take the QIF format.

They chose a QIF over the commonly selected onshore structure for hedge funds, Ucits.

Fleury’s team believes QIFs offer better risk controls as there is no discrepancy between liquidity of assets and capital, they are more cost effective due to the marginal use of contracts for difference (CFDs) and they offer reduced counterparty risk due to the limited use of derivatives.

The most obvious appeal of being based in Paris is establishing strong relationships with French investors.

Fleury says Orsay Merger arbitrage is in contact with a number of investors in Paris and has gained subscriptions from two French investors (a private bank and a private investor) raising total assets slightly, to €104m.

The hedge fund has experienced a busy initial three months with M&A activity in the software, capital goods and energy/petrol sectors.

Deals that have proven particularly rewarding for the fund include Volkswagen taking a majority stake in German heavy truck maker MAN and BHP Billiton’s buyout of US energy company Petrohawk, both in July.

During a bidding process the fund either takes a long position in the target company’s stock (cash offers) or takes a long position in the target company’s stock and an offsetting short position in the acquirer’s stock (exchange offers).


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