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François Lhabitant : «We have received dozens of proposals but only one long / short manager passed our selection ! »

Established in 2001, Kedge Capital manages the assets of the Bertarelli family. The company invests successfully nearly $ 6 billion in hedge funds, for a net return of 6.7% annually since its inception.

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Interview with the CEO and Chief Investment Officer, François-Serge Lhabitant...

Next Finance: Your performance since 2001 is 6.7% per year, after fees. Since 2009, you have earned 7.6% per annum net of fees. What are the criteria regarding your management processes and selection of hedge fund managers?

François-Serge Lhabitant: Some simple rules
- (1) Stay focused in terms of number of managers, but diverse in terms of strategies, geographies and underlying positions.
- (2) Only invest with managers that we consider blue chip both operationally and in terms of investment point of view;
- (3) Monitoring the activities and portfolios of these managers in quick succession;
- (4) Focusing on strategic asset allocation, risk management and minimizing volatility in our portfolio. The rest is hard work, and a team of 25 people dedicated to this activity!

Your performance is in contrast with the current assertions predicting the disappearance of funds of hedge funds. What future for this segment of management? Is it going to be more packed?

Unfortunately, I think our performance is more an exception than good news for the industry. Average performances of funds of hedge funds have been a disaster, and only a few have their own in the game. A lot of them are still struggling with side pockets and other legacies of 2008 and their assets are insufficient to finance their operational structure. And things do not work out with the new regulatory requirements (AIFMD, FATCA, etc...) with requirements for further investment. Many players are about to be taken over or will look for a merger to increase their critical mass. We should continue to see a contraction of the industry in the coming months.

Those in a better position have adjusted their models to respond more quickly if market downturn, or introduced new models that are not simply trend following models.
François-Serge Lhabitant

Is Kedge Capital invested in "purely quants" funds such as statistical arbitrage, CTA, HFT, etc...? How do you analyze the poor performance of the industry this year, especially in markets without big trend?

We actually invest in quant funds, but not in high frequency trading funds. At the end of November, our quantitative managers are positive on average over the year, but after experiencing a lot of volatility. Our quantitative macro manager shows very good performance in 2012 and our statistical arbitrage manager has had a good year. For cons, the absence of major long-term trends has created a difficult environment for CTAs.

Those in better position have adjusted their models to respond more quickly if market downturn, or introduced new models that are not simply trend following models. This is where we see not only the importance of diversification between the different strategies of our quantitative managers but also the capacity of their research teams to innovate and adapt to a different environment.

You who know France well, except in the case of Capital Fund Management (CFM), how do you explain, the low outstanding capital for the French Independent Quantitative Management compared to the capital raised by American Quants?

The French regulatory, tax and policy environment, acts like a scarecrow for foreign investors. The local institutional are afraid to invest in hedge funds because they would be criticized in case of loss. Furthermore, the French talents have more tendencies to go where they are more welcomed - and not treated like the plague or lawless speculators. It’s a shame for France...

Only one long / short manager specialized in European equities passed our investment criteria selection, but he was rejected by our operational due diligence.
François-Serge Lhabitant

A few months ago, you need a long / short manager specialized in European equities. Have you finally found him?

No, still not. We received dozens of proposals, one manager has passed our selection of the investment side, but it was rejected by our operational due diligence. That being said, we have no obligation to be invested in European equities. Our portfolio seeks sources of alpha, not beta. So if there is no alpha in a market segment, we simply do not get in.

Your funds are they still open to new investors and what are your goals in terms of assets for two to three years?

Yes, but only for qualified investors with the same expectations as us in terms of risk and return. To be clear, we have no objective in terms of future exposures. Our sole purpose is to maintain the quality and performance of the portfolio, and the satisfaction of our existing investors. If new customers want to join us and we can match it, that is good. If not, too bad for them!

Paul Monthe , December 2012

Article also available in : English EN | français FR

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