The merging of businesses generates a plethora of decisions by the most senior executives running the newly created entity. Whilst in times gone past integration in finance has been done at a leisurely pace so as not to ruffle egos – think of Credit Suisse and First Boston – that is no longer the modern template, and that recent bias has been reinforced by the harsh operating environment that followed the credit crisis of five years ago. So when the asset management businesses of Crédit Agricole and Société Générale were put together in 2010 to create Amundi, the ninth largest asset management business in the world, and the largest European asset manager, there were plenty of decisions to be made about who got the position where there was overlap. The job of making those decisions within Amundi Alternative Investments (Amundi AI) fell to Laurent Guillet, deputy CEO at the time of the merger, and CEO within 18 months of it.
Crédit Agricole had been involved in funds of hedge funds since 1992, and the flagship Green Way funds were well known in the industry. Crédit Agricole also had a separate American managed account business. SocGen had come into funds of hedge funds later than Crédit Agricole and built a research capability in New York. Both parents had risk management and senior management in Paris.
Putting the two alternatives businesses together meant a lot of overlap and duplication of products and systems as well as jobs and people. Laurent Guillet had already managed a couple of big issues – Bear Stearns was a major counterparty of Crédit Agricole’s when the bank went under in 2007, and he was deeply involved in unwinding the structured products written on hedge funds that had to happen in 2008 and 2009.
There was a lot of unwinding to do, as redemption notices poured in, and it is indicative that assets on the managed account platform (MAP) went from $6.5 billion at the end of 2007 to a low of less than $2 billion. Laurent Guillet is proud to say that they did not lose any clients in the process.
There was a lot of rationalisation to do. The CEO explains: “Our fund of hedge funds business at one time had $24 billion of assets, but it was significantly invested in offshore funds and funds with quarterly liquidity. I had to rationalise and streamline everything at maximum speed.” This rationalisation had to address the funds in which they were invested and the staffing levels.
Rationalising to prepare for the future
He expands, “I have spent a considerable amount of my time as CEO rationalising and enhancing the business model. There were a huge number of FoFs, and a huge number of underlying funds when the businesses were put together.” The situation was complicated by the gating of underlying single-manager hedge funds, and there were lots of assets with limited liquidity such as those in side-pockets.
Guillet decided to concentrate the allocations, reducing or cutting some and increasing the position size of others. With a sense of urgency the Amundi CEO sought to rationalise the holdings of hedge funds, and so took the hard decision to plunge wholesale into the secondary market. “In 2011 and 2012 we were a major player in the secondary market for hedge fund assets,” Guillet says. “And liquidity has significantly improved.”
In putting the two businesses together, Guillet has re-shaped it completely. In the hedge fund industry’s growth phase of the early 2000s Crédit Agricole had bought a hedge fund platform business called Ursa with a New York office, and Crédit Agricole’s alternatives business had a Chicago office. Those running the business took early action – during the financial crisis Ursa’s (hedge fund) portfolio management activity in New York was shut down. But more hard decisions had to be taken.
The 45-person operation in Chicago was closed down, and Amundi AI redeployed some of its US-based staff. For example some hedge fund analysts moved to London. “I had to reduce the staff – it is unusual to completely cut staff for continental businesses,” the CEO points out. When Guillet started as CEO there were 170 people in the business, and that has now been now streamlined to 80 people.
“This was a complex business to manage, with fragmented operations,” says Guillet. He has taken the opportunity to completely re-shape it: “All the analysts are now based in the London office in the City: we cover Asian, American and European-based managers from London. We have found it is extremely powerful to have all the analysts on one floor. Of course they are prepared to travel a lot, and they do.”
The two principal groups of staff are deliberately separated within Amundi AI. The staff responsible for selecting and monitoring individual hedge funds (due diligence analysts in the Amundi AI lexicon) is based in London. Those charged with constructing portfolios of hedge funds (portfolio managers) are in Paris. The universe of managers from which the portfolio managers can choose is selected by the group, based on shortlists put together by the due diligence analysts. Then, within that universe the portfolio managers can choose to allocate to managers and strategies.
Guillet explains the management philosophy behind this segregation of responsibilities: “I want some tension between the two groups. The dialogue between them should give better solutions for our clients. To have such a constructive debate you need highly competent, talented investment professionals. And, at this stage of maturity of our business, implementation is about relationships between people, not the pressing of a button on a software programme.”
To round out the organogram, sales and client relations activity is run from Paris, as is risk management oversight (of the wider group). And the CEO is happy with the way it works in practice. “It is much better now where we have each group focused on product construction and due diligence.”
Eliminating duplication was only part of the rationalisation. Guillet took on board the consequences of the 2008/9 financial crisis. “I realised that clients want portfolio management from us, so that is the term we prefer (rather than fund of funds). My position is that commingled funds face a challenging environment. They will still have a place when we use distribution channels of various kinds. So for example the clients of private banks may use these products.” But Guillet does not see funds of funds returning to the growth phase of pre-crisis times. And there are consequent pressures for providers.
“The long-term trend for the industry is that fees are only going to go down, and we have to be ready for that.” Guillet’s strategic vision is that it was absolutely necessary for Amundi AI to become financially robust through cost-cutting to enable the firm to cut its prices. He is proud that the cost/income ratio of the Amundi AI business is now in line with the wider Amundi Group. “Our cost position allows me to be extremely aggressive on price,” he says with satisfaction.
While most of the rationalisation has been done by now, managing margins does not stop there. According to the CEO, squeezing costs is an ongoing issue, plus he has other management targets. Post credit crunch, Amundi AI adopted the doctrine of putting everything in regulated formats. Guillet affirms that he had finished that job, as the regulations were, but of course, in the modern hedge fund industry there are always more, namely working with service providers to achieve AIFMD compliance.
One of the jewels in the Amundi crown is the $4.3 billion managed account platform (MAP). “It is important to have a MAP,” states Guillet; “It puts across to clients the messages of security, transparency, liquidity and capacity, and gives us the ability to integrate risk management. Also we think it enables us to meet our legal obligations in full.”
As Fig.1 shows, the Amundi MAP is the fastest growing major managed account platform in the industry.
One of the lessons of the credit crisis is that institutional clients want bespoke solutions managed on their behalf – in various forms – it can be a pure advisory mandate, a dedicated fund of hedge funds, or a separately managed account (fund-of-one). Amundi sees it that the modern hedge funds business has to add value through portfolio construction and onboarding/structuring skills via the platform rather than the old sales message of “giving access to the best hedge funds”.
Amundi’s platform has an open architecture. For instance, other managers of portfolios of hedge funds are interested in utilising Amundi’s MAP capabilities. Guillet discloses that investors have gone to Amundi asking whether they can put one of their managers on the Amundi platform. The rationale is that Amundi AI offers some flexibility in running a fund-of-one for a client. Take a manager already on the platform – the Amundi MAP has a fund based on the trading strategy of Jana Nirvana. One motivation may be that the client may want to avoid having their capital commingled with anyone else’s in the standard trading strategy. A second motivation might be where an investor wants a bespoke version. The version of the Jana Nirvana fund on the Amundi managed account platform is the standard investment strategy of the fund you see on hedge fund databases. A client may want a version with particular investment restrictions.
A large majority of the capital invested on the MAP comes from the Amundi Group. Guillet says that this is one of the reasons why he can characterise the Amundi MAP as a buy-side platform rather than a sell-side platform. The platform has been set up for an asset management group to utilise, and there will be elements of the offering which he thinks will appeal to institutional investors that an IB platform may have overlooked or will be sub-optimally provided. One of the surprises of looking at Amundi’s managed account platform is that it has only 21 managers on it. This is the result of a deliberate policy. Guillet explains: “We took the decision at the end of last year to massively concentrate our capital by strategy and sub-strategy. As a consequence we quite frequently get to the point of being 10% of the capital in a single manager’s portfolio. Being significant to the hedge fund manager has some advantages.” Amundi AI has been able to negotiate rebates with the single-manager hedge funds. The larger capital amounts allocated to fewer managers also puts Amundi AI in a strong position to negotiate better fees with the service providers to the platform – with the administrators and custodians of the underlying assets, and with the auditors and lawyers for example. Leveraging the buying power puts Amundi AI into an even stronger position to cut fees to its clients.
Although there are only 21 managers on the managed account platform, on an aggregate basis Amundi AI is invested in statistically significant fifty-odd funds, all of them domiciled in Europe. There are also a few dozen funds fully vetted for investment but not yet or currently allocated, giving an investible universe of about 80-odd hedge funds. It may be reflective of industry conditions that the pipeline of potential managers that the firm has built has many more emerging managers in it than major established managers.
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Selecting managers and building portfolios
Amelie Derambure, the London-based head of macro and systematic strategies, and Francois Bocqueraz, global head of fund manager relations & selection, describe how the analysts at Amundi AI work with the portfolio managers. It is the responsibility of the portfolio managers to select and weight the strategies within portfolios of hedge funds, but they do not do it in isolation. Derambure says, “We work together with the PMs to share views. So for example we give input to which strategies we want to highlight according to what we see impacting markets and strategies.” Then within an investment strategy, say CB arbitrage, it is up to the (due diligence) analysts to find the best names.
The due diligence analysts have to know the DNA of the managers so that they know in what market environments they perform best. Derambure expands, “We know that some managers will perform best in a volatile environment, or when there is momentum change in the markets. On an ongoing basis we can see where the funds are invested down to the position level. So when we have a change in market regime, like when Bernanke said he was looking forward to a tapering of QE, we have an intimate knowledge of which of our managers should benefit or suffer from a rising rate environment.”
The analysts have monthly calls with the managers, and the process is described as iterative and thorough. “We have to understand where the profits and losses have come from through the month – to make sense of them in the context of the manager’s style,” Derambure says. Analysts like Derambure are fully prepared in advance of their calls with hedge fund managers; to this end they dissect risk and position data, highlighting key sensitivities and market positioning. “We monitor managers with a variety of styles, and some of them invest strategically in markets – on a longer time-frame,” says Derambure. “It is easier to understand how those managers make their money. It is more difficult to see how managers with a short-term trading style are producing returns. We always get the quantitative materials, but the monthly call is an opportunity to discuss the true motivation behind the managers’ actions and the strategy’s outlook.”
Francois Bocqueraz gives the conceptual framework. “There are structural and timing reasons for hedge fund manager selection. Structurally, you have to have a broad selection of managers in your long list that can cope with many different types of market environment. You also have to manage the timing element of manager selection, so it is good for me to be in sync with the portfolio managers in Paris, and to be in tune with markets.”
Hecontinues, “Timing is extremely important to make effective decisions in terms of short-term portfolio construction, but in my role in the selection of absolute return managers I am putting as much emphasis on the medium to long term, thereby favouring consistency and robustness at our partner firms.” Amundi AI’s portfolio managers make their investment decisions for the short to medium term, as it is their job to construct portfolios that are robust in a range of market environments, but which do very well in the central scenarios envisaged in the collective wisdom of the wider team.
In this framework Amundi AI is also seeking structural and timing points from the bottom up through the hedge fund managers that manage capital on its behalf. Bocqueraz says he wants the managers to have a structural insight into the markets they address, and, “for our part, we have to understand what impacts the time-varying nature of their returns.”
The advisory role of Amundi AI is not a segregated function. Rather, it occurs as a natural part of the business. When a new mandate is under discussion Amundi AI will generate a series of solutions which will be taken forward for discussion with the clients. Each of the portfolios suggested will have pluses and minuses – these have to be thoroughly rehearsed with the clients so that the clients know what the implications are of the different solutions. “Some clients will care deeply about transparency and the legal structure of the solution,” says Bocqueraz, “and others will mostly look at the true underlying substance of the performance engine and will care somewhat less about the control environment around it.”
According to Derambure the relationship that the (due diligence) analysts have with their hedge fund managers can vastly help in making the most of investments: “On the one hand, it feeds into the profiling of our invested managers, that is, in our ongoing assessment of their DNA or biases. On the other hand, it gives us a constant feedback loop on our own market views and strategic thinking.” The Amundi analysts get some tactical benefit from the dialogue they have with top managers. By talking to a number of managers in a strategy it is possible for the analysts to understand what is going on across the market – information which is fed to the portfolio managers at Amundi AI.
Laurent Guillet has spent some time putting Amundi AI in a shape where it can be competitive on cost base and returns (see Fig.3/Table 1). Having rationalised and restructured it, Guillet says that it is now time to recapture where Amundi AI has been in business terms and to grow. He sees the firm as well positioned in a couple of ways.
Looking out and up
Guillet has changed the business model to make Amundi AI very competitive on fees and still maintain margins. In addition he has essentially brought the Amundi AI business onshore into a regulated environment. “We see it as a game changer that our products can be promoted as regulated products,” he states with conviction. The change is thought to widen the potential investor base, and gives increased comfort to existing clients.
In Europe Amundi AI is targeting pension schemes in the UK, Nordic markets and the Benelux countries. But the French alternative investment business has some bigger targets yet. The wider firm, Amundi, has very good relationships and market share with sovereign wealth funds (SWFs), and Guillet is keen to take advantage of that for the alternatives business. On a similar basis the Amundi Group has goodrepresentation on the ground in Asia, and he wants to benefit from the booming growth in Asia. He sees good prospects in South Korea and Japan in the near future, and growth opportunities elsewhere a little later.
When Amundi Alternative Investments was carved out of existing businesses it was unbalanced in where the resources were located. Laurent Guillet has got a grip on it by consolidating functions in two places which has allowed a corporate culture to be developed, and gives cohesion to the teams. In doing so he has recognised the state of play of the multi-manager hedge fund sector, and taken hard but rational steps to put Amundi AI on the front foot by cost-cutting and hitting some of the hot-spots – institutional clients, regulated products, a flexible product offering via the MAP, and in particular developing a capability for bespoke solutions (both fund of hedge funds portfolios and funds-of-one). Most of the management decision-making to date has been about internal change, but growth requires external parties, the potential clients, to buy into the vision of the offering. To a degree that has started to happen, as the managed account platform of Amundi AI was ranked number 11 by size two or three years ago, and is now number six in the world. The vision is beginning to work in practice.