The Edmond de Rothschild group reshuffled its alternative multi-management unit in the second half of 2017. InvestmentEurope finds out more.
Rapprochement between the alternative and long-only multi-management units of Edmond de Rothschild (EdR) at the start of 2017 was motivated by bolstering fund research capabilities.
Duly done, the move increased to 20 the number of professionals dedicated to EdR’s fund manager research.
Last summer, EdR hired hedge fund specialist Pierre-Olivier Masmejean (pictured) to head its French, Luxembourg and Swiss alternative funds of funds. With 30 years of professional investment experience, including a previous eight-year stint as chief investment officer of Omega Asset Management, he already knew the house.
Today based in EdR’s Geneva headquarters, Masmejean was the managing director and chief investment officer of EdR’s multi-management business in Paris from 2002 to 2005.
Joining him as of last October was Agnès Krafft, with the alternative multi-management team also including Félix Laurin, Pascal Mercier and two other members.
The alternative fund research is coordinated and overseen by Roger Guerra, head of Fund Research and senior portfolio manager at EdR.
“The alternative multi-management unit remains a key asset to the Edmond de Rothschild group. It has reported a constant level of assets under management in recent years. Nevertheless, we stressed a scissor effect among our institutional clients coupled to a slump in assets on EdR’s private banking segment,” says Pierre Bonart (pictured left), group head of Multi- Management at EdR.
“But EdR maintains strong interest in alternative multi-management and given the current asymmetrical risk reward environment, the group shows willingness to increase positions in the alternative pocket again,” he adds.
Bonart explains the group looks for asymmetrical alternative funds delivering high yields and alpha decorrelated from traditional asset classes. In the case of absolute return strategies, he argues that they can be followed both for long-only and alternative multi-management selection.
“Liquidity is a criteria we consider when assessing in which category some absolute return funds could fall. Less liquid funds are rather scrutinised by the alternative multimanagement unit,” he explains.
Masmejean has been a long-time alternative investor. EdR’s head of Hedge Fund Investments suggests that the number of performing hedge funds is shrinking.
“The sector faces a liquidity issue, but hedge fund research has not changed fundamentally. We rather apply a bottom-up approach to our alternative fund research. Our sensitivity to market environment changes remains low,” he says.
Masmejean stresses it is harder than 10 or 15 years ago to find an outstanding hedge fund still open to qualified investors. But, given EdR’s size, it remains easier to access these funds than for large institutional investors.
The group’s alternative multimanagement unit runs concentrated portfolios with a limited number of positions, all being high-conviction and outperforming funds.
In Masmejean’s view, concentrating portfolios does not mean taking more risk but finding a way to gather adequate managers with different, decorrelated strategies. Two decades ago, it was easier to identify successful hedge fund managers, he reckons.
“Nowadays we can thoroughly analyse a fund’s performance and its alpha generation with a variety of quantitative tools and that results in a more sophisticated fund selection process.
“Also, it is as important to identify the turning point of hedge fund managers’ cycles in order to redeem early as it is to identify them in order to be among the earliest investors. Portfolio concentration is synonym of coherence for us,” Masmejean continues.
He says a major risk for the hedge fund sector dwells in a concentration phenomenon: when hedge funds use similar models relying on almost the same processes.
A current trend remains the increasing use of algorithms and other artificial intelligence-related tools in the processes of hedge funds.
EdR’s group multi-management head Bonart notes that the share of systematic investments is constantly on the rise in the present alternative fund landscape.
“A number of players, such as CTAs managers, have been ahead of the trend for several years. We observe that new players are also emerging in this space.
“We maintain a critical stance over these new instruments (algorithms, deep learning…), we are not sceptical, but it is our daily work to understand these new approaches and their way of generating alpha. This new type of alternative fund can generate alpha indeed, but not all managers have the knowledge and skills for handling the techniques behind these strategies.
“Strategies relying on AI or deep learning-driven algorithms with no track record are excluded from our selection scope. It needs to have a track record because that constitutes a tangible and a checkable fact,” Bonart says.
Masmejean explains that the team has begun to look into strategies that rely on artificial intelligence-driven algorithms, machine learning or Big Data.
“The trend is on, but this does not mean that we will systematically be exposed to it and strategies derived from it. We have to ensure that there is a real fund management process behind these strategies and an ability to generate repeatable and sustainable alpha. We look at all alternative segments and do not passively follow the industry’s fashions,” he adds.
EdR’s head of Hedge Fund Investments assesses that manager selection will be much more important as only a few managers will demonstrate significant skills in the AI/Big Data space.
Alternative funds have had a couple of tough years says Masmejean, who estimates they still performed better in 2017 than in previous years. Moreover, he spots that a number of investment professionals are considering asset reallocations to alternatives in coming years.
“I am quite optimistic going forward on the outlook for alternatives as investors want a slice of decorrelated alpha in their portfolios. It is wrong to say that hedge funds are dead and that funds of hedge funds are set to vanish. The good news though is that the remaining competition will not be strong,” Masmejean suggests.
EdR’s head of Hedge Fund Investments believes that the consolidation trend occurring in the fund of hedge funds universe will result in the coexistence of two types of alternative multi-management businesses.
The first will be large funds of hedge funds managing assets for large institutional investors that will struggle to generate a sustainable performance. The other will be funds of hedge funds like these EdR runs, targeting high net worth individuals and smaller sized institutions with more appetite.
“We do not fight for very large institutional mandates as we are not structured for this and we do not want our portfolios to yield only 2-3%,” Masmejean concludes.
This article was first published in the February 2018 edition of InvestmentEurope.