Best group: Pictet Asset Management

Pictet has developed a unique hedge fund unit within its asset management business

Dane O'Dell and Genevieve Lincourt-Gheyssens, Pictet

Hedge Funds Review European Single Manager Awards 2016

Within the Pictet Group, itself a partnership of seven owner managers, there are three business units: asset management, a Sfr151 billion ($157 billion) business set up in 1980 where direct management of hedge funds is placed; wealth management, the over 200-year-old business running more than Sfr171 billion where the funds of hedge funds business sits; and asset services, which manages all aspects of the asset-servicing process.

The hedge fund expertise within the asset management business has been operational since the launch of its flagship multi-strategy Alphanatics fund in August 2004. The entire unit now has assets under management (AUM) of around $5.5 billion.

When setting up the hedge fund business, Pictet Asset Management made the decision to search out talent flying under the radar – not the stars of the business, but "serious" people with a career in front of them, according to Philippe de Weck, equity partner and chief investment officer of total return equities.

The idea, once the multi-strategy fund was launched, was to "incubate" new strategies within the larger fund, allowing managers to create a track record with seed capital from Pictet. This allowed Pictet to grow its single-manager hedge funds which now include Corto, a European equity long/short with a mid cap bias operating out of Geneva; Mandarin, a greater China equity long/short based in Hong Kong; Kosmos, a global credit long/short in London; Agora, a European equity long/short market neutral based in Geneva; and Phoenix, an Asian equity long/short market neutral based in Singapore.

Each year, between two to four teams are created, given capital in the multi-strategy fund and then, if proved successful, launched as a single-strategy fund. There are three strategies being incubated in this way at the moment.

This approach is clearly working for Pictet. Over 2015 and so far this year, the firm has doubled its AUM, something de Weck attributes to Pictet's "prudently run business". He says: "We're not out to generate short-term profits or short-term performance but to create a long-term business." He believes if a business is run for the short term, it creates too much risk as well as problems for the longevity of the business.

"Our focus is on risk management and not mistaking all performance for skill. We are rigorous and honest about where our performance comes from," he adds.

The vast majority of the current AUM is in market-neutral strategies that seek idiosyncratic returns going long and short with no market risk. This emphasis has clearly found resonance with investors who are seeking high single-digit returns but with low volatility and little or no exposure to market risk.

Risk management

Another element common to all the Pictet hedge funds is what de Weck calls "controlled factor risk". Portfolio managers concentrate on risk management, being clear about exactly where performance is generated and how it is created.

There are regular meetings where de Weck, along with colleagues from the asset management company, sits together with each of the hedge fund teams to analyse the process, review decisions and how these have changed the shape of a portfolio. He admits these discussions can be a bit critical of a manager's decisions, but the idea is to create better teams and help managers improve their investment processes. Such a detailed examination, he believes, helps teams focus more clearly on where performance is generated and the risk factors to which the portfolio is exposed.

He admits the process is not easy. "We're asking fund managers to consider changes to what they do without proof that it works. It is a delicate and important part of the process. We need managers that don't have egos and are receptive to this kind of feedback; managers with both feet on the ground," says de Weck.

To expand its hedge fund business, Pictet looks for people who have worked together, have a good endorsement and something to show for their past work. If they worked well in the past and want to work together in the future, he believes that is a good start.

There is no shortage of talent to sift through. Pictet receives information from industry contacts as well as unsolicited emails and also uses search firms.

The aim of hiring one to three investment teams a year for the hedge fund business appears to be working well for expanding the range of strategies offered by Pictet. But this process also takes time, with around 100 meetings needed in order to identify the right teams, says de Weck.

While the hedge fund part of the asset management business accounts for only 3% of total AUM, it generates approximately 10% in revenue terms. "This is a higher value-added business. It is a business where we deliver something that is hard to create: alpha in a concentrated way. Hedge funds are much more complex and therefore have to charge a different price from strategies that are simpler to manage and support operationally. If we continue to deliver performance to our clients, we expect to continue to grow and increasingly become a bigger part of the asset management business," says de Weck.

He believes Pictet's hedge fund business continues to deliver performance expectations and growth will come naturally through increased AUM and additional strategies. Having now built the operational infrastructure and foundations for a sound hedge funds business, and judging by the rapid growth over the last 18 months, Pictet is well on the way to creating a solid hedge fund business for the future.

Agora Fund received best equity market neutral hedge fund and best non-directional hedge fund over three years: equity awards in the Hedge Funds Review European Single Manager Awards 2016.