Lyxor research reveals stark performance differentials

With assets on the hedge fund managed account platform known as Lyxor, owned by Société Générale’s corporate and investment banking division, having swelled by $2bn (€1.44bn) to $11bn over the last 12 months, institutional investors and private banks across Europe are slowly realising “there is no alternative” to uncorrelated investments.

Building a balanced, long-term portfolio composed solely of equities and bonds is no longer a viable strategy for these investors in a volatile, low-growth environment, believes Stefan Keller, head of managed account portfolio research at Lyxor Asset Management.

“These people have realised they need to act and diversify into tactical asset classes and alternative investments,” says Mr Keller, an intense but affable German with a crucial role at the heart of the French operation. “It remains a fraction of their overall allocation, but a growing fraction.”

What is important, in the current climate, he says, is that his team can provide a better service than some of its competitors. Lyxor currently offers investors research and exposure to major hedge fund groups including Old Mutual, BlackRock, GLG/Man Group, Martin Currie and Bridgewater.

Deutsche Bank, Credit Suisse and Crédit Agricole have all built similar managed account platforms to distribute hedge funds, but Lyxor is hoping it can get the edge through performance analytics and a webbased portal which can break down detailed exposure profiles.

“The chief investment officer of one of our client groups might ask us how much exposure we have to Greece, for instance,” says Mr Keller.

“Over the last six months, we have been enhancing our system so that through our internet portal, clients can see how much exposure they have to countries and stocks, they can observe the risk-rating of the fund, analyse the top five or top 10 positions and determine how long it takes us to liquidate the portfolio.”

The measurement of performance data has been another key enhancement in a bid to show potential clients that Lyxor offers much more than an execution-only platform. If clients are given enough data, this can help them make decisions about which strategies to invest in and which particular groups to back with their assets.

There has been much discussion in the hedge funds world, for instance, about whether Ucits III funds, which are regulated in a much tighter way than traditional hedge funds, actually underperform their offshore cousins, predominantly domiciled in the Cayman Islands and other Caribbean jurisdictions.

Lyxor’s 2011 research on performance used the Morningstar database to quantify this regulatory effect on performance and demonstrates some startling differences between the two groups’ returns. The research looked at 450 Ucits funds, split between relative value, equity and global macro strategies. These were compared to 3,386 offshore funds listed on the HFR database.

The Lyxor research concludes that the mean annual performance, calculated over seven years, for hedge funds is 7.62 per cent, versus just 3.3 per cent for their onshore Ucits counterparts. Drilling down further into the Ucits universe, funds managed by non-skilled managers deliver just 2.8 per cent annually, compared to 3.8 per cent, if handled by traders from a hedge fund background.

“There is a safety associated with regulation, but there is a cost to that safety,” contends Mr Keller. “If you choose a Newcits manager with a hedge fund backround, you can reduce the cost of the safety-net.”

However, the Lyxor research also shows that the so-called ‘Newcits’ or recently launched onshore, regulated versions of traditional hedge strategies, are characterised by lower volatility. So while there is a performance cost, the investors are experiencing less risk. “Newcits funds present a much more moderate risk profile,” agrees Mr Keller.

The performance differential between Ucits and offshore funds in the equity hedge classification was slightly more than 3 per cent and 4 per cent for relative value. The highest differential was for global macro and CTAs, where the mean annual return was just 2.46 per cent for Ucits funds and 7.31 per cent for offshore hedge funds.

CTAs are viewed by Lyxor as insurance within globally diversified portfolios. Most investors see allocations to CTAs as cyclical in nature, confining them to when they can anticipate a trending market.

But Mr Keller believes in a more permanent allocation. “The right approach is to always have part of a portfolio in CTAs as an insurance, so when negative events happen, you get reimbursed, and usually more than that,” he says. “CTAs are investing in equities, bonds, currencies and commodities, so they offer natural diversification.”