Hedge fund platform embraces spirit of UCITS

Date: Friday, September 3, 2010
Author: UCITS Hedge

The decision by Natixis to launch its UCITS facility for hedge funds is well-timed. The French bank’s existing managed funds platform, which provides hedge fund managers with a range of different structures, will soon be playing host to a new UCITS-compliant hedge fund in the US. But this is not just another ‘me too’ platform venture, seeking to capitalise on the current vogue for UCITS hedge funds. It is far more than that.

For starters, the decision by Natixis to start supporting UCITS hedge funds on its platform was taken because of demand from its clients. Natixis already has a considerable retail and high net worth domestic client base in France, but further afield it has seen institutional and private banking clients from Germany, Switzerland, Spain and Italy asking it for UCITS hedge fund products.

Its hedge fund platform, Sixtina (an anagram of Natixis), has been up and running since 2006 alongside its multi-manager business, and has weathered the credit crisis. Natixis was punished for the relatively high levels of liquidity it offered, with investors tapping Sixtina for cash. This led to the forced liquidation of many funds, but Hervé Chopard, head of marketing and development at Natixis Alternative Assets, is sanguine. Yes, it is a concern given the UCITS liquidity requirements, but this is unavoidable. It is what investors want, and without it, you are not in the UCITS market.

Over 20 Sixtina funds were closed in the throes of the credit crisis, but a great deal of the pressure to liquidate came because the platform was mostly an internal resource, and the bank required the capital to support its own liquidity requirements. Now, the client base is more diversified, and Chopard believes this is less of a problem should there be a re-run of the credit crisis.

Full segregation of assets
“We act as a service provider, also having a fiduciary responsibility towards our investors, as we are the investment managers of the Sixtina funds,,” Jean-Francois Klein, co-head of the managed fund platform, says of Sixtina’s role. “We offer the investing client full segregation of assets, and we have daily oversight of what the fund managers on the platform are doing, in compliance with the requirements of the Luxembourg regulator, for UCITS funds. This is a core part of our offering.”

The differentiator, adds Chopard, is that Sixtina is setting out to be a pure intermediary solution for both fund managers and investors. Natixis is not seeking to embed managers within its prime broking operation and will work with any number of service providers, trying to best match its partner managers’ funds operational requirements and clients needs.

Sixtina is in the business of partnering with managers, using its brand name to help them to get access to investors in Europe.

“We don’t act as a consultant,” explains Mihai Lezius-Doncel, co-head of the managed fund platform. “But we do take care of all issues regarding the set up of the fund.” The manager focuses on trading his portfolio, while Sixtina manages the cash, subscriptions and redemptions. It also plays a big role in ensuring that the fund stays within its risk parameters and remains UCITS compliant.

Natixis is not in the business of turning away prospective managers, but their proposed funds will need to fit into the spirit of the UCITS directive. This also means that the tracking error to the offshore portfolio (presuming the fund is trying to mirror one) must be minimal. Vladislav Vassiliev, head of investment research at Natxis Alternative Assets, admits that this means the platform is likely to see a similar choice of strategies to the UCITS hedge fund universe as a whole, i.e. the focus will be on long/short equity, event driven, CTAs and macro-based strategies. “We would accept the CFD route to simulate short positions in equities,” he says. “There are a few ways to structure UCITS hedge funds, and we are still debating which are the best. But overall we prefer to have funds that manage the portfolios directly rather than swap out the performance, which we think that is not fully in line with the spirit of UCITS.”

This means working to provide the right legal solution for investors and managers, and most importantly staying within the spirit of regulation. Vassiliev says Natixis will seek to avoid funds that heavily rely on a swap based on an index, as well as those that depend on the use of instruments not allowed in UCITS. He wants to see funds that Natixis clients can be comfortable with. “We don’t like to see additional credit risk, for example,” he says. “A fund that is compliant because of a single swap with a bank is not our preferred solution.”

Even so, if Natixis finds a manager who looks to have real appeal for its clients, there are other ways to launch them on the Sixtina platform, for example using a Luxembourg SIF which is also an onshore vehicle but offers a greater degree of flexibility for the managers. But risk management remains paramount, particularly as nobody knows if the financial embers of the great credit conflagration of 2008-09 will flare back into life.

Investor-driven
The team at Natixis Alternative Assets comes across as very investor-driven, with a good feel for what investors are seeking from hedge fund managers. They don’t view Sixtina as a funds supermarket, and they are also aware of what else is out there. For example, they can already see, before a single UCITS III hedge fund is live on Sixtina, that there is a proliferation of European long/short equity hedge funds in the UCITS universe, and no doubt more to follow. What value is there to adding more funds like this to an already crowded market? Is it any coincidence then that Sixtina’s first UCITS launch is a US long/short fund?

“We are looking for managers who will be interesting from a diversification perspective,” explains Vassiliev. “This means we tend to focus on solid managers, with a proven track record, wherever they might be located, in the US, in Europe and even in Asia”. Sixtina clients still complain of a lack of choice in the list of UCITS-compliant hedge funds. Chopard thinks there is interest in managers who have an angle, who can really focus on something and make it happen, not just a bland pan-European blue chip equities strategy.

Tackle Sixtina about fees, and they come right back at you. Yes, they agree, fees paid for platform funds are an issue with both managers and investors. Chopard himself is wedded to simplicity and transparency in this respect: investors pay Sixtina a fee for risk monitoring the underlying portfolios, the managers pay Natixis a fee for distribution.

Sixtina’s return to the hedge fund fold is timely: as the UCITS universe continues to expand, it is offering a solid, proven platform backed by one of France’s biggest banks (BPCE) with an enviable pan-European distribution network. Its approach seems founded on solid practicality: simple, transparent, accessible. What more do you want?