La Française finds success in focus on quantitative premia and credit strategies

Launching a hedge fund business in February 2013 may have seemed an unusual move at the time, but for the co-founders of La Française Investment Solutions (LFIS) it has proved a logical and successful one

The vision at launch was to pioneer the next generation of hedge funds, which has been the catalyst for the firm’s growth. Between 2013 and 2016, LFIS’s assets under management (AUM) grew to $8 billion – an increase of 125% over the period 2015–2016. Year-to-date 2017, the firm’s AUM has grown by a further 70% and now totals approximately $10 billion, nearly 30% of which is in the alternative and absolute return (hedge fund) strategies, with the rest in the solutions business. All figures are accurate as of November 30, 2017.

LFIS is the investment solutions business line of La Française Group, sitting alongside its real estate, traditional asset management and direct financing businesses. 

Since its inception, Paris-headquartered LFIS has become an established institutional asset manager. The firm takes a flexible, cross-asset approach to deliver differentiated solutions including absolute return funds through premia, fixed-income strategies, thematic – or ‘enhanced equity’ – funds and dedicated solutions.

LFIS currently manages five absolute return funds – three risk premia funds and two fixed-income funds – totalling $2.6 billion in AUM. More than $2.2 billion of AUM is in its premia funds, with approximately $400 million in the fixed‑income funds.

LFIS believes premia funds offer investors maximum diversification and decorrelation. The firm’s alternative premia strategies take a multi-strategy, multi-asset and market-neutral approach, using a risk premia framework to select strategies and manage risk.

The risk premia approach

A risk premia approach is an alternative to traditional asset allocation strategies. Risk premia are embedded in all asset classes and reward investors for taking specific market risks.

Each underlying premium demonstrates low correlation to traditional asset classes compared with other premia. The LFIS approach combines a maximum number of decorrelated premia and implements up to 30 strategies – as opposed to the usual 10 in competitor funds. It focuses on three premia families to deliver performance in all market conditions with a strong Sharpe ratio.

The approach has so far yielded solid returns – annual performance of the Class IS EUR of LFIS’s oldest premia strategy since its creation on December 27, 2013, has returned 9%, with an annualised Sharpe ratio of 2.6. The strategy is available in undertakings for collective investments in transferable securities (Ucits) format and under the European Union’s Alternative Investment Fund Managers Directive.

On the multi-asset, fixed-income side, the focus is on flexible and opportunistic strategies using cash, derivatives and structured credit. Sub-strategies include directional, relative value and carry trades.

Annual performance of the Class I EUR of LFIS’s oldest credit/fixed-income strategy since its inception on June 10, 2013, is 7.8%, with an annualised Sharpe ratio of 1.5.

Hedged equity, launched in April 2015, offers exposure to the upside of the largest market-capitalised stocks in the eurozone while cushioning investors on the downside. The strategy is a potential solution for investors looking to hedge tail risk on equities and maintain or increase equity exposure in a low-yield environment.

As asset managers have shifted towards customisation, LFIS has also started to offer tailored risk and return profiles, and solutions business for investors, with AUM in this area at $7 billion as of November 30, 2017.

Sofiène Haj-Taïeb, joint founder, CEO and CIO (left), and Arnaud Sarfati, co-founder, La Française Investment Systems

As AUM has grown, LFIS’s client base has followed, with the firm’s reach now extending throughout Europe into Asia and North America. 

“Clearly the hedge fund activity is a cornerstone of our business and will remain the major growth engine in the coming years,” says LFIS co-founder Arnaud Sarfati. “The growth is in hedge funds because this is where the largest market for us is today.” 

Sofiène Haj-Taïeb, joint founder, chief executive officer and chief investment officer of LFIS, agrees. “For us, the future is the hedge fund approach,” he says, suggesting that risk management, agility and a cross-asset and quantitative approach – all characteristics common in the hedge fund universe – are the most important drivers. 

Sarfati and Haj-Taïeb see the future of the asset management industry as dominated by liquid alternative and hedge fund strategies. 

The pair are from similar backgrounds – Haj-Taïeb spent more than 16 years with Societe Generale Corporate & Investment Banking (SG CIB), where his last position was deputy head of global markets and a member of the executive committee, and Sarfati spent 15 years with SG CIB, where his last position was as co-head of the cross-asset solutions division.

Taking this expertise into the active management world of hedge funds was a natural step for them and for expanding La Française Group.

Preparing for a changing world

Sarfati believes the convergence between more traditional asset management business and hedge funds is accelerating. This trend will increase over the next few years as investors search for strategies and solutions able to produce alpha in difficult market environments. 

To help position itself for this changing world, during the coming 12 months LFIS intends to expand its hedge fund offering through additional premia and credit strategies while also exploring opportunities in new markets. LFIS has already had success working with Canadian pension funds and is keen to start offering products in the US. 

The firm is incubating premia and other quantitative strategies it proposes to bring to market in the first half of 2018. 

On the credit side, LFIS has taken a multi-strategy, multi-asset approach. Credit has been a particularly attractive area for investors since 2013, with particular demand for long- and short-credit multi-asset funds. 

“Investors see this as a way of diversifying and moving away from high-yield and duration risks. They see our absolute return credit approaches as diversifiers for the fixed-income portion of their portfolios,” says Sarfati. “Throughout 2017 this was a particularly effective strategy, and we are seeing a lot of interest in this area, particularly for funds in a Ucits format.”

New risk premia-based multi-asset strategies to be offered in 2018 will target investors looking for market-neutral strategies with a long bias through a multi-asset vehicle. 

“One of our new offerings will be a multi-asset income strategy relying on our credit premia and derivatives expertise, while another will be a factor investing fund,” confirms Sarfati. 

To meet demand for liquid solutions for the retail/wealth manager market, LFIS is incubating several strategies with a long bias, including a multi-asset factor investing fund, a multi-asset income fund and an equity-hedged strategy.

LFIS believes demand will continue to grow for liquid alternatives in this segment of the market. “We continue to see strong convergence of hedge funds and traditional asset managers in liquid alternatives. There are several ways to offer more diversification with these absolute return strategies through Ucits funds giving daily liquidity and multi-asset, multi-strategies,” Sarfati says. 

The push into retail will be mostly through platforms and banking and insurance channels, as well as wealth managers and independent financial advisers in Europe.

Diversifying the client base

Looking at the future prospects for LFIS, Haj-Taïeb believes the firm’s strength and growth trajectory relies on continued investment in research and people. “We expect to add approximately eight people to the team, mostly in the research and quantitative areas, in 2018. Most important for LFIS is to remain focused on performance and risk management,” he says.

Sarfati agrees that diversification and launching new strategies needs a foundation of research, which means ensuring that quality people are part of the team. “For us, growth in AUM is not everything. We will never sacrifice performance for asset growth. We’ll keep on recruiting, developing new strategies and diversifying. If we’re successful in this, then the assets will naturally follow,” he says.

Overall, LFIS is “patient”, notes Sarfati, which will keep it in a competitive position as it expands into the Asian market. 

“Asia will be very important for us in the future and is already starting to be so now. We have had discussions with investors from Japan, Singapore and [South] Korea. It is a market that will become more important and will require, in due course, a local presence,” says Haj-Taïeb. “The type of funds we provide, based on diversification and risk management, is particularly favoured by investors from these countries,” adds Sarfati. 

With a new market cycle starting and interest rates – at least in the US – beginning to rise, the main focus of asset managers will be on diversifying risk for investors. Many funds found success over the past 10 years purely from the market rally. 

With a changing environment, investors are looking to diversify risk. “They can’t rely on bonds to diversify their portfolios. They want additional investments and to be sure the asset combination will keep them decorrelated. This is where risk management is important,” notes Sarfati.

“When I talk to financial advisers or distributors in France, for example, they are fully aware of the situation. They are looking for solutions and a new way to address the diversification challenge while being reassured that it will be delivered through better risk management. This is very much a departure from the traditional approach of bond and equity portfolio allocation.”

“We believe our clients will be rewarded through good risk management,” Haj-Taïeb adds.

There is a growing demand for illiquid assets and absolute return funds that have proven decorrelation from the market.

“We’ve shown our funds can perform if volatility comes back to the market. If we are truly exiting quantitative easing, this is a new environment and a return to more normal market conditions,” says Sarfati. LFIS funds have shown strong performance in high‑volatility environments, as well as strong performance and resilience in lower‑volatility periods.

In such an environment, bonds will not be the natural hedge or diversifier for equity, so investors will look for something different. Whether LFIS calls these strategies hedge funds or liquid alternatives depends on which investors it is in discussion with – as many European investors shy away from the hedge fund label but are comfortable with liquid alternatives or absolute return.

“When you talk to investors in the US, it’s about hedge funds. The same is true for some Canadian investors. But risk premia, absolute return and diversification strategies sound better and are terms more familiar to European investors,” explains Sarfati.

To cater for these diverse markets and to further expand the LFIS brand, the firm is focusing on quantitative strategies, risk management and selling its expertise in multi-asset and multi-instrument management. 

“If we keep delivering performance and diversifying our client base while maintaining our strong risk management, in five or 10 years we expect to have around $20 billion AUM coming through the different channels we have identified. We want to have institutional investors as well as retail ones,” says Haj-Taïeb.

This means a more diversified client base by geography and type as well as an expansion to the range of strategies offered. “Our competitive edge will continue to be our strong focus on quantitative strategies, risk management, a pragmatic approach and, above all, delivering performance. If we continue investing in this way, we will continue to attract clients. We must stick to our principles and keep investing in diversification. That’s where we can add value compared to others,” he says.

“We can move very quickly and retain the ability to hire talented people with an understanding of the new technologies and how to apply them. That’s our real competitive edge – our people,” adds Sarfati.

Conclusion

Growth will continue to be organic. LFIS shies away from buying in existing teams, preferring to add selected people to its group, ensuring the same philosophy and cultural values.

Sarfati and Haj-Taïeb believe keeping the focus on performance and continued monitoring of risk exposures will be the key to continued AUM flows. “Our biggest challenge is not necessarily from markets, but in keeping our people motivated and inquisitive,” says Sarfati. “Managing risk is part of being alive,” adds Haj-Taïeb.

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