Introducing institutional investors and hedge fund managers to one another is vital, but is only one facet of the support that the global Societe Generale Prime Services (SGPS) capital introduction team offers managers in their fundraising endeavours. A broad dialogue on distribution is in turn just a subset of what the team actually does, not least since they belong to a larger group. “The capital introduction team is an integrated partnership with prime brokerage sales and alternative consulting, sitting between investors and managers,” explains Global Head of Hedge Fund Sales, Duncan Crawford.
The business includes provider-neutral advice on a myriad of asset raising avenues; educational events, a substantial database of managers reaching well beyond SGPS’s own client base, respected hedge fund performance indices, insightful market commentary covering discretionary and systematic strategies, and alternative investment consulting for allocators and managers alike. All of this has been developed since the 1990s and “it would be very hard to replicate what we have built over 25 years,” reflects Crawford, who was there from the start.
“Helping managers and allocators to get it right is a simple concept but quite nuanced in practice,” says Managing Director and Head of Capital Introductions, Americas, Dan Rizzuto, who joined the US team from the hedge fund industry. The SGPS recipe is “we reach out to allocators and managers and have an active dialogue with both. We constantly check the pulse of institutional investors; where they are allocating now, what are their concerns, their objectives. Then we also update each of them on who is doing what in the manager space. We provide qualitative and quantitative support to both sides so managers and institutional investors get the alternative investment equation right and have a long-term, positive experience,” says Rizzuto.
These conversations are documented in a proprietary customer relationship management database that the entire global team can access. “All dialogue is synthesised into relevant information for managers and allocators,” explains Rizzuto.
“This develops relationships among managers and investors and also builds business relationships for SGPS broadly,” adds Crawford.
There are capital introductions specialists based in each key global region: Americas, Europe, Middle East and Asia Pacific. These in-house alternative investment experts communicate with each other around the clock and compare notes formally on a weekly basis.
Growing the SGPS fund roster
“The three-pronged approach is a symbiotic relationship to develop our own and our client managers’ businesses,” says Crawford.
As competitors contract their balance sheets and prime brokerage businesses, the multi-asset class SGPS finds itself in the enviable position of receiving reverse enquiries, as funds fret about whether other counterparties will continue covering them after many banks have ceased activity in some asset classes. In contrast SGPS has resolved to climb up the prime brokerage rankings.“Cross-asset margining and OTC intermediation can be heavy on balance sheets, but Societe Generale has made a commitment to this business, and indeed has invested considerably in its prime brokerage infrastructure and is comfortable to take on balance sheet heavy business in the right circumstances,” says Crawford.
SGPS has always been renowned for systematic strategies (of which shorter term CTA Altiq is one example of a manager client profiled by The Hedge Fund Journal in February 2016), but the group is now “making deliberate inroads into the discretionary world,” says Rizzuto.
If quantitative equity was the first natural progression from quantitative macro, now SGPS’s enhanced equity and cross-asset capabilities are attracting more multi-strategy, systematic and discretionary equity managers (with support services specialist Broadmark one example of a manager client profiled in THFJ). “The consulting and capital introduction teams are leading connectivity with the alternative equity sector and we are hiring equity experts in the group to facilitate that,” says Rizzuto.
Clearly, Societe Generale is dedicating resources to the prime brokerage business when other prime brokerages are retrenching.
Moving east to Asia, the hedge fund space is distinguished by its diversity. The combination of developed, and developing, markets makes Asia special. “Australia and Hong Kong are clearly established markets with China offering both sides in one go. The possibility of outsized returns is a drawcard and some investors cannot believe they did not get here earlier,” says Head of Prime Brokerage Sales and Capital Introductions, Asia Pacific, Rebekah Pang, who was selected for EY and THFJ’s ’50 Leading Women In Hedge Funds 2015’ survey.
The differences between markets such as Singapore, Hong Kong, China, Thailand and Korea are also startling to many allocators. Pang remembers how there were once 15 commodity hedge funds based in Singapore, but the city state has not escaped the trend of commodity funds shutting down. For Asian investors today, Pang finds “equities and macro are the favourite strategies with consistent demand, and people are still looking at China.”
Though the Asian hedge fund landscape is dominated by equities, Pang does see more macro strategies popping up. Asia is seeing launches in the $100-$200 million range, but at the same time most are between $30-50 million and the smallest between $5-10 million. “We will look at funds of all sizes because we look at the overall relationship with the fund and not just starting assets,” says Pang.
Most funds are located in Tokyo, Hong Kong and Singapore, all of which attract regular allocator traffic.
The Middle East is home to many representative, marketing offices of hedge funds and some funds of funds, but so far fewer are managing money from the region, explains Head of Capital Introductions and Hedge Fund Sales for MENA, Saleha Osmani-Eliard. “The DIFC (Dubai International Financial Centre) has been around for nine years and has a sound structure in terms of regulation, compliance and legal frameworks, but it has been a slow process for funds to decide to set up here.” The rep office structure is preferred here; some of the leading hedge funds have a representative in Dubai or Abu Dhabi.
Full spectrum of investors
The Middle East is more sought after for its capital. “We have been in the Middle East for over two decades and have solid links to the sovereign wealth funds,” says Osmani-Eliard.
Most countries in the region have at least one SWF, and SGPS also talks to banks, family offices, and other asset managers, right across the region including Dubai, Abu Dhabi, Bahrain, Saudi Arabia, Kuwait, and Qatar. The conversation can be broader than single hedge funds, with some allocators looking at funds of funds, private equity and real estate as well. Essential criteria for the Middle East include a three year track record, assets of at least $300 to $500 million, and sufficient capacity to accommodate big allocations; but none of this guarantees assets and certainly not at short notice. Managers seeking to raise capital from the Middle East are in for the long haul, as well as regular long haul flights. “It is not about doing one or two trips and giving up. You have to continuously show commitment and show up. This region is known for the strong value it places on long term bonds and relationships,” Osmani-Eliard has found, in her nine years in the Gulf.
Lower oil prices are clearly slowing down some local economies but it is very much business as usual when it comes to hedge fund research – as large sums of accumulated wealth needs to be deployed. “People are still holding meetings, carrying out due diligence and visiting hedge fund managers with a strong pipeline of investment opportunities,” is what Osmani-Eliard hears on the ground.
The US is also active with hedge fund assets breaking new records. SGPS’s US teams talk to allocators from sovereign wealth funds down to family office groups. This list includes “pension funds, banks, bank platforms, insurance companies, Taft-Hartley funds, funds of hedge funds, multi-family offices, outsourced CIOS and consultants.”
The spectrum of investor types is broadly similar in Europe and Asia, which is a larger region than some may think. “My region of Asia goes from China in the north to New Zealand in the south,” says Pang.
The SGPS teams, some of whom were allocators or hedge fund product specialists in former jobs, are conversant with institutional investors’ operational due diligence (ODD) requirements, of which counterparty due diligence is the area SGPS has daily experience, fielding several phone calls per day.
Open architecture distribution and liquid alternatives
Catering to the full range of managers globally means SGPS naturally has an open architecture approach to distribution channels. Some managers structure their own liquid alternatives (UCITS or 40 Act) products, including AQR’s mutual fund series, while other managers work with a multi-manager platform such as Franklin Templeton’s K2. “Managers may choose a selection of different distribution partners within the US market, and may also have multiple partners in other markets,” finds Rizzuto. He stresses: “Distribution is key for liquid alternatives so you need to align with an entity that has distribution strength. Alternatively, you can try and build the capability internally, with the goal of achieving economies of scale and proper return on the investment for the resources committed to distribution.”
This is a two way relationship, and “distributors want managers to provide professional expertise, such as product specialists, to support distribution channels,” Rizzuto notes.
In the US, distributors could include managed account platforms (MAPs), private banks, traditional broker-dealers, and independent RIAs (Registered Investment Advisers).
In Europe “UCITS has been a big growth area since the credit crunch,” observes Crawford.
When it comes to structuring UCITS, SGPS again “follows an ‘agency model’ of servicing the client in the way that is most suitable for what they do and who their clients are,” says Crawford, which means some clients build their own, others partner with one platform, and some have as many as four or five different UCITS feeders on as many platforms. Whether and how UCITS obtain exposure to commodities is one example of a structuring choice that managers make. Some managers now have both 40 Act and UCITS feeders.
The appetite for liquid alternatives continues, with “many institutional allocators wanting low cost, core exposure to certain momentum and other factor-based strategies,” says Rizzuto – and this does often imply lower fees for more scalable strategies (though UCITS have thus far not seen much pressure on fees, Crawford notes).
Some liquid alternatives also have lower volatility targets, but Rizzuto thinks that the absence of capacity constraints and commercial realities are the primary reasons for lower fees.
As these core exposures have been put in place, SGPS notes allocators are again searching for more unique and distinct strategies, and taking a serious look at the newer and smaller managers that SGPS is traditionally known for nurturing. And, “when all of the creative power of the manager is harnessed, investors are prepared to pay full hedge fund fees,” finds Rizzuto, because research costs money and truly unique alpha commands a premium.
In Asia, private banks are big fans of UCITS, but aside from them, Pang does not see much indigenous demand for the structure, with US 40 Act structures even less widely used due to their restrictions on non-US investors. “Offshore funds are still popular, with some allocators using managed accounts or funds of one,” she sees.
Local fund domiciles are not taking over from the offshore ones, and local fund passporting schemes such as ASEAN are not gaining huge interest from hedge funds at the moment. Some funds in the region are garnering inflows from mainland China and the reciprocal recognition of Hong Kong and China funds is being closely monitored. Meanwhile “Japan is on everybody’s radar and distribution partners can help. Managers first need to decide between a wholesale or retail partner – and then need to pick the right partner!” says Pang, underscoring the importance of open architecture.
In the Middle East, “managed accounts (MACs) account for most of assets, with some of the renowned largest SWFs structuring their own dedicated MACs while others, in Saudi Arabia and Kuwait, may prefer managed account platforms (MAPs). Funds are also used, though UCITS is a newer phenomenon,” Osmani-Eliard explains.
Regulatory frameworks for distribution
SGPS give clients high level insight and direction on their marketing strategy in various regions. The US may be seen as a split between Delaware or Cayman vehicles for institutions and 40 Act for retail, but Rizzuto explains that “a variety of US regulated fund structures exist and can be sought after by certain types of institutional investors.”
In Europe, “we are cognisant of regulations and their implications for clients, in terms of what products can be distributed to whom in which markets,” says Head of Capital Introductions, Europe, Oliver Druce.
Druce’s team is spending increasing amounts of time providing managers with strategic guidance on how best to approach European investors. For instance, some larger non-European managers are setting up marketing hubs in Europe as gateways. Meanwhile, some smaller groups are reconsidering marketing in Europe altogether, due to the perceived costs of adhering to regulations such as AIFMD and CISA (Collective Investment Schemes Act in Switzerland). Druce observes that “regulations have raised the barriers to entry for managers and this has resulted in less choice for investors. This makes the role of capital introductions more important than ever” as investors increasingly turn to the team for insight into the expanding universe of onshore regulated vehicles.
Osmani-Eliard stresses that managers seeking to market in the Middle East need to pay attention to the rules applying in each market, which can include criteria on assets, track records, and years of experience. “Kuwait is different from Bahrain, which is different from Saudi Arabia. And even within the United Arab Emirates, Dubai has different expectations from hedge funds than Abu Dhabi,” she explains, going on to say that “there is a huge demand for regulatory, compliance and legal advice to get documents in line with local requirements.”
Osmani-Eliard also suggests that managers could approach the local regulators, which are often the central bank, or bodies such as the DIFC and ADGM (Abu Dhabi Global Market). There is a long term aspiration for the Gulf Cooperation Council (GCC) to develop a common set of rules but this has not happened yet.
Events and conferences
Even in a virtual world, real world gatherings are part ofcapital introduction but“our events are more content and substance driven, and less about networking and handshaking,”explains Rizzuto. “We have the intellectual firepower and informational resources to be the content cap intro team and not the speed dating one” he adds.
SGPS’s thought leadership events are research focused, and attract audiences of CIOs, directors of research, and heads of alternative investing across the spectrum of institutional investor types, to listen to managers and other industry experts discuss provocative and thematic-minded topics. Extended one-on-one time among allocators and the presenters is also facilitated and encouraged. “It is not about sales, but is rather about finding interesting, topical research ideas to increase education and understanding in the space, which may well then lead on to a sales discussion,” Crawford expands.
SGPS holds its own events and travels extensively in the major financial centres of the US and globally. SGPS is also increasingly active in more regional locations across the Americas. Coverage is widening because Rizzuto sees “the benefits of successful alternative investing gaining greater recognition from more and more endowments, corporate pensions and regional consultants.”
SGPS’s European events have historically been somewhat London-centric, but some are now being held in Switzerland and the Nordics. In the Middle East, “SGPS tailor makes events for investors rather than attending generic events,” Osmani-Eliard explains.
Specifically, SGPS gathers managers globally to hold research events that are educational rather than marketing in their agendas, and smaller workshops can also be tailored to particular clients, she adds.
As part of SGPS’s strategy to service the alternative investment industry broadly and collaborate with other advocates of alternative investing, they also actively participate in third party events, including having been lead sponsors of the Miami-based Context Summit and Managed Funds Association (MFA) events. SGPS are also regular contributors and participants at other events such as the GAIM and EDHEC conferences.
Alternative investment consulting
SGPS’s own events complement its consulting efforts. “Our peer group analytics provide perspective and comparisons,” says Rizzuto, who highlights the value of insights about “downside risk profiles, factor correlations and asymmetry of the return distribution.” These analytics are produced by SGPS’s unique Alternative Investments Consulting team. “All of the analytics are proprietary, using SQL databases, Matlab and custom applications,” says Global Head of Alternative Investment Consulting, James Skeggs.
SGPS went down the bespoke route because off-the-shelf packages did not have the functionality and capacity sought. “We are generating thousands of reports with dynamic templates, and dynamic benchmark selection, with data automatically processed from thousands of emails,” explains Skeggs. As usual, all of this is integrated into the CRM so that it is a practical and accessible tool.
SGPS has now rebranded the Newedge CTA Indices and Trend Indicator, which are now 16 years old, as SGPS Indices. The SGPS Indices make meaningful analytical distinctions between trend following CTAs and short term traders, between quantitative and discretionary macro managers, and between trading and equity oriented commodity traders. SGPS’s volatility index monitors a range of managers that can be long volatility, short volatility, neutral or have a variable bias. Many of the leading managers belonging to these indices, including Amplitude Capital, Aspect Capital, Campbell & Company, Cantab Capital Partners, Informed Portfolio Management, Man Investments, Millburn Ridgefield Corp, and Systematica Investments, have been profiled by THFJ, and many have also been recognised with performance awards.
In January 2016, SGPS launched its fourth daily index, a new index for 40 Act mutual funds, called the SG CTA Mutual Fund Index. “We wanted to benchmark these products in a proper robust manner, so we followed the same methodology as for our flagship indices, only for 40 Act we select and equal weight the largest 10 CTA mutual funds whereas we choose 20 for our main CTA index,” explains Skeggs.
The indices can be one foundation for market commentary, but they also cover a universe of managers much larger than the index members. “The consulting team work hand in glove with capital introductions and PB sales, producing market commentary on CTAs, liquid alternatives and other hedge funds, mainly for investors,” says Skeggs.
Crawford recalls how this work began 25 years ago at one of SGPS’s predecessor organisations, Fimat. The starting point is a huge database of thousands of managers, who report daily data to SGPS that is then refined into analytical reports, including objective peer group comparisons. The data is collected from managers well beyond SGPS’s own client roster, and was historically used to support the investment decisions of SGPS’s allocator clients who were investors in managed accounts at the firm. The database is not sold on a standalone basis, and has some proprietary features such as how SGPS defines strategy groupings as opposed to letting managers self-identify their strategies. Most beneficiaries of the database, and associated Nelson reports, are investors, but some are managers. Those managers reporting data can choose to restrict their information to the investor distribution list.
“Dialogue with investors and managers over risk and portfolio construction, leads to white papers intended to better explain topics to a wider audience, and designed to facilitate cap intro conversations,” says Skeggs. Recent papers have looked at how calculation methods influence the definition of holding periods. This is in turn important for defining which managers are ‘short term traders’, and SGPS has for some years alerted allocators to how shorter term traders are not just low correlated with longer term CTAs, but also less correlated with one another than are longer term CTAs. SGPS’s research elsewhere has highlighted the diversity of the hedge fund universe. Their piece ‘Same, Same, but Different – Heterogeneity within the Discretionary Global Macro Universe’ used clustering techniques to uncover the wide spread of correlations amongst macro managers. ‘The Life Outside of Trend’ illuminated how many CTAs use a variety of signals in addition to, or instead of, trend signals, and created six categories: Trend following, Quantitative Macro, Short Term, Commodity, Currency and Diversified Technical for various types of CTAs.
Market commentary has now expanded into equities too, mirroring SGPS’s client base and the enhanced execution, award-winning research and capacious security lending capabilities afforded by the merger of Newedge with Societe Generale. The SG Prime Services Snapshot in the AlternativeEdge series entitled: 'A Review of Equity Hedge Fund Performance in 2015' identified growing performance dispersion between equity hedge fund managers. It discusses differences between and within long/short and market neutral equity strategies, for three regions (Americas, Europe and Asia). The report also analyses six long/short factor indices. Societe Generale’s strong presence in security lending makes it natural for the team to comment on the stock-loan environment for European equities in 2015.
Institutional investor clients come to SGPS with questions that sound more like meaty projects, including how to construct a portfolio of CTAs, how to select equity market neutral strategies, and with bespoke screening requests. Hedge fund manager clients seek feedback on business development strategy and best practices for an asset management company. Once again, all of this is intended to facilitate capital introduction conversations, which are additive to SGPS’s client experience, underscoring the benefits of uniting this trinity of activities.