CDC IXIS Asset Management has recently enlarged its investment capabilities through the creation of a ‘Long-Short’ Equity Fund. This hedge fund will, in turn, reinforce company expertise in alternative investment products, targeting an institutional clientele of qualified investors.
The acquisition of the American holding company Nvest at the end of 2000 (renamed CDC IXIS Asset Management North America in early 2001) has provided the company with an initial solid expertise in alternative investment management through one of the holding’s affiliates, Harris Associates. Harris, based in Chicago, manages $1.5bn (e1.7bn) in multi-hedge funds corresponding to several risk-return profiles.
At the same time, CDC IXIS AM Paris launched a convertible bond arbitrage product in September 2000, and manages today over e250m in this management strategy.
The promotion of these products corresponds more with an awareness of the increasing correlation between different factors within the same asset class rather than to any recent trends. The need for diversification in the allocation of assets, in fact, necessitates the introduction of different asset classes within the same portfolio. CDC IXIS AM has thus undertaken to offer, in the medium term, an alternative fund of funds through Harris Associates as well as a complete ensemble of individual strategy products.
As the long-short fund market is already considerable, CDC IXIS AM has decided to present investors with a ‘pure’ product, easily identifiable thanks to a well-defined, existing investment universe, and offering a rigorous management process coupled with comprehensive risk control.

A product coherent with company European equity expertise
CDC IXIS AM derives its long-short fund from a European equity process that has already provided for strong and sustainable results. The new product profits from the expertise of the European equity team, under the leadership of Gilles Meshaka, yet offers investors a new combination of risk/return/correlation without the bias of plain vanilla products.
The key elements of the Long-Short Fund comprise the following:
q the fund is neither an arbitrage product (situated in the universe of enhanced money market), nor is it highly leveraged, which would involve excessive volatility;
q rather than attempting any ‘immunisation’ from the different sources of risk (market, sector, industry), the goal of risk control is to maintain the fund under a certain volatility as well as to guarantee adherence to other predefined constraints. Market exposure remains an option through the construction of a portfolio that is slightly directional and non-market-neutral;
q the product targets the overall universe of European large caps (including all sectors), without developing any geographic, sectoral, or stylistic orientation. Gilles Meshaka and Sadri Tamarat, the two portfolio managers of the fund, use a double investment management approach: top-down for the ranking of industries and bottom-up for the selection of stocks within each industry.
Industries within each sector, are ranked based upon criteria relating to valuation as well as current trends and evolution. Criteria relating to industry trends - such as yield curve evolution (to which each industry has an individual sensitivity), earnings growth trends, comparison with American industries, implicit growth rates and certain fundamental factors (such as sensitivity to prices, costs, and changes in technology and environment) - are analysed concomitantly with relative valuation factors and ratios.
At the same time, the fundamental position of each company in respect to the competition is studied in order to determine its future profitability within its industry.
Through such analysis, the portfolio management team is able to build a ‘long’ portfolio through investment in companies with a dominant position in industries that are profiting from a positive phase in the business cycle. On the other hand, the ‘short’ portfolio is constructed with companies in precarious financial situations, that are within industries in the process of losing ‘steam’.

Structural bias management
The overall long position of the portfolio shall vary between 0% and 40% in market exposure, with decisions based upon the conclusions of not only the Investment Strategy Committee at CDC IXIS AM, but also of the Equity Committee.
Relative indicators are analysed - through the study of valuation multiples - in order to ascertain the relative ‘dearness’ of markets on a global scale. In addition, absolute factors such as yield curve, supply and demand, and liquidity injections serve as a means to determine market trends.
It is to be noted that market exposure can only be positive or neutral. Directional exposure (‘long’) is capped at 40% in order to capture market appreciation, independently of stock selection. In the case of market downturn, neutral market exposure may be undertaken, with equal long and short positions.
Risk control at the Front Office level, led by Claire Méhu and Olivier Ekambi, constitutes one of the key aspects of the Long-Short investment process, and acts as a key element in the differentiation of the process from that of ‘Long Only’ equity management. Controls are carried out conjointly with the Risk Control Unit at CDC IXIS AM, and allow for ex-ante monitoring of predefined constraints.
In regard to portfolio diversification, the weight of any one industry may not exceed 12% of total positions (both long and short). In turn, the maximum weight of a long position may not surpass 6% of total long positions, with short positions not allowed to exceed 4% of total short positions. Such diversification inevitably necessitates use of the repo market in order to borrow un-owned stocks for delivery to attain an equivalent percentage of assets (otherwise unnecessary in the case of a long portfolio), while taking into account risk that is theoretically ‘unlimited’ on short positions.
The correlation between long and short portions is managed so as not to increase the ex-ante tracking error between the two portfolios, taken individually for reasons of risk control. Correlations between different industries are equally taken into account so that industry limits are not contradicted by any tightening of correlations, which would evidently be converse to the diversification which is desired. The beta of the Long-Short portfolio is to remain, therefore, less than 0.25, and is essentially generated by the long bias.
Ex-ante risk control is integral to the goal of maintaining a volatility at one-half of that of the equity market - and not exceeding 15% ex-post in any case. Weekly value-at-risk is kept below 3%, and monthly drawdown is maintained below 8% by the same ex-ante control that will limit portfolio management’s leeway.
The table below outlines the limits of long and short exposure, as well as the accompanying structural bias and leverage:
Long Short Bias Leverage
Maximum 100% 100% 0% 2%
Minimum 60% 20% 40% 0.8%

Over the long term, the long-only process has generated an average excess return of 3% with an average tracking error of 3%. As this risk/return ratio was obtained through an active management of 33% (the rest of the portfolio remaining benchmarked), it is reasonable to expect an attractive risk/return ratio for the Long-Short product as the full active position is derived from the same European equity selection process.
The objective is to provide a remuneration at least at one times the risk undertaken. With an expected average volatility of 10% (or one-half of average equity volatility of 20%), a minimum absolute return is anticipated at 10%, optimally reaching 1.5 times the volatility.
Such hypotheses seem realistic, and they correspond to a leverage position that is proportional to the excess return of the tracking error of the Long-Short process: Certain short positions offset long positions, with Long-Short volatility reduced more than expected return.
This asymmetry in the relative risk/return ratio, resulting from long position leverage and coupled with minimal correlation to equity markets, constitutes the objective of the Long-Short Fund.

CDC IXIS AM: an expanding alternative product offer
With an already long experience in the management of multi-hedge fund through the expertise of its American affiliate, Harris Associates, CDC IXIS AM is in the process of strongly expanding its offer of alternative investment products.
In turn, this corresponds with standard recommended strategic allocation: the proportion of de-correlated products to include situates at approximately 10% (on the condition that they are diversified by strategy).
It is true that the multi-manager, multi-strategy proposed by Harris Associates is a logical choice for investors who are making their first investments in alternative investment management, or who lack the means to try out the different actors or hedge funds offered on the market. CDC IXIS AM has taken it upon itself to go further by proposing a comprehensive ensemble of individual strategy products. The creation in Dublin of a Long-Short Fund, in which CDC IXIS AM has engaged the best players in prime broking, custodian services and audit, fits neatly into this developmentproject, which is proceeding slowly, yet decisively.
Franck Nicolas is head of product development at CDC IXIS Asset Managment in Paris

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