The hedge fund solutions team of BNP Paribas’ Theam is looking for confident, responsive hedge fund managers running liquid strategies.
Debonnet also examines how a manager runs their team and divides risk within it. It is important to identify whether six analysts take decisions without speaking to each other, or if one person makes every decision alone. He asks managers to speak to Theam’s investors in simple but honest terms.
In terms of hedge fund strategy selection, Debonnet is not keen on highly illiquid strategies such as distressed debt. This does not mean Debonnet has turned to more liquid Ucits hedge fund strategies for the answer. He says he is seeking hedge funds “that make money – it does not matter whether they are Ucits or not”, acknowledging that Ucits hedge funds have historically underperformed their offshore hedge fund counterparts.
Recent performance figures indicate alternative Ucits underperformed hedge funds in November. The Lyxor Hedge Fund Index returned a negative 0.44% in November 2011, a disappointing figure but better than the Ucits HFS Index, which was down 0.76% for the month.
Debonnet considers a fund’s investment and operational risk management processes as crucial factors to making a fund selection decision. This involves keeping a close eye on the funds’ service providers. “We know the service providers for more than 300 hedge funds. It would be odd if a fund’s administrator was not used by any other hedge fund, and we would never invest in such a fund.”
The key to uncovering the best fund managers is not through applying screens, Debonnet adds. More important is the network of contacts a fund selector develops with experience, he says. Today, Theam invests in about 90 hedge funds with an average allocation size is €5m-€20m. Turnover is high at 20%-30%, as Debonnet is averse to making long-term investments. “Even if a convertible manager says liquidity is not a problem, it’s not always true,” he comments.
Debonnet wants to raise Theam’s exposure to Asian managers. They are more capable of offering truly market neutral strategies. Debonnet is hoping to begin allocating to a Japanese hedge fund soon.