However, the best multi-strategy hedge funds are generally concentrated on a single or narrow group of strategies and they lack the safety of being optimally diversified by number of funds. With multi-strategy managers, operational risk is concentrated within one firm, while with FoHFs operational risk is mitigated and spread over several management firms.
The single manager is very opportunistic and moves from one strategy to another. Stress testing is applied within each strategy but not as a portfolio in itself. Performance objectives are double digit with volatility in excess of 8 per cent and leverage is applied generously.
FoHFs adopt a very constrained approach to mitigate risk. Correlation analysis between strategies is closely monitored and strict guidelines are applied in accordance with historic risk testing. No leverage is applied at the FoHF level.
Since they are invested in multiple hedge funds, FoHFs are, by construction, less exposed to business risk or manager risk, i.e. the potential massive loss that a single hedge fund could suffer due to, among other reasons, fraud, excess leverage, and lack of risk management.
FoHFs minimise market risk at two levels, first at the strategic diversification level as the different alternative strategies – directional, event driven and arbitrage – can exhibit low correlation to one another. Second, market risk is minimised at the hedge fund allocation level, as hedge funds within the same strategy can have different styles, bias, and underlying investments.
FoHFs offer two sources of alpha: bottom-up value added by selecting the best hedge funds for a particular strategy in addition to top-down by over or underweighting exposure to various strategies. All portfolios managed by CAAM AI (Crédit Agricole Asset Management Alternative Investments) are the result of its rigorous investment process, which is a combination of asset allocation and meticulous manager selection.
The first step of the investment process is to assess each alternative strategy in terms of liquidity, risk return and correlation with other asset classes. The next step is to determine the attractiveness of each strategy based on the macroeconomic outlook and strategy-specific factors for each strategy. The weighting of each strategy in the portfolios is based on this strategic asset allocation.
The other key step of the process is manager selection. From a total universe of over 8500 hedge funds, initial funds for consideration are reduced to 1400 that are monitored on a regular basis. The selection teams at CAAM AI undertake around 800 visits per year. The due diligence process consists of a thorough quantitative and in-depth qualitative analysis.
At CAAM AI, our team of 26 investment professionals is dedicated to hedge fund selection, strategic allocation and risk monitoring. Portfolio construction is implemented from Paris while our offices in London and Chicago focus exclusively on selecting hedge funds. The risk management team is also based in Chicago.
Our analysts benefit from their proximity, both physically and culturally to the traditional centre of the hedge fund industry in the US as well as to increasingly important European and Asian hedge fund markets.
Overcoming capacity constraints
As the number of hedge funds which are forced to close or to introduce dissuasive terms of entry due to their success is constantly growing, the FoHF acts as a wholesaler of capacities with hedge funds.
Our critical size and long-existing relationships with hedge fund managers enables us to overcome entry barriers and offer higher liquidity and lower minimum investments to investors. With an audited track record since 1992, over £10bn under management in funds of hedge funds and 70 employees, CAAM AI is an industry leader and ranks among the top 10 fund of hedge fund managers worldwide. We provide more than 400 institutional investors worldwide with access to the best hedge funds, many of which are closed or selectively open to new investors. CAAM AI has built up trust relationships with many quality hedge funds, therefore when spare capacity is available we are among the first ones to be served.
Being a stable investor with a steady asset growth and benefiting from the financial backing of the Crédit Agricole Group has enabled CAAM AI to
obtain capacity with hedge funds that need a certain stability of assets to invest in sometimes less liquid markets or need time to implement long-term investment strategies.
Sourcing and investing at an early stage is key to getting and keeping capacity. In being able to identify highly promising managers and invest with them early, CAAM AI secures and negotiates future capacity.
There is a premium for long-standing funds of hedge funds that have built up trust with their partners and have been able to retain staff. They will get supplementary investment capacity in hedge funds, in the form of mandates, beyond what their maximum share in the fund would, in principle, give them.
Crédit Agricole Asset Management Alternative Investments
Contact: CAAM AI Client Servicing,
Phone: +33 1 43 23 13 18
E-mail: client-servicing@caam-ai.com,
Website: www.caam-ai.com
