Discussing Risk Premia fund with the LFIS team
While many quant fund managers struggled in 2018, one of them managed to preserve capital with a well-thought and experienced-based approach.
Let’s find out how these ex-IB fellows, together with seasoned quantitative researchers, have managed to bring LFIS to a leading position in the quantitative markets space. Let’s also find out why they bring a new multi-asset strategy to the market and why now.
The power of diversification over the power of conviction
Quantilia [Guillaume Subias]: LFIS can claim one of the top-performing Alternative Risk Premia (ARP) funds in the market. What are the recipes behind such a success?
LFIS: At LFIS, we believe in the power of diversification over the power of conviction. This has been a key to our success. LFIS was among the first asset managers to launch a broadly diversified premia fund in 2013. Today, we manage over $4 billion in AUM in premia funds and have proven the value of our approach and our ability to protect capital through a range of market crises.
Our portfolio managers’ unique blend of investment banking and quantitative asset management experience allows LFIS to go beyond traditional academic premia and combine approximately 30 strategies including academic as well as implied and liquidity/carry premia.
This approach has high barriers to entry and we had to invest heavily in proprietary tools and infrastructure from the start.
LFIS made a multi-year investment in building out an institutional capital markets platform with multiple ISDA agreements and proprietary tools for pricing OTC instruments. This set-up positions LFIS to understand and identify opportunities and dislocations in many markets and flows. The same set-up allows LFIS to negotiate, price, implement, stress test and risk manage all of our strategies and to ensure that each captures a resulting premium in a pure, market neutral manner.
LFIS’ market-neutral approach
Quantilia: 2018 was such a difficult year for ARP strategies globally. How did you perform? What pitfalls did you avoid and how come? Finally, how is 2019 looking so far?
LFIS: Those who wished to see how the premia industry and our funds would perform in an adverse environment got that chance in 2018.
Our analysis showed that 2018 losses were concentrated in four sub-strategies: short volatility, trend following, foreign exchange carry and equity multifactor strategies. A number of risks inherent in ARP investing materialized simultaneously in 2018. These included overly simple factor construction and inadvertent market exposure, forced selling/deleveraging, re-correlation risk and lack of diversification.
Rather than pointing to problems with factor investing per se, 2018 simply showed that the ARP universe is highly heterogeneous. As we always say, investors must choose carefully between the options available. This corrective period also served to eliminate, as and where needed, overcrowding in some positions, strategies and market segments. Generally, this bodes well for further alpha generation.
LFIS’ rigorously market-neutral approach means that our funds were not invested in the strategies that drove much of 2018 losses, including short volatility or CTA approaches. It is interesting to note that many of the strategies that suffered in 2018 were the gainers in 2017, again pointing to a lack of market neutrality across the sector as a whole.
Additionally, construction and implementation are areas of intense focus for LFIS, with the objective of avoiding the common traps that came to the fore last year. Most of all, the high level of diversification present in our strategies allowed us to weather 2018 relatively well. In a year when the returns of most ARP funds sat within a band between –4% and –8%, we proved our ability to protect on the downside, delivering flat to positive performance for the year across our premia range.
The winning strategies/risk premia for 2019
Quantilia: I understand you build your own risk premia strategies and then combine them into a portfolio. Being an asset manager, you have the possibility to underweight and overweight them, unlike static baskets of strategies. What tools do you use for market timing? What will be the winning strategies/risk premia for 2019, the ones driving the performance?
LFIS: If recent performance challenges have taught us anything, it is that markets are highly unpredictable. This is in line with LFIS’ conviction that trying to predict or time premia is very challenging and therefore illusory. Likewise, the significant drawdowns of certain strategies, including equity value, illustrated the risks of overexposure to one premium and the importance of maximizing diversification rather than concentrating ones’ bets.
Rather than trying to time premia, LFIS emphasizes diversification across the broadest range of risk and style premia possible. Our combination of diverse premia underlies the resilient performance we have posted over the last 5+ years). Some strategies require markets to move, others rely on stability. Strategies can benefit across markets (volatile, trending, range-bound) and materialize at different points in time. This makes for a highly resilient portfolio.
Quantilia: In Europe and also in Asia now, the brand “UCITS” is more and more powerful towards investors. As an outsider, I think it means constraints. Isn’t Managing a UCITS ARP fund a contradiction? How does a Portfolio Manager navigate within UCITS rules without impacting performance?
LFIS: We do not see a contradiction in managing ARP funds under both formats. Our UCITS and AIF funds have different risk profiles, precisely because the UCITS wrapper does impose certain restrictions. Our AIF strategy is managed to a volatility target of 7% with a Sharpe ratio objective of 2, while the UCITS version has a volatility target of 5% and seeks a Sharpe ratio of 1.5. The two funds also have different liquidity parameters, the UCITS being daily and the AIF weekly. Investors can choose the regulatory and risk/return option that best fits their needs.
A new multi-asset strategy
Quantilia: LFIS has just begun marketing a new multi-asset strategy. How does your approach differ from traditional multi-asset managers? How does a multi-asset fund fit with LFIS’ DNA?
LFIS: Long only exposure to European equity and interest rate markets has shown limited potential for performance. Our ‘Perspective’ strategy offers a new take on multi-asset investing. LFIS’ edge comes from taking different exposure to traditional asset classes. We invest in traditional asset classes, namely European equity and high-grade bonds, but achieve the exposure differently to the majority of multi asset funds.
LFIS’ DNA is founded on expertise in derivatives and Perspective is implemented using liquid, index-based derivative instruments. This allows us to benefit from more market scenarios, including rangy and flat-to-down equity market performance and to capture value from the mean reverting tendency of markets (essentially buying low and selling high). The result is a liquid fund with enhanced exposure to traditional asset classes, simple risk parameters and reduced idiosyncratic risk.
Rather than relying equity markets performance, Perspective seeks to capture carry from the resilience of markets over the medium- to long-term (or, in other words, that fact that systemic risk rarely materializes.
Though we only opened the fund up to external investment in Q1 2019, we have been running the strategy since 2013. With annualized returns of 6% and a Sharpe ratio of 1 since inception, Perspective was awarded a 5-star rating from Morningstar earlier this year. We are already seeing strong client interest in this simple but innovative approach to multi-asset investing.
Quantilia: a few years ago, LFIS was a start-up. Now it is an established brand. What makes you decide to onboard your funds onto Quantilia platform, also a start-up?
LFIS: As the Quantilia platform was focused on premia at its inception, this made it a natural fit for LFIS. LFIS also has an established track record of collaborating with and supporting promising French FinTech firms and this continues that tradition. We have seen that the platform allows us to connect with the client groups we are targeting and look forward to onboarding more strategies onto the platform going forward.
Launched in 2013, LFIS has $14 billion of assets under management as of June 30, 2019(1). LFIS’ innovative set-up combines asset management expertise and specialist quantitative capabilities to deliver performing solutions for the long-term. This unique blend of skills underlies a broad range of value-added investments including alternative and multi-asset funds as well as dedicated funds and solutions adapted to the needs of today’s investors.
LFIS is part of the French asset manager La Française Group and its entrepreneurial spirit is complemented by the support of La Française Group and its majority shareholder Crédit Mutuel Nord Europe. Over more than 40 years, La Française Group has developed core competencies in third-party asset management, with 610 employees and EUR 68 billion in assets across four core activities: securities, real estate, direct investing and investment solutions (as of June 30, 2019)(2).
(1) Source: LFIS. AUM means assets under management. Unaudited data as of June 30, 2019. The EUR/USD exchange rate used is based on June 30, 2019 Fininfo closing rate i.e. 1 EUR equals 1.1488 USD.
(2) Source: La Française Group. Unaudited data.
This document is aimed solely at the media and is for information purposes only. The opinions expressed here are the views of the author and do not constitute investment advice. This is not a recommendation to purchase, sell or subscribe to financial instruments, an offer to sell investment funds or an offer of financial services. This press release is as dated. They do not necessarily represent the views of any company within the La Française Group and may be subject to change without notice. This does not constitute a financial promotion as defined by applicable laws and regulations and is for information purposes only. No financial decisions should be made on the basis of the information provided. Information regarding the background and personnel of La Française Investment Solutions is provided for information purposes only and is accurate as of the date of this document. Such persons may not necessarily continue to be employed by La Française Investment Solutions and may not continue to perform services for the teams mentioned above. No representation or guarantee is given that any targeted figures will be achieved.
Premia topics – Luc Dumontier, Head of Factor Investing and Senior Portfolio Manager
Luc Dumontier joined LFIS in 2013, prior to which he was Head of Absolute Return strategies at HSBC Asset Management in France. From 2004 to 2011, he was in charge of Absolute Return strategies at Sinopia, where he developed quantitative strategies including Global Bond Market Neutral, Currency Overlay, Global Tactical Asset Allocation and Multi-Government Bonds. Luc began his career in 1998 as an equity portfolio manager and has been leading portfolio management courses at the French Society of Financial Analysts (SFAF) since 2002 and the French Asset Management Association (AFG-PRAM) since 2011. Luc holds master’s degrees in (i) economics, and (ii) money, banking and finance from Paris I Panthéon-Sorbonne University.
Perspective / Multi-Asset topics – Edouard Laurent- Bellue, Head of Fund Solutions and Senior Portfolio Manager
Edouard joined LFIS as a Portfolio Manager in 2013. Edouard started his career as an Equity Derivatives structurer at Société Générale in 2005. He then joined Deutsche Bank as a structurer within their Equity Derivatives departments, in which he developed investment and hedging solutions for institutional clients and hedge funds and became the manager of this team in Hong-Kong. Edouard joined Morgan Stanley Hong Kong as an Equity Derivatives trader in July 2011.
Edouard graduated from Ecole Polytechnique. He also holds a Master’s degree in Probability and Finance from Paris VI University.