What is new about your approach to a long/short equity strategy?
The originality of the long/short equity management process developed by Crédit Agricole Asset Management can be summed up in three points: the combination of three long/short approaches within one portfolio, the systematic use of derivatives, continuously controlled risk management according to Value at Risk (VaR) calculations.
The objective consists of achieving a performance as decorrelated as possible from directional trends in European equity markets. The strategies implemented by the investment team call on two types of complementary signals used to increase investment opportunities. First of all, quantitative signals derive from in-house models verified by the investment team. Secondly, fundamental signals coming mainly from the ratings awarded to European large caps by Crédit Agricole Asset Management’s buy-side financial analysts are used for implementing discretionary long/short arbitrage strategies. The strategies implemented on the basis of these two signals are said to be non-directional and neutral in terms of sector allocation.
At last, technical signals derive from graphic analysis tools and statistical indicators such as support, resistance and acceleration levels. The strategies implemented on this basis are mainly non directional on very short term.
Finally, steering is precise, permanently adjusted according to the risk budget (VaR calculation) allocated to each strategy and to the portfolio as a whole. This enables us to measure and adjust the desired levels of risk, volatility and correlation for each approach.
But are these sources of added value truly decorrelated?
Each of the three sources has been reviewed and implemented so as to have as little correlation with the others as possible. The sources of added value are constructed according to strict diversification rules (in terms of style, sector, country and currency) by independent teams in order to arbitrage distinctive parameters and market behaviours. The quantitative model seeks convergence between stocks and is used to arbitrage flows. The fundamental analysis is contrary, arbitraging valuation levels, and the technical approach is more of a trend follower based on market trends and the psychology of the market.
Regardless of the market conditions, we seek the allocation enabling us to generate a performance both robust in the long term and absolute, with as little correlation as possible with trends in equity markets.
How do you deal with trading costs?
Admittedly, long/short equity models require significant turnover in structural terms, approximately 30 per cent of the portfolio per month. Instead of buying equities directly, we resort to derivatives which enable us to cut our trading fees sharply. We have therefore opted for the systematic use of products such as single stock futures, options and equity swaps. Commonly known as ‘delta one’, these instruments replicate the performances of underlying securities with limited capital immobilisation. This technique enables us to invest a minor part of the portfolio in derivatives and to invest the remainder in money market assets so as to steer performance and control the fund's overall risk.
