Hedge Fund Awards 2016

Hedge Fund Awards 2016 13 In the last of our series of articles on this industry defining company we discuss the firm’s index arbitration work with its Deputy Head of Alternative Strategies Emmanuel Terraz, who has a strong background in this sector. In 2003 when I joined Candriam we noticed that there were an increasing number of index funds in the mar- ket, all of which are forced to buy and sell the stocks the same stocks at the same time in order to track their respective indices. This presented an ideal opportunity for market and pricing inefficiencies and therefore we created our index arbitrage fund that same year to capitalise on them. Index arbitrage exploits the fact that index funds are benchmarked to an equity index and therefore each time stock is added or removed from an index, these funds are also required to buy or sell the stock, creating significant volume of buys and sells in the market which often lead to large swings in price. Our fund seeks to take advantage of those alterations in price through a market neutral approach, exploiting the convergence or divergence in price. We target the main equity indices worldwide, such as the S&P 500, FTSE 100 etc. The fund is structured to work with low volatility, with the bulk the fund being pure cash. We have 20% long and 20% short invested in the index arbitrage strategy. Currently we have 1.2bn Euros in assets under management and have had a sharpe ratio of 1.3 since incep- tion, which is considered strong performance. To achieve this our philosophy is to view index rebalancing arbitrage as a business of its own. We were pio- neers in this area, as many firms previously viewed arbitrage as an aspect of other investments rather than an investment strategy in its own right. Now it has become a more mainstream aspect of investing, and we are at the forefront of the industry. Our fund is managed by a team of just three, all of whom have strong and experienced backgrounds. Our investment approach is a mixture of quantitative and qualitative investing. This is unusual in our industry, as often funds are either purely quantitative, and take a systematic approach to viewing the markets through their technology, or they are focused on qualitative investing and are dedicated to meeting with the management in the businesses they invest in to gain a thorough understanding of the firm’s prospects. We combine these approaches, which requires a very varied skillset but does reduce the risk of error by splitting the responsibility between the human brain and our technology. Many of our competitors only have one set of skills which they use to their full advantage, but we are able to combine these which creates a far superior level of market understanding. This is because each approach relies on a different asset; either the human brain or technology. Neither of these is infallible but they are complimentary, and by combining these approaches we are unique. This is particularly important to us because in the financial industry a lot of firms copy each other, but by being unique we have fewer competitors and are able to offer our investors a more individual service. This individual approach extends to our qualitative risk solution, which looks at every long-short position, and to always imagine the worst case scenario for each position we take and calibrate the position. This ensures that if this scenario happens we know how the portfolio would look. We then check that there is no specific risk that has been introduced, for example delta risk, which we cannot have in the portfolio as it is delta hedged. Overall the key to our department’s success is that it has been delivering long term returns for the last twelve years. I am fully accountable to our investors, and am keen to ensure they are always kept informed of the developments within the fund. As a company we are always looking to the long term, which is quite unique within our industry as often firm’s focus on short term gains. This has been our CEO’s strategy for all the previous years and I am grateful he has allowed us to follow this path. Company: Candriam Investors Group Web: www.candriam.com