How to capitalise on hedge funds’ push into Europe

Citywire Selector

Hedge funds are coming under pressure to prove their worth. Their relatively high costs don’t sit well with their recently diminishing returns.

Jean-Christophe Rochat, a fund selector at Banque Heritage, is well aware of the challenges facing both fund buyers and hedge fund operators, as his remit has expanded over the past year from a long-only focus towards adding alternatives.

‘The market’s direction was completely unpredictable last year, everything grew very fast. One and a half years ago we were quite worried about the economic situation, so, as part of our strategy, we decided to switch into more hedge fund strategies,’ he says.

Rochat was charged with opening up a new field of investment for the Geneva-based private bank. ‘When we travel, especially in London or New York where many asset managers are based, I spend probably 40% of my time meeting with hedge fund managers now. That is a big change.’

This doesn’t mean Rochat has a free rein to bring all manner of high-octane hedge fund ideas back to his largely Swiss client base. The emphasis continues to be on funds that comply with Ucits rules, ie Alternative Ucits funds.

‘Once a hedge fund strategy complies with Ucits rules we feel we can rely on it as we can understand the risk management process,’ he says. ‘You need to spend a lot of time to grasp exactly how a hedge fund strategy works – the way the managers run their process, generate alpha and gain exposure to market beta – because there are so many people with so many different approaches.’

For Rochat the investment case for hedge funds – notably long/short equity strategies – has strengthened in the age of accommodative monetary policy, even if the funds themselves haven’t lived up to their billing.

‘Hedge funds have been a bit disappointing since the end of the financial crisis, but I believe you should be out there, selecting the right ones for your clients. Central banks are likely to continue supporting the equity market and being exposed to long/short strategies means you will be able to capture part of the upside while protecting the portfolio when the market corrects.’

So, which strategies have met Rochat’s needs? ‘A recent one is Alpine – a New Jersey-based hedge fund company – we selected its merger arbitrage strategy.

‘They are really professional and still quite small and we like working with them to promote their business because they did well on the offshore side and are doing more on the Ucits side. They achieved what they said they were going to achieve.’

Going big and green

More and more hedge funds are now launching Alternative Ucits products to attract inflows from Europe, and Rochat disagrees with the notion that the best-performing funds won’t be accessible in an Alt Ucits wrapper. ‘You can definitely find interesting companies with strategies within Ucits and those that fit the investment criteria and risk,’ he says.

One of the more pressing considerations, he says, is how these companies will convert their strategies to be Ucits-compliant, while also meeting the greater demand for ESG-focused approaches from European investors.

‘When we were in New York last September, we met several asset managers and two things came into the discussions. One is that they really need to penetrate the European market because this is a new driver of growth,’ he says.

‘The other was the ESG criteria within the hedge funds space. I was quite impressed, as two or three years ago you’d never have talked about ESG with a pure-hedge fund guy.

‘This was the first year they were talking about it and they are all trying to develop ESG expertise because they know that’s a condition of penetrating the European market. They have understood that market and they want to put in the requisite resources to be successful there.’

Rochat believes this is an important trend, as the Alt Ucits market, which is arguably behind its long-only counterpart, has not yet embraced ESG whole-heartedly. ‘US firms are now understanding that if you really want to go into the institutional world in Europe you don’t have a choice on ESG.

By Chris Sloley

March 05, 2020


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