Lyxor Asset Management has cemented a reputation for its hedge fund solutions expertise, but as regulation and investor preferences change, the firm has evolved to offer multi-management solutions to support investors in fund selection, portfolio construction and infrastructure services.
Lyxor’s multi-manager solutions draw on the broad range of underlying investments on Lyxor’s investment platform including managed accounts, external hedge funds, ETFs and mutual funds.
The result is a range of commingled, dedicated and advisory solutions that spans the spectrum of liquidity, risk/return and strategy options to support global investors in meeting their idiosyncratic needs.
“There have been a number of powerful trends that we’ve seen over the last few years. The first one is that in the fund management industry we are seeing an increasing convergence between the traditional long-only world that now offers absolute return solutions, and hedge fund managers, who have historically provided absolute returns strategies and are now offering them in a mutual fund format,” comments Stephane Enguehard (pictured), Head of Product Development for Alternatives and Multi-Management at Lyxor Asset Management.
This convergence that Enguehard speaks of has been underway for a number of years.
Hedge fund managers now offer their strategies in a mutual fund format, using the well-established UCITS fund wrapper in Europe to widen out their investor base and diversify their base of AUM.
The industry has seen a flurry of hedge funds strategies coming to market in a UCITS format. According to Alix Capital, which runs the UCITS Alternative Index, last year saw UCITS absolute return funds record their strongest year of inflows, attracting EUR70 billion; an increase of 37 per cent and pushing total AUM to more than EUR260 billion.
But it’s not just hedge fund managers embracing the more liquid regulated market. At the same time, traditional fund houses have increased their capabilities and built their own AR strategies to generate returns in all markets, rather than solely trying to beat an underlying benchmark.
This dynamic is good news for investors as it has increased the level of competition among asset managers and widened out the scope of investment opportunities.
“However, the problem is there are so many funds to choose from globally; we alone monitor 40,000 long-only funds and about 3,200 hedge funds. From there you have to apply filters to select the best funds. Investors struggle with this because they don’t have the internal resources.
“We’ve been selecting hedge funds for investors since 1998. We have the knowhow and the methodology, the due diligence, and basically the credibility to move beyond just selecting hedge funds to also start selecting mutual funds that may, or may not, have an AR objective; there are plenty of interesting long-only funds of course,” says Enguehard.
This migration into the mutual fund space, selecting both long-only and AR strategies, is helping Lyxor respond to the nuances of institutional investors as they look for answers to fund selection and portfolio management in an increasingly complex world.
To underscore the importance of this development, Lyxor Asset Management has been entrusted by the Societe Generale group to provide these extended fund selection services to its private banking group, opening up a far wider investor audience.
“This gives us a sound base of assets under advisory to offer our selection capabilities to institutional investors worldwide. The convergence trend is one that we have fully embraced to enhance our fund selection expertise. As a result, we’ve had to grow our resources accordingly.
“Historically, we’ve had a team of 20 hedge fund analysts. This is now complemented by a team of 10 mutual fund analysts. I believe we now have one of the largest European teams of fund selectors. This is an attractive proposition to investors who wish to outsource or partner with an expert in fund selection,” comments Enguehard.
This group of 30 people is complemented by a team of 10 portfolio managers and a team of 40 specialists in providing infrastructure solutions.
Overall, Lyxor’s 80-strong team can now offer a variety of services for investors:
- Fund selection
- Portfolio construction
- Infrastructure solutions
- Regulatory solutions
Portfolio construction and the desire for customised, solution-driven portfolios is the second major trend that Enguehard has seen in recent times.
In a world where bond yields are so compressed and equities are getting more expensive, investors are concerned in creating portfolios that serve their specific needs and return targets in terms of liquidity, in terms of correlation with other markets, and so on. As for regulation, the third major trend, investors have to think carefully about choosing the right product to fit their fiduciary responsibilities; do they continue with offshore funds? Do they move towards more of onshore regulated portfolio of AIFMD-compliant funds? These are the questions that institutions now face.
“We’ve sharpened our portfolio construction expertise. Investors can come to us and explain what their constraints and objectives are and we then design a tailored solution for them. We notice that increasingly investors are looking for tailormade specific portfolios.
“We can do this either by providing advisory services or the investor can delegate the investment mandate to us on a discretionary basis,” explains Enguehard.
It is precisely because institutions need to develop more customised portfolios that it has resulted in a push towards outsourcing the function to expert partners. And crucially, which is why Lyxor has evolved, this customisation is not just about selecting hedge funds but a variety of both hedge funds and mutual funds to achieve the desired outcome.
The Lyxor Managed Account Platform is one aspect of the business offering. It now offers a range of 80-plus hedge fund strategies, which are step-be-step being redomiciled to Luxembourg, following a decision by Lyxor to make the platform AIFMD-compliant.
In addition, the platform is building out a suite of alternative UCITS funds. It now offers seven single manager funds and represents a part of the business that has grown substantially over the last 12 months.
“I believe we’ve seen something like 400 per cent growth, albeit starting from a low base, and we’ve raised in excess of USD1 billion of assets.
“Right now, we can offer a variety of managed accounts on the platform: AIFMD-compliant funds, UCITS funds and offshore funds,” says Enguehard.
This is just one route for investors. Lyxor also has a well-established FoHF business, and as mentioned above, offers both discretionary and advisory services to investors who want to build portfolios of funds that may not necessarily be in a managed account format.
“Over the years we have created an approved list of hedge funds which we are very confident for our investors to invest in. We are now doing this on the mutual fund side. We have an approved short list of some 200 mutual funds. There is value in that selection process. People who don’t have those resources can rely upon us to help them.
Whilst around 80 of the 150 or so hedge funds on Lyxor’s approved list sit on the MAP, Enguehard is quick to clarify that Lyxor has no intention of offering long-only mutual funds in a managed account format.
“That’s not our ambition. We have a 10-man team in place to help us select mutual funds, which are already regulated UCITS funds. Why are we doing this? Because we notice that investors are very specific in what they look for. Some investors want us to create a portfolio of alternative strategies to get some alpha to complement their existing investments.
“Other investors give us a much broader mandate that allow us to access alpha strategies and beta strategies. We’ve been winning mandates from global pension plans who are giving us instructions to create blended portfolios of AR strategies and long-only strategies,” confirms Enguehard, noting that Lyxor is working on developing multi-manager solutions for institutions in Europe, North America, Korea and Japan.
Whilst the Societe Generale private banking relationship is paramount, Lyxor wants to be in a position to support institutional investors across the globe who are looking for a partner to help them select the best managers regardless of whether they are hedge fund managers or long-only managers.
“Investors want us to work within their constraints as pertaining to performance objectives, asset classes, regulation, liquidity etc., and come up with the right solutions. We are in a position to help them do this successfully,” adds Enguehard.
Lyxor is seeing demand for both advisory and discretionary services.
Typically, larger institutions opt for the advisory solution, whereby Lyxor recommends investment funds and the institution has the final say on whether to follow its recommendations.
But for the majority of institutions who are moving to outsource their portfolio construction needs, they leave Lyxor to use manage the portfolio on a discretionary basis once the investment goals and objectives have been clarified and agreed.
“To illustrate the kind of work we are doing, a European pension fund has asked us to build a portfolio that can generate Libor plus 7 per cent.
“In order to achieve that we are able to mix hedge fund strategies with long-only strategies. The mandate started with capital in excess of EUR100 million and we have some strict constraints to adhere to in terms of maximum correlation to equity and bond indices. This is where our expertise comes in; understanding how best to blend alpha and beta strategies.
“We have also done this for a Korean investor, following a similar approach where we are free to mix both styles of investments to deliver a precise outcome.
“One of the reasons investors are willing to consider having these hybrid portfolios is because they want to have the maximum probability that we can deliver the expected outcome,” states Enguehard.
Fleet footedness and the ability to provide a deconstructed suite of services for investors has become a critical point of differentiation among asset management firms. That Lyxor has been quick to identify this and grow its capabilities in fund selection, portfolio construction and infrastructure services has helped the firm remain a key partner to global institutions.
“Investors can contract us for fund selection work, or fund selection plus portfolio construction; they can choose advisory or discretionary services. It’s a much more “à la carte” approach to fund management. Whatever the investor is looking for, we can provide the answers,” says Enguehard.
In his view, in order to service the needs of different investors, asset management firms need to have access to a broad investment universe and confidence in selecting the right funds from that universe. Moreover, firms need to adopt an open-minded approach to how they work with investors, either on an advisory or a discretionary basis.
“Then you need to take into account which preference for regulation they want to invest through, what liquidity preferences they have. Indeed, liquidity is very often one of the key drivers for us to consider when building client portfolios. The liquidity need are very different when speaking to a private bank, who prefer to have access to daily liquidity funds compared to a SWF who is perfectly happy to have quarterly liquidity.
“So in order to be successful and be in a position to grow the asset management business it’s important to have broad capabilities in portfolio management, fund selection, and even infrastructure solutions, and operate under various regulations,” says Enguehard in conclusion.
Lyxor currently has USD33 billion under management and advisory in multi-management assets.
