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Thaddée Tyl : « I would invest in an entrepreneurial management company rather than a fund owned by a large group!»

Thaddée Tyl, president of Rivoli Fund Management, is strongly advocating entrepreneurial management firms as they show more management team stability...

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Next-Finance :You’ve founded Rivoli Fund Management with your partner Vincent Gleyze in 1996. What is your assessment of the evolution of hedge funds since that time? ?

Thaddée Tyl : Hedge funds started in the years 40-50 but it remained marginal for a while. Main developments occured the late 80’s. It was mostly small hedge funds, small shops with low asset under management, unregulated, offshore, and not transparent. Strategies applied were mainly Global Macro strategies and directional bets on stock, bonds and currencies markets. One of the flagship funds of that era is the Quantum fund, managed by George Soros who made headlines by betting against the pound. During the 90s, alternative management has definitely taken off with a surge in assets. In early 2000, alternative investments assets were said to be around 2000 billions.

Also, a classification with two main management styles has been made: Arbitrage, which aim to buy undervalued assets and sell overvalued ones without market exposure (at least in principle), and Directional investments which include global macro strategies and aim to take bullish or bearish positions on an asset class. The subprime crisis and its drawbacks put an abrupt end to the rise in assets.

Can we clearly distinguish hedge funds who performed well and those who failed to deliver ?

Yes and it is very important because people tend to think that hedge funds universe is homogeneous. 2007 events have raised issues on specific fields of alternative investments. These include the funds of hedge funds business, which exhibited a strong correlation to equity markets, a "hidden beta" in breach of contract with investors commitment. These funds of hedge funds, supposedly provider of alternative returns especially during severe market decline, have been hammered like traditional funds. There is also another group of hedge funds invested in illiquid assets such as credit arbitrage, convertible arbitrage and distressed funds, which have suffered from massive redemptions and liquidations.

Besides, there’s a part of alternative management that it is actually de-correlated to markets and rely on its liquidity; "liquid alternative investment". it worked very well through the 2007-2008 crisis and delivered very good returns. It has proven itself to be consistent and continue to grow.

These liquid strategies are often implemented using complex trading algorithms, statistical arbitrages, and ultimately investors may feel they dealing with black boxes

Indeed, this part of the quantitative process - the so-called systematic management - which has weathered the crisis, relied more or less on computers and decision tools systems often mistakenly considered black boxes. A concept that refers to the lack of knowledge or the difficulty to understand this type of investment.
But do not do amalgam because it would mean that non systematic investment is necessarily transparent. Yet nobody can explain why a long-only manger buy or not one stock. Answers to these questions can be surprising. Pushed into a corner, a long-only manager is able to say "because I feel it." This is not transparency.

We, Rivoli Fund Management, are specialized in the systematic investment process. We take the time to explain to investors how our systems work and what are the principles. Our systems are indeed based on mathematics, statistics, computer programs and everyone did not want to dig into; it is certainly sophisticated, but it is transparent. Under no circumstances will we say to investors "It is confidential". We even push transparency beyond the explanation of management techniques by disclosing the positions we hold. When an investor calls us on the positions of our European Equity fund, we give it. It is, thanks to statistical data analysis, an investment universe of 700 to 800 stocks.

You opened your funds to individuals ...

Yes, we have 2 types in our range of products. First products dedicated to professionals and then coordinated UCITS III funds that we open to individuals.

What is the added value of quantitative management in individual’s portfolio?

Diversification is the first value added. The portfolio of an individual is generally made up of stocks, bonds and currency. By analyzing these different asset classes, we observe that equities, which are supposed to be the best investment over the long term, deliver returns from -30 to - 40% over 10 years. This does not mean that investors should not invest money in equity. However we invite them to diversify much more.

Bonds showed very high returns because interest rates have not stopped falling since almost the beginning of the 80s. The 20-year bond investments are currently the best investments. Will they still be in the years to come? Not necessarily. With long-term rates at 0%, 1% or 2%, bond investments have much to lose with a rate hike. If nobody knows the timing, however, everyone agrees to say that this will happen in the next 5 to 10 years. One must remember that we had rates of around 10-15% in many countries over extremely long periods, from the 70s to the 80s...thus there is a potential downward on bonds investment. Advise an investor to be fully allocated on bonds is inappropriate.

The third type is the monetary investment. Nobody is thrilled to win 10 or 20 cents per year; Of course there is no capital risk, and for short term investor, investments have to monetary investments. But for long term investor it is not appropriate.

What I suggest to individuals is not to give up equities, bonds or cash, but to reduce their weight in their portfolio to include an investment in liquid, diverfying and alternative funds. Funds that are not benchmarked to equity or bond market, actually funds with quantitative processes as the ones we have here at Rivoli Fund Management.

The key strength of our process is that it matches its expectation in terms of returns / risk ratio, especially in times of crisis. And this seems likely to suit any investor seeking to diversify its investments. For example, one bond fund of Rivoli Finance, coordinated range of UCITS III funds, has posted its best year (+16.4%) in 2008. It was down -4.2% in 2009 and this year it rose by almost 11%. Another fund, an equity one which rely on European equities arbitrage, and has done, 8.77% in 2008, +8.1% in 2009 and +15.7% since the beginning of year.

Investors seem often lost as they are not able to compare the performance of hedge funds ... Sometimes managers will try to do better than an index, others to do better than EONIA capitalized ... What do you think investors should look beyond the annual returns?

First is to look at the benchmark of the fund. A fund that has to do better than a benchmark index of 50% bonds and 50% Eurostoxx 50, is not an hedge fund. it is a fund that will try to do better than diversified equities and bonds investment! It will share some positive and negative effects but will still be less diversifying than an investment alternative. Conversely, funds that are true hedge funds, will aim to do better than the money market.

Second, investors must analyze the volatility of the fund, although this is not always sufficient, it gives an indication of the risk taken. Thus, when analyzing performance, one must pay attention not to the absolute returns but to the Sharpe ratio, the relative return given the risk taken, especially in periods of decline.

Another critical point is analysis over long periods. A major shortcoming of investors, and it’s human, is to focus on short terms returns. Returns over a period of one year is very weak. What is important is to study 3, 5 or 10 years and more generally the longest periods possible. In one year, it is likely to face a lucky manager. Over 5 years is more difficult. It is then essential to look at ratios over longer periods. Right now, it is particularly easy to make comparisons because during the last 5 years we’ve experienced periods of increase, periods of decline, periods of crisis and periods of strong growth. A manager who delivered consistent returns in all these configurations, can reasonably continue to do so. However, someone without trackrecord, who delivered amazing returns this year, will he be able to renew it next year?

And finally, it is very important to have a view on the management company and management teams. Are managers in the business for long? Are Teams stable?

The investors are also paying attention to the size of the management company. They think small structures are more likely to suffer from their low number of employees and a higher probability of bankruptcy. What is the real risk for an investor who invest in small asset management firm like yours?

We,at Rivoli Fund Management, we argue strongly for small management firms. Small management company, often means entrepreneurial firm and are the founders are the owners and major shareholders, as it is the case in Rivoli. And in general, their management is more conservative.

Be careful, you can always face managers who want to make "shots" and take enormous risks. But investing in a small society like ours, operating for 14 years, delivering excellent returns overall, managing more than € 400 millions, and which, despite the successive crises, has never faced liquidity issues or liquidations, I find it rather reassuring.

There is no certainty, but if I were an external investor, I would have invested in this type of structure, were ownership belongs to individuals, rather than a fund owned by a large group

What about the stability of management teams and expertise in Rivoli Fund Management?

Many investors ask this question. Our management team is the same for 15 years. I challenge you to find a fund within a large banking group which has the same manager over that period, I believe there are not any!

Stability is found in small structures, not in large groups. And this is also reflected in performances. Fund returns of major banking groups are poor, of course, on the very large number of funds they hold, some are spared in. We, however, have no client loosing money and all our funds, except money market fund, this year’s show 2-digit performance.

How do you manage risk at Rivoli Fund Management?

We have a risk committee meeting every Monday. As part of our systematic quantitative management, the computer system we designed and implemented, manages the risks automatically and fund manager and risk commitee provide supervision. We will never take unnecessary risks on a fund. I am co-owner of this company with Vincent Gleyze and 4 other employees and we have private investments in funds managed by us: as security risks, it is appreciated! When you are fund manager, employee of a large group, if your fund had disastrous returns, you risk nothing. At worst, your future will be out of the management company. For us, if we can not control the risk and our fund collapses, we lose 15 years of hard work and a part of our heritage.

About regulation, Germany has banned short selling, does that worry you? especially regarding your various long/short strategies

One must be very precise when it comes to short selling ban. It is not having short positions which is prohibited but the naked short ie the sale of securities that has not previously been borrowed. Furthermore, the prohibition applies only to German territory. In practice, if Deutsche Bank wanted to use this technique, he would go through its london’s branch. Actually this does not change much.

However, what will be implemented at European level is not a prohibition but an obligation of transparency. European authorities will ask the manager to disclose his short positions on one or more securities above to a given threshold. This will prevent positions squeeze abuse, on both short selling and excessive long positions. Markets control a whole is a very good thing. It is necessary to have transparency on both buy and sell side.

We are based in France, not in the Cayman Islands and all our funds are regulated by the AMF in France, the CFTC in the U.S., and by IFSRA in Ireland. We are pleased with these controls because it provides security for investors.

There are few quantitative management companies like yours in France who seem to suffer from low visibility and a lack of awareness compare to the big quant funds such as American DE Shaw or Renaissance Tech. Do you have any explanation ?

There are several reasons for this. In France, to set up a small management firm, quantitative or not, is extremely difficult. Institutional, supposedly amongst the first supporters of small entrepreneurial firm, are particularly cautious. If you have very small assets, and you meet a pension fund, the answer will be "we’re not interested, because there is a risk." While in UK or the United States, if you create a management company and have a bit of credibility, a number of institutional - $ billions manager - will trust you, and will allocate limited amount - 5 to $ 10 million - to help you start and build network. This behavior does not exist in France, and thus it is much more complicated. Who says small management company, says less visible management company. It is the time that highlights the know-how. We, Rivoli Fund Management, have begun to take off only two years ago. Before, we were somewhat in the shade and had few resources to devote to marketing and communication budget.

In the phase of growth that you experience now, do you pay attention to the maximum amount you are able to absorb and manage?

When we meet professional investors, they ask us about the characteristics of funds, assets and of course, maximum capacity. So, we constantly have this last question in mind. Once a fund manager adopts an innovative management approach, quantitative or not, there is always a threshold of assets under management not to exceed in order to avoid becoming too large relative to the market.

For example our Equity Fund, which manages € 120 million, can handle not more than € 300 million given its current investment universe: eurozone equity market. So we invest heavily in order to process Japanese equities in the next 2 months. This step will allow us to double the fund’s capacity. Then we will address the U.S. equities. After all this, we will have no more ways to expand the capacity, estimated at € 1.5 billions. If we were to reach this stage, we will inform investors of the closure of Equity Fund to new subscriptions.

Over the past 10 years, all management firms that have delivered very good returns but did not follow carefully assets increase, have experienced serious setbacks.

To conclude, what are your medium-term outlook for Rivoli Fund Management?

We will develop our existing Equity Fund which works very well. We expect its asset to grow up to the above limits. We also have a bond related hedge fund with a very large capacity, about € 4 or € 5 billion, which deals with German bonds, U.S. and Japan using futures. This is a fund with a great potential, taking into account opportunities bond markets will offer in years to come.

We also offer a diversified fund, Rivoli Capital, with modest assets under management - € 22 millions - taking into account its recent launch. It takes positions on all financial markets, stocks, currencies, interest rates and bond markets and aims also to do better than the money market. We have focussed our sales forces on our equity and bond funds, which have raised € 200 million this year, thereby helped us almost doubling our assets under management to € 460 millions. We will intensify our marketing and sales in 2011 for Rivoli Capital.

Next Finance , November 2010

Article also available in : English EN | français FR

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