Unigestion learns to learn

Genius is proverbially 99% perspiration and 1% inspiration. Bernard Sabrier, chairman of the Geneva alternatives fund of funds and boutique equities manager Unigestion, offers a variation on the old adage when he says that probably 90% of the firm's ideas for new strategies originate in understanding client needs. And with a list that includes institutions like Nestlé's Swiss pension fund under Jean-Pierre Steiner, who can say that Unigestion's clientele is not sophisticated?

The firm's global equity minimum variance long only strategy, launched in 2005, is an offshoot of its European capacity launched in 2000 and the result of a client request. The same applies to an SRI strategy that came to life in 2004 following a request from a Danish pension fund client. The strategy was then also launched in a Japan Equity version.

"The reality is that the more we talk to clients the more we learn," says Sabrier. "We have to be passionate and try to understand clients' worries and where they feel something can go wrong. Learning or creating is not a lonely process, there is a lot of interaction. The more interaction we have with clients the smarter
we get."

Sabrier has seen institutional demand evolve since the firm started taking on institutional business for hedge funds in the mid 1990s, especially in that sophistication has increased. Of course, and like other hedge fund of funds providers, Unigestion has had to work somewhat to meet the increased demands of institutional investors in terms of transparency.

Unigestion does not see hedge funds as a distinct asset class and Sabrier says many investors make false assumptions about their place in the portfolio. "Because we were in certain market patterns, especially in 2001-02, hedge funds did extremely well and were sold to people who wanted to listen to [the] story [that hedge funds were] a four-wheel-drive investment tool that will always be less volatile, deliver better returns and correlate with nothing."

His experience over the decades has also taught Sabrier that talent is not absolute, and a good hedge fund manager can become a mediocre looking one if there is a change in the economic conditions behind his performance.

"We are paid to discover and maintain alpha but we need to be humble enough to realise that alpha is cyclical and even the best alpha provider provides alpha because his style - the way he trades his positions, constructs his portfolios - is perfect in certain market conditions and in certain market conditions it [will] not work. It does not mean that he is less smart."

Unigestion advises clients to allocate part of their assets to strategies that will produce bond-like returns or equity-like returns respectively. "We realised quite early thanks to our clients who use hedge funds not as an asset class but as a strategy or as multiple strategies will use hedge funds out of certain pockets," he continues.

If a pension fund is allocating from its bond ‘pocket', Sabrier says Unigestion's aim is to put together funds consisting of managers that will produce bond volatility but hopefully better than bond return.

"We have always been quite allergic to vastly leveraged arbitrage strategies," he explains. "The first reason is that we understand them less well than others and we always believe that the tail risk is the most dangerous part of the exercise. The problem of the tail does not show up most of the time and when you see the tail it is mostly too late and could you lose three to four years of returns."

For strategy replacing bonds Unigestion would try to choose strategies that do not correlate with equities but without very high leverage. These could be global macro, CTAs or Forex, for example.

Sabrier also believes that new questions arise due to the fact that the boundaries between different strategies are blurring: "Because boundaries are getting closer it is even more important to understand them more deeply…We are very much against saying that hedge funds are an asset class."

Some hedge funds are being asked to manage long only money, and Sabrier thinks this trend will continue, albeit in a limited way. "It will always be a special flavour or special strategies which first will enable them to ask for superior fees," he says. "But then the question is, how conflicting is it with your hedge fund book? Nobody has the answer really because it is a bit too fresh yet."

Like other fund of funds managers, Sabrier says that hard closed managers are rarely hard closed: "Some of them are hard closed and it is hard to get in. But if you establish a long term, stable and confident relationship with a certain number of managers, most of the time you can get access to capacity at one stage or another.

"In the course of our investing history in hedge funds we have realised that although 60-70% of the managers we are invested in may be closed, we always manage to find capacity. Sometimes there may not be capacity for a while, there is a crisis - managers are doing less well and find capacity - or they are doing too well and people want to get part of their portfolio out."

When it comes to private equity, Sabrier is sure that the coming few years are not likely to be as lucrative for investors as the past few with the combination of good economic growth, booming stock markets and low interest rates.

"The best guys will get some fantastic opportunities, maybe in mezzanine and credit. Maybe you will see that some private equity deals have been too leveraged and will get sold for a fraction of their entry price," he comments.

"You should not be afraid when the markets turn; it can be the best time to be there. It may be the worst time today but we shouldn't forget that those guys will deploy the assets in two-four years and I am pretty convinced that in the next two to three years that there will be excellent opportunities," Sabrier adds.

Unigestion does not want to grow for the sake of it, says Sabrier. "We own control of this company, even if we have some prestigious minority shareholders like Bâloise or HSBC. Many people are tempted to think that you need distribution channels and need to be owned by a large corporation," he says, emphasising that directors and employees own 74% of the firm.

Rather, Unigestion is striking out into areas such as Asia, which Sabrier is convinced will produce many of the talented traders and hedge fund managers of tomorrow, as well as increasing amounts of capital to be invested.

"You have to move where the opportunities are," he comments. "You don't know whether the Vietnamese or Chinese stock markets in five years' time will be 50% higher or lower than today. The only thing you know is that those countries will continue to grow. We have a view that we will continue to grow, not opportunistically, we will continue to invest in new technology and in understanding or exploiting better our capabilities but [will] avoid doing things for the sake of growing."