Lyxor Asset Management’s managed account platform is one of the most established in Europe, expanding strategy selection with the addition of more managers and consistent operational risk management.

Lyxor Asset Management is one of the dominant players in Europe and possibly the world with its managed account hedge fund platform. It sees an increasingly institutionalised future for the asset class, according to Stéphane Enguehard, head of the managed account platform.

Lyxor, a wholly owned subsidiary of French bank Société Générale, launched its first hedge fund managed account in 1998. Over the following years the platform has grown in both assets under management and in the number of strategies and managers represented on it.

Lyxor prides itself on its disciplined approach to risk management, something Enguehard says allows the company to focus on the underlying accounts offered on the platform and maintains high-quality dealing standards, making for a better investor experience.

The selection of managers is a process developed over the years, according to Enguehard. Ten people based in New York, Paris and Tokyo are tasked with deciding which funds are “greenlighted” to join the platform. A team of 20 relationship managers carry out in-depth checks to guarantee any fund approved for the platform can replicate its strategy within the tight parameters of the platform meeting operational requirements as well as liquidity and transparency standards.

In order to join the platform a fund manager needs to have significant investment experience coupled with an identifiable and sustainable edge, a compelling risk reward strategy and a proven track record or decent risk adjusted returns over various market cycles. In addition the risk control process needs to be robust. Fund managers must also have the ability to provide complete transparency and be able to manage capacity while maintaining performance.

Liquidity is key to the Lyxor offering. Another challenge is to ensure only strategies able to meet the platform’s liquidity standards are accepted.

With over 111 funds and a total of $11.7 billion of assets under management (AUM) at the end of July 2011, the Lyxor platform is one of the largest in operation. A total of 30 new funds were added to the platform by the end of August 2011 with plans for another 10 to join before year end.

On average it takes between two and four months to onboard a new manager. “Generally we would add 30-40 managers each year and close between five and 15 for reasons such as performance, a drop in assets making it hard to replicate the formula on the platform or where that fund’s capacity has been reached – this last can be a hard nut to crack but when a fund’s volume reaches such as level as to hinder its trading strategy then the fit is no longer there,” explains Enguehard.

“We strive to push limits. Innovation is a core part of the culture,” Enguehard adds. “We look to identify rising stars and challengers as well as niche or capacity constrained strategies and the end result should be an intelligent mix of large institutional organisations and smaller boutiques.”

The platform has existing relationships with some of the best-known hedge fund managers as well as a reputation for spotting top-performing emerging managers. “We are now working with Balyasny Asset Management and George Weiss Associates and have overcome the challenge of offering only single-strategy funds. We have also sought to enlarge our emerging markets and commodities offerings working with GLG Partners and Goldman Sachs Asset Management and the like,” says Enguehard.

Two multi-strategy programmes have also been accepted onto the platform this year. Enguehard believes the Lyxor platform may be the first to offer this strategy to ­investors.

Lyxor believes consistency, standardisation and a transparent subscription and redemption process are important key selling points. The end result should be full visibility for investors (and managers) as to order processing and fulfilment. In practice this means defined and regular terms for both subscription and redemption. In addition switching is possible on a weekly basis for 90% of an investor’s current holdings, according to ­Enguehard.

The platform is underpinned by a robust risk management process. “We have built an open architecture and have 10 prime brokers plus 15 over-the-counter (OTC) counterparties as well as three administrators. This means the platform has the structures in place to deal with everything that an end investor might require,” states Enguehard.

Lyxor has developed proprietary tools including a dedicated risk engine software system, Panorama. This software is able to run detailed risk analysis on the platform. It focuses on minimisation of operational risks, compliance with trading strategy and limits systematic profit and loss analysis, monitoring tracking errors and provides qualitative reviews before and during the life of each ­managed account.

Lyxor carries out extensive due diligence into new managers. This includes vigorous checks on risk infrastructure, investment guidelines, documentation and counterparties and conducts onsite visits. A fund launched on the platform is considered an entirely new fund, so, for example, although the existing prime broker is often retained, new legal contracts have to be concluded.

Operational risk management encompasses the full segregation of assets from fund managers. Assets are held only with top-tier financial custodians and depositories. Valuations are performed independently.

Other areas Lyxor monitors closely are style drift, tail risk and extreme market risk. Each fund is given customised investment guidelines. This allows the manager to implement the strategy in the managed account with predefined parameters agreed in advance. There is comprehensive stress testing and analysis of the maximum loss potential in the event of severe market dislocations.

Once on the platform each manager is closely monitored to ensure the replication of the strategy is working. “We have 50 trading limits that we can apply where appropriate but generally only 40 or so are used. The monitoring is done by default on a weekly basis but can be carried out more often, too. This adds to the overall transparency,” explains Enguehard.

The launch of a new website in September facilitates investor communications and reporting on a weekly basis. “This is central to the offering and we are proud to boast innovative technology to bridge the gap between investor and platform,” he says.

Reporting encompases various risk factors such as aggregation, beta, sector/geographic and market capitalisation, ratings or currency exposures and other matters. The system provides investors with information in a uniform manner, making decisions more informed.

“Innovative technology to allow a single view is a key advantage of investing via a platform. The data is refreshed on a weekly basis and can be accessed globally. The website also hosts proprietary research and regular podcasts with managers,” says ­Enguehard.

Better investor communications should serve Lyxor well as it seeks to grow in terms of both investors and managers. Assets under management have grown significantly since June 2010 to July 2011 by $2.8 billion to a total of $11.7 billion.

Areas of growth
Geographically Asia ex-Japan is the biggest growth area. “For these less mature markets the immediate advantages of a platform model are obvious. In addition 2008 acted to validate the very nature of the platform model and served to reassure the investment community on a global basis.”

Latin America may also be targeted in future. The region is still very much a developing market for hedge funds, partly because many of the continent’s jurisdictions restrict shorting and the futures market is under-developed with only a few financial products available to aid in shorting.

The nature of the investor base itself is also changing; with more and more large pension funds looking at managed account platforms as a good alternative to fund of hedge funds investments as well as a way to diversify portfolios in a relatively easy way. Lyxor’s platform investor base also includes private banks. Last year, for example, ABN Amro Private Banking signed a deal with Lyxor Asset Management, under which the Dutch state-owned bank offered its clients hedge fund products. The deal enables the bank to tap Lyxor’s selection of hedge fund products including multi-manager products both offshore and in Ucits III format within the ­European Union.

This is another segment of the market that is attractive and will have its own requirements and priorities as regards hedge fund investment and managed accounts in particular, believes Lyxor.

Another trend is towards dedicated managed account platforms for larger institutional clients. This should play out especially well in the pension fund world where there is considerable mandate restraint, making the dedicated managed account within the platform environment a compelling choice. It is also an attractive option for pension providers who are large enough and have enough in-house expertise to take advantage of a managed account platform designed just for them. A good example of this is the platform solution Lyxor is helping Dutch pension administrator PGGM manage.

The interest of pension funds also acts as a good reason for managers themselves to have a platform presence. “For the funds themselves although they may have initially been resistant they know that not having a platform offering is cutting off a growing part of the market,” says Enguehard.

Looking to the future Enguehard expects the managed account platform world to grow, as long as it continues to define its operating parameters and work within those. “We want to offer an enriched investment universe; it’s all about the product. We hunt for the best talent and push the limits but still remain mindful of the need of investors to access coherence in risk reporting, accurate and across all investments.”

“Effectively a managed account platform offers exposure to the liquid part of the hedge fund universe and because investors are increasingly defining assets by whether they are liquid or not, managed account platforms have a definite role to fulfil,” he concludes.

Managed accounts should be a continuing feature of the hedge fund investment landscape as investors will continue to demand them, believes Lyxor. Hedge fund managers are increasingly realising they need this tool in the offering they provide to investors.

Lionel Paquin is the new head of Lyxor Managed Account Platform replacing Stéphane Enguehard who now has responsibility for the business development of funds of hedge funds at Lyxor.