24 Jul 2015 Alexandre Rampa, co-head of Hedge Fund Investments, SYZ & Co – Oyster Multi-Strategy UCITS Alternative
Alexandre Rampa, co-head of Hedge Fund Investments, joined the SYZ & Co group in January 2006. He holds an MSc in Management (major in finance) from HEC Lausanne, and is also a CAIA and CIIA charterholder.
He co-manages the fund Oyster Multi-Strategy UCITS Alternative alongside Michaël Malquarti.
LUXHEDGE : Could we start with a short presentation of SYZ & Co?
ALEXANDRE RAMPA: SYZ & CO is an important player of the UCITS Alternative industry. Alternative investment is one of the core businesses of the Group, which demonstrates over 17 years of experience managing multi-manager products. Several alternative investment portfolios have been launched since the inception of SYZ & CO in 1996, accounting for €1.2B. Oyster Multi-Strategy UCITS Alternative is one of the first multi-manager funds launched under a UCITS compliant format.
LH: Can you introduce in further details the Oyster Multi-Strategy UCITS Alternative fund for us?
AR: Of course. I co-manage this fund of funds, launched in April 2010, with my colleague Michaël Malquarti (Mr. Malquarti, who joined the group in 2005, holds an MSc in Mathematical Physics from the University of Geneva and a PhD in Astronomy from the University of Sussex, UK). Our target for this UCITS fund is LIBOR + 400 bps, with a volatility between 4% and 6% (lower than the one of the equity market). We don’t invest in a specific zone, and we try to maintain a low correlation to fixed income and equities by using both directional and non-directional strategies, which gather Equity Hedge, Macro, Event-Driven and Relative Value, using a combination of top-down and bottom-up approaches.
The sub-funds are available in three different currencies: EUR, USD and CHF. At the moment, we have €78M of Assets under Management.
LH: Could you tell us more about your philosophy in the management of this fund?
AR: Our philosophy is based on five different approaches:
- Team approach: we apply the 4-eyes principle in our selection process. The idea is to have at least two individuals reviewing the process before taking any action. We are as much focused on avoiding losers than finding winners.
- Understanding true performance drivers: while we acknowledge the past performance, we believe it’s a limited indicator of future performance. We believe that future expected returns will be linked to levels of risk-taking.
- Aims to identify 12-36 months opportunities: the outlook for each strategy will have an impact on the overall portfolio. The expected market environment influences the way we balance our portfolio as well as the overall risk.
- Position size linked to predictability of returns: as we want to avoid undertaking any decisions that present useless high levels of risk, we have larger positions in strategies with more predictable outcomes.
- Diversified sources of returns: we do not rely on unstable correlation matrix but we rather aim at diversifying by asset class, style, manager and culture.
LH: How has your fund performed since its inception more than 4 years ago?
AR: From its inception (16.04.10) until July 2014, the Oyster Multi-Strategy UCITS Alternative fund shows a total return equals to +5.7%. The volatility of the fund stayed, as expected, in the target range, as it is equal to +4.3% annualized. The Fund was down 5.3% in 2011, up 4.0% in 2012, up 8.8% in 2013 and so far this year, down 0.8%.
LH: Can you detail a bit the performance, and especially the strategies that performed best since inception?
AR: Of course. Since inception, the vast majority of the Fund’s total return derives from its Equity Hedge allocation. Relative Value and Event-Driven strategies both added a small positive contribution, while Macro was a small detractor.
Moreover, we managed to limit losses during tough time and thus our maximum drawdown was -3% in August 2011. In comparison, the MSCI World dropped near -10% several time during the last 4 years.
LH: During the first few months after inception, you occasionally experienced negative performance. Could you explain us what happened at this time?
AR: This period can be explained by the 2011 European crisis. At the very beginning, UCITS Alternative funds were essentially managed by European companies, applying European Equity Hedge strategies. Consequently, the Oyster Multi-Strategy UCITS Alternative fund suffered from this bias. During that period, when the European markets started to suffer from the crisis, the fund encountered a negative return equals to -5.25%, in line with the LuxHedge FoF UCITS Index, which lost -5.45% over the same period.
LH: What is the average number of positions in the fund? Have you made recently any notable change in the portfolio allocation?
AR: Usually, the number of positions in the fund ranges between 15 and 20 names. It is worth noting that last year’s turnover was higher than usual because we added strategies we didn’t have so far. For example, we are now investing in two funds that follow a discretionary macro strategy, while we didn’t have such investments in our portfolio last year. We also initiated a new position in Equity Market Neutral. We are expecting to get a 10% to 20% turnover per year in the coming months.
47% of the Oyster Multi-Strategy UCITS Alternative fund is currently invested in Equity Hedge but we plan to reduce this percentage in order to be more diversified: this number should reach 35% to 40%. The weight allocated to the Event-Driven strategy should remain around 15%-20%, while we plan to increase the proportion of the fund dedicated to Macro to 20% (now it stands at 7%). In the same way, 12% of the fund is now invested in Credit Long/Short (including convertible bond strategies), but this number will rise to reach 15%-20%, as we have identified a short biased manager. This allocation will, of course, evolve in a steady manner.
LH: How do you adapt to changes in market conditions?
AR: Our outlook for alternative investments distinguishes five different themes that create investment opportunities. Four of them can be implemented in a UCITS format:
- A higher stock dispersion allows us to get better investment positions in equity hedge and equity market neutral strategies.
- The increasing corporate activity we are facing now enables us to get more possibilities for event-driven strategies.
- The asymmetrical opportunity in credit markets is positive for credit long/short managers and possibly for protection strategies.
- The end of risk-on/risk-off and monetary and economic divergence is a good thing for macro strategies.
- The accelerating financial deleveraging in Europe creates opportunities for credit special situation strategies. This theme is however not applicable in a UCITS format as it requires a longer time horizon.
LH: What are the different steps of your investment process?
AR: We distinguish 2 different steps in our investment process. We first need to define the content of the fund and then the way we will manage it.
- Manager selection: we will differentiate two sub-steps. The first one, called manager selection, gathers the different stages we go through to select funds in which we will invest. The due diligence evaluates all aspects related to the manager, the company, the strategy and the risk management. Then, once we have selected a fund, we regularly monitor them via a disciplined process. This second sub-step basically insures that all aspects assessed during the manager selection phase remain in place.
- Portfolio construction: this phase is split into two sub-steps: first, the portfolio design phase during which we establish the best “neutral” portfolio to reach the return objectives given a certain set of constraints. Then, the portfolio management phase requires us to pay attention to market conditions, to look for investment opportunities, and to follow portfolio guidelines that have been established.
LH: Do you use any methodology (such as inclusion and exclusion criteria) for the selection of the funds to invest in?
AR: Yes, we do. We use a 3-step selection criterion to decide whether we should invest in a pre-determined fund.
- We first begin with a qualitative analysis, which is the most important part of our overall selection criteria. In this step, we usually analyse the sources of returns, the qualities of the team manager, the financial resources of the company, the risk management, and reference checks amongst other factors.
- Then, we continue assessing the fund by conducting an operational analysis, during which we evaluate asset safeguarding, corporate governance, as well as the operational setup.
- We complete our fund analysis with a quantitative examination, but this step is only used to confirm our qualitative judgment. Basically, we identify the benefits that investing in the fund would bring to our portfolio, in terms of risk and return.
Alternatively, if one of the following events occurs, the fund may be excluded from Oyster Multi-Strategy UCITS Alternative fund:
- If a protagonist of the fund management, such as the fund manager himself, leaves the company,
- If the fund’s assets under management (AUM) exceed or fall below the pre-determined range,
- If a style drift occurs, or any specific features of the fund that made us select this fund in the first place changes.
Please note that there is a lot of other “soft” factors leading to a fund dismissal.
LH: How do you set the level of risk, manage it and monitor it?
AR: As I previously said, the level of risk is determined depending on the mandate’s specific objectives and constraints. Then, once the level has been set, we control the risk with pre- and post-trade compliance checks depending on legal and internal constraints. Also, an escalation procedure in case of breach has been implemented, as well as an agreed-upon resolution plan.
We also constantly measure each underlying manager’s performance and reassess the situation if those returns deviate from a pre-determined range.
LH: Could you give us some examples of risk management?
AR: We check the bases of the return of the funds that are in our portfolio and we try to diversify as much as possible these sources. To do so, we diversify our investments in terms of strategy, style, geographical zone, management culture, and location.
Also, guidelines concerning risk management specific to our company have been established and an independent team makes sure that fund managers don’t cross hard limits and respect those guidelines.
After determining the expected volatility and expected return for each fund, we conduct a depth analysis aiming to define those same data for the overall fund. Then, once the fund has been designed, we monitor our results to know whether the risk taken is sustainable with the return objective equals to Libor +4%.
LH: In order to illustrate what you have told us so far, can you give us a trade example?
AR: We recently decided to exclude one fund that was in our portfolio. This fund faced one of the events we discussed earlier. After being one of the most successful funds in 2013 showing impressive return and a rapidly growing Asset under Management (AUM), we noticed a liquidity mismatch between the daily liquidity that the fund offered and some of the positions in which the fund was investing. As a result, we decided to exclude it from Oster Multi-Strategy Alternative UCITS.
On the opposite side, we just added a new fund to our portfolio. So far we had a portfolio with a momentum tilt and we wanted to complete our fund of funds with a more value-oriented non-European large cap instrument. Ivory Capital, a United States based Management Company, recently launched a UCITS fund that met our requirements. We became one of the first investors in this fund and thus benefited from lower fees.
LH: What are the reasons to invest in Oyster Multi-Strategy UCITS Alternative?
AR: First, we benefit from the UCITS format: tighter regulation to protect investors, good liquidity terms (weekly in our case), limited use of leverage, minimum level of diversification ensured, and market decorrelation. Also, the growing universe of UCITS funds constantly offers new opportunities.
In addition, our fund offers various advantages: strategies are carefully chosen and analyzed before including them in the fund, the aim is to generate return similar to non-UCITS funds of funds, whenever possible, managers are asked to open their strategy in UCITS format, which let us participating to early bird fees and enables our investors to get a current 0.26% p.a. discount on underlying management fees.
LH: What is your outlook for the coming months?
AR: Despite the difficult start of the year for Macro managers, we still believe that the opportunity set is widening and that over the mid-term they should be able to provide positive uncorrelated returns. In the systematic manager space, we are carefully monitoring assets under management as the long drawdown in the strategy is losing investors’ patience and might put some businesses at risk, especially for those managing several billion USD. We note however that dispersion of returns is relatively high in that strategy and that the last few years have not been bleak for everyone.
We remain positive on Equity managers, based on the breadth of opportunities that have come from the one-directional market of the last couple of years. As a matter of fact managers are telling us that they are seeing an increasing opportunity set on the short side. For that reason we keep a preference for those who have a low or variable net exposure as opposed to the more long biased ones.
We remain positive on Event-Driven strategies in equities and credit alike. In addition to the abovementioned supporting factors one can also mention opportunities in the less liquid space. In credit there is a trend of private pools of capital replacing banks for direct lending. Although it requires a longer time horizon the strategy also offers appealing returns. In equities activism is also on an upward trend. Hedge funds in this activity should continue to extract strong value from idiosyncratic situations (including now on sometimes very large companies, thanks to several hedge fund alliances).
Overall we remain neutral on relative value strategies. We prefer equity market neutral and now volatility arbitrage strategies that have started to see an improvement of their environment. On the other hand, on the short-term we are still cautious on interest rate arbitrage and credit long short strategies as the timing of the central banks’ (and in particular the US Fed’s) withdrawal from markets remains uncertain. However, as already described in previous letters, we believe it is worth starting to get an exposure to those strategies as it is more a matter of months rather than years until fixed income markets start normalizing.