Teun Johnston discusses Crédit Agricole Asset Management Alternative Investment's hedge fund strateg...
Teun Johnston discusses Crédit Agricole Asset Management Alternative Investment's hedge fund strategy from its inception to present day
The Crédit Agricole name may be familiar to those who holiday in France but less so when it comes to investment products, particularly in the hedge fund world. But the bank's alternative investments subsidiary Crédit Agricole Asset Management Alternative Investments (CAAM AI) has a long tradition in the market, says Teun Johnston, head of CAAM AI's London investment team.
In fact, with assets under management of US$18.9bn (more than £10bn at current rates) it ranks as one of the 10 largest fund of hedge funds (FoHF) managers globally. And with more than 14 years' experience in this space, its funds and management team deserve closer inspection.
Crédit Agricole is one of the pioneer banks in Europe in the hedge fund space, making its first hedge fund investments in the nascent hedge fund world in 1992.
Way before FoHF, or even hedge funds themselves, became popular with institutional and retail clients, the group made an active decision to invest in this alternative asset class. "It was certainly unusual for the early 1990s, you could almost call it radical," says Johnston.
The project was a real success and the firm opened up its flagship fund, Green Way Limited, to outside investors in 1996. Green Way Limited continues to be a true multi-strategy FoHF that invests in a broad range of hedge fund strategies. The fund's performance objectives are to deliver consistent absolute returns, with moderate volatility.
The fund also aims to deliver returns that are uncorrelated to any of the major asset classes when measured over the medium term. Green Way Limited is a diversified fund with over 120 holdings, none of which makes up more than 10% of the fund.
In 1999, a second fund was added, the Luxembourg-based Green Way Arbitrage fund, with an even lower volatility target of less than 3%. Following market neutral and arbitrage strategies, it is more concentrated than the flagship fund and currently invests in 46 underlying hedge funds.
Since then, the range has grown steadily to 16 offerings with a unique mix of multi-strategy and niche sector specialisations, covering Europe, Asia, North America and a cash plus fund.
All portfolios managed by CAAM AI are the result of its rigorous investment process, which is a combination of top-down asset allocation and bottom-up manager selection. The manager selection process is meticulous and the group aims to hold investments for long periods, leaving fund turnover relatively low.
The first step of the process is defining the universe for closer inspection. Each hedge fund strategy is assessed for liquidity, risk return and correlation with other asset classes before the second stage of portfolio allocation takes place. Today, CAAM AI has identified nine main hedge fund strategies to which the flagship fund allocates its capital.
The second step focuses on determining the attractiveness of each of the strategies. This is based on the macroeconomic outlook and strategy-specific factors for each of the strategies. The weighting of each strategy in the portfolios is based on this strategic asset allocation.
The other key step of the process is manager selection. The team has an exceptionally rigorous approach to finding and selecting managers. From a total universe of more than 8,000 hedge funds, initial funds for consideration are whittled down to just over 1,400 hedge funds that are monitored on a regular basis.
The regional teams at CAAM AI undertake around 800 visits per year. Only a small number of hedge funds make it through the due diligence process, which consists of a thorough quantitative analysis and an in-depth qualitative analysis. This analysis is then recorded in a due diligence report that is circulated to the whole investment team who have the ability to question any part of that report.
Johnston says: "As individuals, we see a significant number of funds. But we rely on input from across the whole team before making an investment decision."
After a decade and a half in the hedge fund business, the team has a formidable little black book of contacts. These names are scoured regularly and confidential, but highly revealing, third-party references also form an integral part of the due diligence process.
"We keep a database that has 15 years' worth of contacts. It helps us in checking thoroughly into any manager's history and progress over the years. It is a crucial element in our due diligence process," adds Johnston. "The opinions of our contacts are generally very candid and really help determine what a manager's strengths and weaknesses are and whether someone is worth pursuing."
As an early mover in the FoHF arena, Crédit Agricole has developed long-standing links with its corporate clients and has levered these relationships to develop products that the market wants. With more than 400 institutional clients, the company is spoilt for choice when it comes to feedback.
"Most of CAAM AI's clients are institutions ,which are based in Europe, the Middle East and Japan. Strong client relationships have been instrumental in the development of our business and product range," says Johnston.
Single-strategy products include long/short funds in Japanese, European, North American and Asian equities, macro strategies and a corporate opportunities fund.
The evolution of the corporate opportunities fund is reflective of the thinking at CAAM AI. Originally set up in 2002, the fund focused on distressed opportunities, which were plentiful at the time following the shake out after the dotcom era.
"From time to time, opportunities can be very compelling in a very specific area, as was the case for distressed debt investing in the fourth quarter of 2002," " says Johnston. "The fallout from the excesses of the late 90s and the significant number of bankruptcies in 2001 and 2002 meant the supply of distressed debt was significant. This represented a significant investment opportunity. But, to deliver consistent returns, the strategy may have to adapt to a changing market environment and other strategies may be introduced in order to meet the investment objectives of the fund.
CAAM AI has added further strategies mainly focused on corporate restructuring, with the aim of maintaining a consistent return profile.
Today, the company is a truly global investment organisation consisting of some 26 investment professionals located in Chicago, London and Paris. Portfolio construction is handled in Paris, while the team in London focuses on the selection and monitoring of hedge funds in Europe and Asia. The team in Chicago focuses on the selection and monitoring of hedge funds in North America.
The risk management team is also based in Chicago. This team has been developed in a meticulous manner. Rather than hiring professionals from the competition, CAAM AI prefers to train up its analysts. The analysts in the team generally have a strong experience in the trading strategies employed by the hedge funds as well as the underlying asset classes.
Johnston explains: "We hire people for their knowledge of specific financial markets and understanding of strategies and asset classes via their previous roles. But the training of analysts is best done if they have not worked for a competitor previously."
The global reach of the investment team means that CAAM AI's team have found investments in far flung places, that would not necessarily be directly associated with the hedge fund industry. The team has found, evaluated and invested with hedge funds whose managers are located across the different continents, from the big financial centres in New York, London and Tokyo to ones that are found off the beaten track in such locations as Bermuda, Sydney, the Bahamas, Oslo and even Honolulu, an increasingly popular location for Japan-focused hedge fund managers.
The Crédit Agricole FoHF is making its presence felt in the UK market. Johnston expects that advisers are most likely to be drawn to the multi-strategy and long/short equity funds.
Since launch, the flagship fund has returned around 8.34% annually on a volatility of 4.5% since inception, on a portfolio with a large number of funds and strategies in the range. Green Way Limited, which is Bermuda-based and listed on the Irish Stock Exchange, remains open.
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