Shortlist: Best event driven hedge fund

Shortlisted 2010
Best Ucits-compliant hedge fund
 
Dexia Long Short Risk Arbitrage fund is a Ucits-compliant fund with an event driven strategy based on two different arbitrage strategies. The first looks for arbitrage opportunities on announced mergers and acquisitions (M&A). It consists in buying or selling the companies involved in an M&A deal based on the fund's anticipations of how the deal will turn out. The fund can invest in any investment vehicle that can be impacted by M&A activity.

“This type of strategy, based on announced deals, is loosely correlated to the markets. The main risk is whether the deal will go through or not,” explains Sophie Elkrief, one of the portfolio managers.

The second strategy is arbitraging special situations. This strategy consists in buying or selling a stock in order to exploit an expected event such as a change in capital structure, refinancing, restructuring, the sale of non-core assets, regulatory or tax changes.

“Anticipated events can lead to significant shifts in the security's price,” says Elkrief. “Our analyses enable us to estimate the probability of the event occurring, as well as a risk/return ratio over the proposed investment timeframe.”

As the success of this type of strategy depends on market trends, systemic risk must be hedged. When buying a security involved in a special situation the fund can, for example, short a security in the same sector, a sector index or use derivatives.

Dexia believes its overall team expertise in M&A arbitrage and special situations within its alternative asset management division stands it apart.

This fund offers moderate volatility and daily liquidity.

Targeting an absolute return above Eonia with an average volatility of 5% over a recommended minimum three-year investment horizon, the fund is primarily invested in the European and North American markets. Its maximum gross exposure is 200% (long plus short).

The current environment favours risk arbitrage funds that are likely to capture the current trend in M&A globally. An expected slow economic recovery which favours companies’ external growth, attractive equity market valuations, strong cash positions within corporations, the facilitated financing of transactions and regained corporate confidence should all support the current pipeline of M&A transactions through sector consolidation.

Other investment opportunities may arise from capital injections either via fresh equity or loan capital, debt reduction by sales and asset acquisitions.

Dexia was positive on the M&A activity in 2010 and it continues in that view for 2011. In the first quarter of 2011, announced M&A transaction volumes increased by 20%, according to Dealogic. The company believes this trend will continue throughout the year, fuelled by renewed market confidence, low interest rates, sound balance sheets and low economic recovery that favours external growth.

The risk arbitrage process comprises three steps. The first is identification of investment opportunities by a team of four experienced managers, each boasting a sector-specific expertise that helps them identify event driven scenarios and enhance the decision-making process. The second is a specific analysis of each investment opportunity through an investment case in which the event’s probability is studied. Each investment case is given a targeted return and a maximum loss (stop loss).

The selection of strategies on the basis of strict risk/return ratios, in order to comply with the fund’s objectives is the third step.
 
The portfolio is constructed using the selected strategies. Investment decisions are based on minimising overall portfolio risk and maximising diversification.

Volatility is controlled on the basis of an in-depth analysis of each position aimed at determining the best entry points for a position. The trades are structurally low-volatility in nature and shifts in each position are due mainly to news on the deal, the regular updating of each position’s risk/return ratio and the dynamic management of all positions.

Dexia has been managing onshore domiciled and regulated hedge funds for institutional investors for more than 15 years.

Fund facts
Full name of fund: Dexia Long Short Risk Arbitrage
Name of portfolio managers: Sophie Elkrief, Edouard Petitcollot, Jessica Younnes and Olivier Baccam
Name of investment/management company: Dexia Asset Management
Contact information: Gabriel Des Courtils, Head of Alternative Specialists, 40 rue Washington, 75008 Paris (+33 1 53 93 40 00; alternative-dam@dexia.com; www.dexia-am.com)
Launch date:  March 25, 1999
Assets under management: €260 million (at end March 2011)
Net cumulative performance since inception: 75%
Annualised return: 5%
Annualised volatility: 5%
Sharpe ratio: 2 (1 year at end March 2011)
Strategy: event driven, risk arbitrage
Share classes: C
Administrator: RBC Dexia Investor Services Bank France
Auditor: KPMG
Custodian: RBC Dexia Investor Services Bank
Domicile: France
Management fee: 1.5% (C class)
Performance fee: 20% Eonia
Lock-in: none
Redemption/liquidity terms: daily liquidity with possibility of daily redemptions or subscriptions