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Nicolas Gomart : «It is inaccurate to say that the alternative investments industry has not been able to provide expected non-correlation»

Nicolas Gomart, deputy CEO of OFI-AM, in charge of alternative management, answers our questions about the hedge fund industry....

Article also available in : English EN | français FR

Owned by Macif and Matmut, OFI Asset Management has been specialising for 40 years in asset management for third parties with 20 billion euros of assets under management in late 2009.

Nicolas Gomart, deputy CEO of the group in charge of alternative and multi-management investments, answers our questions about the industry

How much of the OFI group is dedicated to asset management ?

The value of assets under management portfolio has reached about 1.7 billion euros. This amount is spread between three activities:
- direct alternative investments (400 million euros) with a dedicated expertise, notably in the area of credit arbitrage, volatility, correlations, mergers and acquisitions, long/short
- alternative multi-management (1 billion euros)in the shape of opened or dedicated fund of funds.
- incubation activity (200 million euros) combined into a New Alpha structure in 2003, which has established itself in France as a reference in the domain of hedge fund incubation.

Could you tell us in more detail, about the activities of New Alpha ?

New Alpha allows institutional investors to qualify for investment, via a fund of funds, in the incubated funds which would be difficult to access without a costly process of "due diligence" and to profit from the success of incubated fund during the investment period (2 or 3 years) and to participate in the success of the incubated management companies (equity capital or revenue sharing) for 6 to 8 years

What would your expertise give, in terms of performance, in the domain of alternative multi-management applied to funds invested in traditional asset classes

Firstly I would like to point our an important point on this subject. In OFI Asset Management, there is an activity of traditional multi-management investing in traditional assets. About 2 billion euros are managed under this department

But to return to your question, I would say that, as far as multi-management goes, the added value would be seen more on the level of the tactical allocation of portfolio and, secondly, in the selection of managers. In the case of traditional multi-management, this added value will probably be more evident on the level of the allocation process, although to a lesser extent than the management of diversified investments through direct lines, as the selected funds can be slightly benchmarked. On the other hand, as far as alternative multi-management is concerned, this added value stands for the selection of managers. This is the reason why, at OFI MGA, our subsidiary company dedicated to alternative multi-management attaches a great amount of importance to the selection of managers. For this activity, our management team does quantitative and qualitative analysis by attaching great importance to the quality of the "due diligence" and getting to know the selected managers (more than 300 visits each year) to offer access to better hedge fund managers around the world. "Risk management" is applied at each step in the process.

During the financial crisis, most of the indices of alternative management showed a strong correlation with stock markets direction or credit spreads widening. Is one still able to speak of "absolute return" for alternative strategies with such disappointing returns ?

In 2008, the sudden drying up of liquidity of certain markets in the face of sales by bankers, combined with high leverage in the portfolios led to the degradation in the performance of some alternative management strategies particularly a large number of arbritage strategies necessitating leverage.

It is, however, inaccurate to say that alternative asset management as a whole, has not been able to bring the "non-correlation" that was expected. Some strategies have succeeded, in fact sometimes remarkably, in holding their own as managers CTA (note : "Commodity Trading Advisors", macro, neutral equity market, or arbitrage of mergers and acquisitions. The global indices have made them significantly better than the equity markets and convertible bonds.

However, care should be taken in future not to "only" invest in management alternatives, but also accompanied it with, or substitute it by traditional assets. To put it schematically,

- some strategies have a "short put" profile or "carry" : these are arbitrage strategies. They make a portfolio with low-risk assets, more dynamic.
- others are more "long call" : these are trading strategies (CTA, macro for example) The help reduce risk in a portfolio of risky assets and can therefore be used in addition to an equity portfolio.
- others have a more symmetrical portfolio : those are long/short strategies. The can be used in place of portfolios investing in equities.

What type of strategies do you favour for 2010 ?

In 2010, we tend to favour hedge funds whose performances have suffered during the financial crisis to the detriment of those which on the contrary, have been able to hold their own in the game. As a result, for the year 2010, our choices lie more with "distressed" type strategies or merger-acquisition arbitrages and convertible bonds.

France, despite the excellent training and scientific knowledge of its financiers, seems to still trail behind in the field of alternative management. The French hedge fund market is not very visible and largely behind in terms of the Anglo-Saxon reputation for alternative funds. How would you explain this ?

This analysis is difficult to contest, it is difficult to give a categoric answer to this question. We can, however, attempt a few explanations :
- For a long time a tax and favourable regulatory environment in Europe favoured development in the London Marketplace which benefited, moreover, from historical advantage in financial activities. London has thus become the central point for the gathering of players of the industry in alternative management. Managers, therefore find on the Marketplace, the service providers that they need, (prime brokers, lawyers, fund managers) a culture of Anglo-Saxon operation, which is exactly that of the hedge fund industry without any bias or unfavourable media opinion. A certain number of well-renowned hedge funds have been created in London by the French.
- Even if the AMF spent worthwhile efforts during the 2000’s to adapt French law of the OPCVM to favour alternative management, the regulations by which French institutional investors are bound, are not sufficiently evolved, not allowing steps for these investors to invest as much as they would have liked in this type of management and as a result, French managers rely on a domestic market large enough in which to develop

What do you think of the recent European developments in regulation ?

Brussels has recently proposed a new directive to regulate the alternative funds and funds of capital investment with the aim of giving the EU a new architecture of financial supervision. It concerns the directive AIFM ("Alternative Investment Fund Manager") which could be adopted in the summer of 2010. These new developments are concerning, in that one is moving towards "reining in" alternative management, while the latter has been more a victim of financial excess. Even if the effects of its implementation are still difficult to grasp, before getting the final version, the hedge fund landscape should be profoundly changed on two principle aspects :
- Firstly from a commercial point of view, from the limitation of investments by the investors based in Europe on the domestic funds outside of the EU and in particular the offshore funds.
- next, from a financial point of view from a restriction of leverage or even the obligation of declaring short positions on the stock market for example, which can be problematic in some cases.

Next Finance April 2010

Article also available in : English EN | français FR



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