Winner: Best performing emerging markets fund of hedge funds

HDF Finance, founded in 1986, has a wealth of experience in the hedge fund and alternatives industry and a track record spanning over two decades in equity long/short strategies

In the 20 years since it was launched in May 1990, the HDF Emerging Markets Equity fund has seen volatile markets come and go. Its bread and butter remains traditional long only equity funds. While it is flexible enough to make an up to 40% maximum tactical allocation to long/short strategies, some 90% of the fund is currently with long-only managers.

Not a problem, says chief investment officer (CIO) Christophe Jaubert. “Since we benchmark to a long only index, the fund is mostly long only. It has performed well relative to its index but with a much lower volatility. We mix purely benchmarked funds and absolute return funds. It’s not easy to find these because the capacity to short emerging market stocks is not very well developed.”

Jaubert and co-manager David Gilleron are part of a 14-strong team at HDF Finance which also benefits from a long-standing collaboration with renowned French economist Christian de Boissieu. A global view is essential to successful emerging market fund allocation, Jaubert explains.

“We allocate geographically,” he says. “In general, we choose specialist emerging market funds but if they are very good we might choose some global ones that understand well the general macro environment and can do their own geographic allocation,” continues Jaubert.

Tough times since the fall of Lehman Brothers and the onset of the financial crisis have been a challenge but the fund has pulled through with some impressive figures to show: a 10-year annualised return of 8.8%, albeit with volatility of 17.5% over the time period.

“When you invest in emerging markets, the challenge is always the same,” Jaubert says. “Volatility can be large and growth is not smooth. You need to find ways to reduce volatility, to find managers with the right skills and styles to make your portfolio as diversified as possible even though they are all investing in emerging markets.”

Another challenge has come from the changing regulatory environment and the decision to expand distribution potential by making the fund compliant with Ucits restrictions. Most of the fund’s investors (70%) are institutional. Investors also include high net worth individuals, private banks and family offices.

“We have changed the portfolio to make it Ucits compliant,” Jaubert explains. “That’s involved replacing the so-called hedge funds with absolute return funds so now the liquidity is much better. The regulator let the fund keep its track record through this transition in January (2010) because we were able to demonstrate that the change didn’t really narrow the investment universe.”

Normally a switch to Ucits requires substantial changes for fund of hedge fund strategies. This was not so in the case for HDF Emerging Markets Equity, says Jaubert.

“Why? Even before shifting to Ucits, we were already excluding those funds that were taking too much risk, such as going into distressed stocks, so the switch to Ucits was not dramatic,” concludes Jaubert.

Fund facts

Full name of fund: HDF Emerging Markets Equity
Name of investment/management company: HDF Finance
Portfolio managers: Christophe Jaubert and David Gilleron
Contact: Christophe Chouard, managing director  (+33 1 44 17 12 65; cchouard@hdf-finance.fr)
Launch date: May 18, 1990  
Assets under management: €20 million (total AUM of management company: €1.6 billion)
Annualised return: 8.8% a year over 10 years
Annualised volatility: 17.5% over 10 years
Strategy:  emerging markets equity long/short
Share classes: euro, US dollar, sterling, Swiss franc
Administrator: RBC Dexia Investor Services, CACEIS
Auditor: PricewaterhouseCoopers
Custodian: RBC Dexia Investor Services
Domicile: France
Management fee: 1.5%  
Performance fee: 10% above MSCI EMF
Minimum investment: €10,000
Lock-in/up: none
Redemption period: weekly plus two business days