Turning Noise Into Information

Q&A with Marc Romano and Gary Crowder of Credit Agricole Structured Asset Management

Stuart Fieldhouse
Originally published in the October 2006 issue

Credit Agricole Structured Asset Management (CASAM) is a joint venture between Calyon Corporate and Investment Bank and Credit Agricole Asset Management, that has been specialising in the development of structured asset management, alternative managed accounts, and Exchange Traded Funds. Its alternative managed accounts platform has 64 managed accounts and 10 alternative investment strategies available, and is used by structurers, institutional investors, and funds of funds. In addition, CASAM announced last month that it had acquired 100% of Ursa Capital, the holding company of two US-based managed accounts specialists, namely Starview Capital Management and Lyra Capital. These have been renamed CASAM Americas.

Stuart Fieldhouse spoke to Marc Romano, Managing Director of CASAM, and Gary Crowder, founder and CEO of Ursa, who has been named CEO of CASAM Americas, on their recent visit to London.

Marc Romano (MR): As of now, in terms of managed accounts platforms, we can claim to have a unique operation and balance between the US and Europe, and with licenses in the Europe and the US, allowing us to distribute products everywhere, including Asia. We have €2.1bn in alternative assets, and a very steady growth plan. Gary's group brings us experience – something you cannot create on your own. You have to have learned from your mistakes, been exposed to crisis situations, and react to them. He brings us size, his US team, and his CISDN hedge funds database, the former MARHedge database and one of the oldest in the industry.

SF: This was the database previously owned by Zurich Capital Markets?

Gary Crowder (GC): We donated it to the University of Massachusetts and we subsequently took a perpetual license with the university as a long-term strategic partner. In addition, we have the fully investable Dow Jones indexes, on a 20 year exclusive license to create their investment indices.

SF: Why did you make the decision to create this platform? What was the rationale behind it?

MR: We have an open architecture platform. Our rationale was that we had identified a demand in the market. We had the strength and the resource to be able to deliver it: we had the people, and yes we had some internal demand – when you want to kick off something, to have some internal demand really helps. Our internal requirements were twofold: a fund of funds for our group, a big, actively managed strategy that needed to be fully transparent, for our sister company Credit Agricole Asset Management Alternative Investment, known in the market as the Green Way Funds. The second driver was structured products. From the beginning, we had two drivers, along with the demand from external investors. It's important as it has dictated the way we have set up, and is why we are very different. One of the reasons we have been able to convince Gary to join us is because he has been able to create an open architecture platform, working with the street. When you want to do structured products, you need a managed account platform, you need to have that level of transparency, enhanced liquidity. For Calyon it has been very important to be able to access this through a managed accounts platform, and it was one of the reasons we were created, but we also believe it is very important to be open architecture, because this is the best way to attract good managers to a platform. Why does a manager join us? He joins us because we bring meaningful investment, and sticky investment. If you only rely on your own distribution resource, even if ours is very big (we have salespeople all over the world, in 60 countries), it is good to be able to say you are open to the market, to the major investors. I as a manager would not open a managed account on all the platforms existing on the street.

GC: Our starting point in creating a managed account platform was not this vision that managed accounts platforms were a good idea. In large part, working with institutional clients over the years, you listen to the clients. They tell you what their concerns are. Their concerns are, historically, when investing in hedge funds, oriented around transparency. You and I both know that given the amount of trades that are done on a daily basis, that frankly true transparency, complete transparency, is noise. There's no way, unless they have incredible technology and 10 people in-house tracking it, that they can actually understand what's going on. At the same moment, they've always had that historically, in their portfolios. We made the decision to give it to them, in such a way that we can create reports for them that meet their internal operational needs. We take that transparency and we create an antenna, turning that noise into information. They also need someone to monitor the situation for them. When looking at a hedge fund investment from the standpoint of an institutional investor, you have the risk of losing money, which is always a very bad thing; but you also have the reputational risk in that you made that decision to invest – a huge risk for a major institution. You also have career risk for the people who made that decision.

MR: And when you say there is a risk of losing money, it is also a risk of losing it thought something unforeseeable. We know that if you have returns you are also taking risk, and everyone realises that. What is very hard in the current situation with Amaranth is that people are unable to explain. Why? That's the problem.

SF: Theycan't communicate the risks the client is taking on effectively, or the client is simply unable to understand what the manager is doing?

MR: There is no more trust for the manager. The manager can say what he wants after that, but noone will trust him, that's the problem. There is always the fear that the manager has wandered off-base, has done something totally unknown. When certain events happen with a manager, if you have a third party like us, who is able to tell you 'I've observed everything, and it has all been done in accordance with investment guidelines, philosophy, etc', then you can look to your management, you can look to your investors, and you can say, 'Okay, it happened, it's bad, but I've not been stupid.' If something had not been done properly, we would have detected it, and acted to correct it.

GC: This is probably the only industry in the world where a stumble, where you lose that trust, means it is impossible to regain that trust and move forwards on some ongoing basis. Think about the 1982 Tylenol scares, where people actually died, but where Johnson & Johnson was able to rebound from that by taking prophylactic measures, by reassuring the public, and by going on to continue to build a thriving business. The hedge fund business, the asset management business, is markedly different – it thrives on trust.

SF: Doesn't this argument support the fact that institutional investors are going to prefer this kind of platform for making their hedge fund investments, and secondly are they not also going to prefer to invest with the established brand names in the industry, with their own seasoned risk management and operations departments?

GC: I think you've hit it on the head in terms of our business model. Our business model was first of all institutional investors, then working back down the spectrum, what's our bias? Towards large hedge funds that have significant assets under management, with a proven, seasoned investment team, they have established operations and risk management procedures that are implemented. And I underscore 'implemented' because right now everyone knows the game, they know what they're supposed to say. On the due diligence side we have to go past what they are supposed to say, and actually satisfy ourselves that these procedures are actually implemented. The bias towards the larger managers, absolutely, because we, as the result of our clients, have a great deal of money to invest. The emerging manager is not a part of our lexicon, the mid-sized manager is not a part of our business model.

MR: Usually, when you start to be a dominant investor in a manager, it changes the dynamic. Otherwise, if you are not dominant, you can decide to get out. If you become dominant, you own the manager, you cannot sell out like you can with a larger manager. This is why we have a tendency towards the larger managers, because we cannot have more than 10-15% invested with a manager, because otherwise it will create problems.

SF: Would you agree that going forwards, as we see the liberalisation of regulatory regimes to allow more hedge fund-based retail products to come on the market, that it is going to be the managed accounts platforms that will form the basis for such products?

MR: We hope so.

GC: Our starting point is institutional investors, but if we can satisfy the investor that is most sophisticated, that has the most resources to analyse what we're doing, and how we're doing it, the retail market is easy.

SF: Do you think that, with other investment banks launching their own platforms, that it is possible that there will be too many managed accounts platforms around, none of which will be able to reach the kind of size they would be happy with?

MR: Yes, there are quite a lot of platforms, but not so many that are open-architecture, that are serious platforms out of an investment bank or asset manager, but fully dedicated to them.

GC: There's a lot of 'me too.' The issue actually becomes the successful execution of a solid, well-though out business plan. As we've looked at our business plan, both historically and going forward, what we believe is that an open architecture platform with quality managers, and full transparency, gives us the basis on a structured level to build unique return solutions for our clients. We're also looking to have the basis to provide the platform for others, for Morgan Stanley, for JP Morgan, for Mizuho, for Lehman Brothers. Current clients can access our platform to create their own unique products. Those unique products will in part have an allocation to hedge funds, they may also have an allocation to other assets. The critical piece that we provide on the hedge fund side is the transparency, the operational security, the risk management, that gives them the ability to predict – not performance – but behaviour. If we could predict performance, hey, we're not here! I'm on an island somewhere. The key is to predict behaviour, because in asset allocation models that's all you're concerned about. You want to understand the behaviour of different asset classes under different economic conditions, and the only way of doing that is through information. We can predict, for example, how the S&P is going to respond. Why? Because we have 50 years of fully transparent information, under different economic conditions, and we can plot that. What's been missing in the hedge fund area has been that kind of transparency, where you can plot those data points. When we look at five years, in fact the longest history in this industry, of that kind of transparency, and in addition we own a significant database which provides us with a level of transparency from a risk management standpoint, we are able to do meaningful factor models on behaviour. How should this asset class or manager respond to different economic conditions or variables?

SF: Does that mean it is important to have access to a database with unchallenged historical data?

GC: The short answer is yes. The more meaningful answer from my standpoint is that it's important for the industry to have meaningful information. I would much rather compete against people who have the information to make decisions, and those decisions were rational, rather than people who are making irrational decisions because they don't have the information base in order to make a decision. I know that pricing is going to be rational. I know their behaviour is going to be rational – because they're very smart – as is they way they approach our client base. One of the biggest problems in a business where information is limited is that people make unreal promises, and your clients end up pushing back to you with the unreal promises of these people. They're passionate about it, they give it to the clients, and yes it blows up. I want a rational universe, and the only way we get to that point is through a lot of the things we're doing now. Marc says open architecture – we're providing information to the marketplace, we're providing transparency through our managed accounts, we're providing it through our databases, by publishing it via Bloomberg, PerTrac, and other data providers. I firmly believe that in a rational marketplace, we win.

SF: There's been a lot of debate about what makes a good hedge fund index, and how accurate they are at replicating various strategies, and the performance of the industry as a whole. What is required to make an investable hedge fund index?

GC: In the first instance, I don't believe you can create an investable hedge fund index that is representative of theindustry as a whole. I do not believe that is possible. There is just not enough information. Look at our Dow Jones indices. We call them 'institutional indices.' That gives you our first bias. We're looking to create indices that large pools of money are comfortable in investing in. There's going to be a bias on size, a bias on track record, style, the seasoned management team, all these biases are inherent in our index, and we state these, because anything you're using as a measure, what do you want to do? You want to be able to objectively measure it, and say to yourself, 'this takes into account these points.' And it doesn't go further than that. What I tell people in the States, is 'We've created a ruler. It is 12 inches long. It is designed to measure that space, and that space only. If you want to measure a model, you'll have to use something else, because this doesn't get you there.' One of the things that's happened, and this happens in any new industry, is that people are not defining what they're measuring. In an attempt to be all things to all people, they can't say 'we don't do that.' We have no idea what happens in the emerging manager area for example. Why? Because it's not our space, it's not what we do. As you look at indices, and you're analysing them, you should be asking some basic questions. What does it purport to measure? Is that measurement transparent? Can I replicate? Any good scientist or mathematician will tell you: 'I want to see the formula. Let me test the formula on my own, in my study, and I will tell you whether I believe in that formula, but you have to give me the formula.' We're looking at measurability, we're looking at transparency, and another critical issue in terms of measurement: is it a valid measurement of the problem? Overall, these indices are each and every one of them different, each and every one of them measures something different, and I think the key problem is that they've not been completely candid about what they're attempting to measure.

SF: Are you confident that you have eliminated any biases in the indices?

GC: No, I'm comfortable I know what the biases are. I am very comfortable that we fully disclose those biases to the world. Think about the S&P 500: what do they do, first and foremost? They say: 'This is our bias.' They full disclose it, they fully disclose how they calculate it, they fully disclose what the changes are, how they change, etc. If you want a broader indication of the US stock-market, you go to the Wilshire 2000, Russell 2500, the NASDAQ, etc. This is no different. I think that what's happening here is that rather than understanding all the asset classes, and treating them as you treat traditional asset classes, people expect hedge fund indices to accomplish all of these things in one, and it is not possible.

SF: Going forwards, what are your plans for the platform and for the index business?

MR: The simple answer, is to win! We'll continue to grow the platform. We expect to have 80 managers in one year's time, and we see an optimum number as 120. We don't want to have the street, due to the barriers mentioned by Gary. We have no interest in having 200, 300 managers. We want to have top tier managers. Let's say we're in a situation where we have 12 strategies, and want 10 managers per strategy, then you have 120. We know that after that we will still continue to grow, we will turnaround the managers – we will get managers who will not remain within the top tier, and we'll have to replace them. We will continue to grow the assets under management, which may increase our barriers towards the institutional managers, because as we grow the managers, and as we limit the number of managers on the platform, we will be increasing our allocation to those managers. That's our play. We don't want to have the whole universe because we believe that when you benchmark yourself solely in terms of numbers of managers, then you create some undesirable biases, such as being less strict on the quality, being reluctant to fire managers. If you communicate that you want 'x' number of managers on the platform, then each and every time you fire one, you take a step back. Our position is that we want to have high quality managers, so if one is not happening, then we kick him out. For the product, for the raw material, we see the development as institutional clients, structured products, and regulatory arbitrage. We see the big driver of people who used to invest in funds of funds that are now facing some sort of capital charge, moving to managed account platforms.

SF: Are you open to approaches from managers that want to be included on the platform, or are you going out to the market to specific managers?

GC: Both. When we say open architecture, we mean open architecture across the board. Managers contact us daily, and we respond to those managers. But we're also realistic about responding to the managers. Quite frankly, at least 50-60% of the managers who contact us have $100-$150m under management, they're looking to grow their platforms, etc. We can't respond to those managers in a meaningful way, because it's not within our business model. There are some managers that are great: they get 50-60% returns, they have incredible attention to detail, we'd love to have them on our platform, but the most they can manage is $200m and maintain that.

MR: It's not that they're bad, but they're useless for us.

GC: There are some hedge fund strategies that simply do not accommodate our business model.

MR: I think the hedge fund world is not unified. We use the single phrase 'hedge fund', but I think we are seeing different types of market appearing. For example, you have the institutionalised hedge funds that are moving closer to mutual fund groups in that they have become very well-established boutiques, with the right operational infrastructure and large staff bases that have a system in their own performance towards equity in the long run; they have organised themselves to replicate their success. And you will have boutiques that remain boutiques. That doesn't mean they're not good, but they won't fit our business model.

Marc Romano is Deputy Chief Executive Officer of Credit Agricole Structured Asset Management. He started his career in 1989 as a financial modelling consultant at CDC, then at Andersen Consulting in 1993. In 1995 he joined Axa group where he was Head of Strategy and Development (UAP holding group), Head of the Financial Risk Department (Axa Global Risks) and, at the same time, Chairman of Axa Paribas Alternative Risk Finance. In 2000, he was founding partner and member of the management committee for strategic risk solutions at Credit Suisse group. In 2002 he joined Calyon as Head of Risk Solutions. In 2004 he was appointed to the Alternative Investment & Asset Management Entities division before being appointed Chairman of the Management Board at Equalt Alternative Asset Management in September of the same year. In September 2005, he was appointed Deputy Managing Director of CASAM. Romano is a graduate in Mathematics from Normale Sup Ulm (1988) and a graduate of the French Institute of Actuaries (1997). He also holds a PhD in Applied Mathematics (1992).

Gary Crowder is the Founder and Chief Executive Officer of Ursa Capital LLC and the new CEO of CASAM Americas. Previously, Crowder was a Managing Director and member of the Management Committee at Morgan Stanley Group Inc., Morgan Stanley Asset Management. From 1995 until 1998, he designed and managed national marketing and client service efforts for money management services to governmental services. From 1990 to 1995, he was a Principal/Vice President. As Western Regional Manager, he started the Los Angeles Office, where he built an asset base of $17 billion representing over 200 corporate, public fund and endowment clients. From 1987 to 1990, Crowder was an Associate/Vice President with Morgan Stanley & Co., Inc. where he acted as Mid-West manager for tax-exempt securities. There, he started the Chicago office and designed and executed structured bond transactions. Prior to this, he was also a Vice President in the Municipal Securities Department at Continental Bank in Chicago (1985-86); an Executive Vice President at Metro Equities Corporation (1985-86); a Vice President at Bear Stearns Co. (1985); and an Associate at Sidley Austin Brown & Wood LLP in Chicago (1983-85). In 1982, Mr. he was awarded the J.D. degree from Northwestern University School of Law where he graduated with honors. Prior to that, he received his Masters of Management at J.L. Kellogg Graduate School of Management at Northwestern University where he also graduated with honors. Crowder also holds a Masters of Science from the University of Louisville, and a Bachelor of Science from the University of Missouri.