Lyxor Managed Account Platform: Lyxor Asset Management

Winner: Best managed account platform

Managed accounts are all about control. Their growing popularity with investors is fuelled by a desire to have much more say over their hedge fund investments, in particular the underlying assets, liquidity, risk management and governance of the fund.

None of this comes as a surprise to Lyxor Asset Management, which has been in the managed account platform (MAP) market since 1998. Within the context of the overall group, MAP is an important part of the business, according to CEO Inès de Dinechin.

"We definitely believe the managed account platform is part of the future," she says. As more investors want direct access to strategies, rather than through funds of hedge funds (FoHFs), de Dinechin says MAPs are a logical solution, particularly when it comes to operational securities. "It's an important part [of Lyxor] and it will probably be a growing part of our business. We definitely see more appetite [from clients] investing in managed accounts platforms."

For most institutional investors, direct allocations to hedge funds are a costly and complex business. Resources are needed to analyse the hedge fund market in order to choose the right managers. Once the allocation is made, operational elements are needed in order to monitor that investment. The ability to do this well and in-house is limited to a small number of investors, according to de Dinechin.

For her, MAPs are the solution and one of the latest evolutions for Lyxor has been the setting-up of similar platforms for investors who then populate it with their own hedge fund choices.

"What we call the dedicated managed account platform is a growing business and will continue to grow. For the big investors the level of resources needed is quite big and they don't necessarily want to take the time to invest or the time so they are happy to have partners to bring technology first, some selection [of managers] for them and to open operationally some hedge fund for them," she says.

While selection of the right managers is problematic, the ongoing operational monitoring of the investments is what the MAP is probably best suited to provide for investors. Another issue of concern for many investors is liquidity. "Our platform gives weekly liquidity in the hedge fund world where sometimes that is not the case and where the clients would like to have that. Transparency, liquidity and selection process are the three key elements of using the platform," notes de Dinechin.

Investor interest, says de Dinechin, is matched by managers keen to tap into this source of assets. "They can sell directly to some clients but it's a small part of the investor world. They will be able to sell a much higher and bigger part to other investors through the platform."

There are around 188 managed accounts active on the platform, including an impressive range of strategies. Lyxor, which claims to have the world's most diversified MAP, offers a broad investment choice. Adding new sub-strategies and investment styles is part of the process of keeping the platform relevant for investors.

Some of the range includes convertible bond arbitrage, volatility arbitrage, short and long-term CTA trend-followers, emerging markets, currency trading, commodity specialists, event driven strategies and global macro discretionary and systematic. More traditional hedge fund strategies such as equity long/short are also available. Over the next few months, Lyxor expects to launch a range of 10 GLG funds.

"We used to have only very liquid strategies on our platforms. We think that the time is over to have only security and some clients would like to look more at performance than security," says de Dinechin. The result has been for Lyxor to open its platform to less liquid but strong performance funds.

"We are also increasing the early-stage part: the platforms are also for the [use of] funds of hedge funds. We see a lot of funds of hedge funds using platforms," she continues. "In order to differentiate themselves from both platforms and those directly investing in single managers, they will have to go into early-stage managers. The platforms are a way for them to select good early-stage managers."

Even with established managers the process of choosing funds for the platform is not simple. Around 200 managers are analysed every year by Lyxor. For each successful candidate the team needs a detailed understanding of the trading strategy and risks, idea-generation and analytic process, and operational infrastructure including risk management and leverage policies.

While the emphasis may be shifting back to performance at the expense of liquidity, investors across the board still want to see robust operational risk management. "The way we are organising our platform is to bring complete transparency and the ability for the investors to see what's behind the hedge fund strategies. For the managers it's very important as well because they have access to investors who want to see what's behind their black box," states de Dinechin.

"Risk management is an important part and I think it will remain a very key element of value proposal," she adds.

Lyxor benefits from a robust risk management process that is constantly re-evaluated and refined. For the hedge funds on the platform, risk management covers minimisation of operational risks and monitoring trading strategy and limits. In addition Lyxor regularly conducts systematic profit and loss analysis, tracking error analysis with the benchmark fund and qualitative reviewing of the trading adviser before and during the life of each managed account. This last includes such things as reputation and staff turnover as well as the strategy itself.

The competitive edge, believes de Dinechin, comes from Lyxor's independence. Unlike many platforms, the Lyxor MAP is not an internal one, selling its own hedge funds. The size and range of the platform is also important, she says, "because it gives us a clear penetration into the hedge fund world".

"Having an important level of assets under management on the platforms gives you the ability to open more funds and to offer to the investors a wider range of performance," she says. This range and depth gives clients more confidence to look at the less liquid strategies, in particular distressed and special situations as well as high-yield credit.

During 2012 some new services were offered to investors. One was a dedicated website designed to optimise portfolio construction and enhance transparency. The site allows portfolio management and monitoring of performance in each accounts as well as aggregate risk exposures as if the accounts were part of a multi-strategy portfolio.

Another innovation was improving research in order to give investors more information on strategies. In the second half of the year, Lyxor introduced MAP Views, a quarterly document that shows the positioning of each MAP fund versus its strategy and the industry. The document provides key figures such as performance, exposure and geographical/sector breakdown and allows Lyxor to share the knowledge it has gathered because of its strong relationship with hedge fund managers.

Another innovation is MAP On Air, a weekly collection of a selection of fund-specific performance and exposure comments posted on the website for investors.

All this is on top of the usual information available for each managed account: fund details, trading adviser details, historical net asset value (NAV) charts, among other indicators; performance statistics, 12-month rolling risk/return profile; risk-adjusted performance, drawdown and run-up, risk statistics; exposures and stress tests including geographical breakdown, asset class breakdown, exposure capitalisation breakdown; trading adviser comments with fund history archived month by month; and fund documentation to download.

Aside from helping investors manage their hedge fund allocations, Lyxor also prides itself on its close relationship with the managers on the platform. One area where its help is particularly welcome is in asset-raising. "It's always difficult to raise assets when you are in a period where the total level of assets decreases," admits de Dinechin. "There are some parts of the world that are in better shape than in Europe. We don't expect the total level of asset allocation increasing in Europe so much but there might be some relocation there on the alternative. In other parts of the world, like the US and Asia, there might be some new assets raised," she adds.

Lyxor targets clients that "have an appetite for alternatives". Lyxor does this through events or face-to-face discussions as well as leveraging its network of high-net-worth individuals and private banks where platforms are used but where platforms have become more popular following the 2008 crisis.

"After the different problems that the hedge fund world encountered, [these investors] are keen to look at [a platform]."

[Pictured: Inès de Dinechin, CEO, Lyxor Asset Management]

In its selection of managers for the MAP, de Dinechin says Lyxor looks for the best hedge funds and then helps them market themselves to potential investors.

She expects investors who did not put money into hedge funds a few years ago to become more interested in alternatives. These investors are looking to take on a bit more risk and diversification but most importantly they are looking for non-correlation of performance, something hedge funds can provide.

Most growth in 2013 is expected to come from the US. "We see a lot of flows already in hedge funds from there. I think they are more active." However, Europe continues to be a challenge with northern states becoming more active and increasing their appetite for both equity market and hedge funds. In southern Europe, de Dinechin does not expect much capital flow because of the ongoing fiscal crisis in most countries in the region.

Looking at the future of the MAP over the next 12-18 months, de Dinechin expects to see "a clear growth in investor appetite for hedge funds" and "definitely on the managed account platform".

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Platform facts
Name of platform operator: Lyxor Asset Management
Name of platform: MAP (managed account platform)
Contact details: Mélanie Le Bouder, MAP external relations ([phone]; [e-mail])
Launch date: May 1998
Assets under management: $11.3 billion (at October 30, 2012)
Performance since inception: +0.05% (net cumulative performance since inception: represented by the Lyxor HF Index (investable index) launched in April 2009)
Annualised performance since inception: +0.04%
Sharpe ratio since inception: -0.19
Strategy breakdown (AUM in %): equity hedge (22.9%: equity long/short and multi-strategy), event driven (21.4%: merger arbitrage, distressed, special situations), macro/CTA (37.4%), relative value/arbitrage (18.3%: convertible bond arbitrage, fixed income, long/short credit arbitrage)
Share classes: US dollar and euro denominated share classes (institutional, distribution)
Service providers: multi-prime brokerage policy (11 prime brokers), 15 authorised OTC counterparties, three independent fund administrators
Transfer agent: RBC Dexia Investor Services Bank
Custodian: Société Générale Securities Services
Domicile: Jersey (offshore) and Ireland (onshore)
Minimum investment (initial/subsequent): $100,000 (for B share class)/$10,000
Fee structure: structure fee, 0.70% (for B share class); trading adviser's fees, aligned with benchmark fund's terms; subscription/redemption fee: none

2011
Shortlist: Best overall investment platform and best managed account platform

2010
Highly commended: Best managed account platform

2009
Winner: Best overall investment platform
Winner: Best managed account platform
Lyxor profile, September 2010