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Alternative Investments - March 01, 2005

An Interview with Arié Assayag, Director of Hedge Funds at Société Générale Asset Management (SG AM)

SG AM is the Société Générale Group's asset management subsidiary which ranks among the top 20 players in the world. SGAM Alternative Investments is a SG AM subsidiary dedicated to third party management of alternative investments. The activity of SGAM AI, which manages €25 billion in assets, covers four poles: structured products, passive management and dynamic monetary funds; hedge funds (funds of funds managed from New York and single strategies managed in Paris); private equity: venture capital and capital development; and real estate management.

In this interview, Arié Assayag talks about SG AM's volatility arbitrage strategy.

Arié Assayag

You will be participating in the Edhec Asset Management Days 2005 where you will be notably running a workshop on "Volatility as an Asset Class". Can you summarise this approach to alternative investment?

Arié Assayag: Volatility is the market price of options. Daily volumes of listed options are around $1 trillion per day, without accounting for OTC contracts. Therefore, the volatility market is a very liquid and deep asset class. The participants are mainly market makers and market users, such as hedgers and speculators. There are no investors in the volatility asset class: we view this as a major imperfection. SGAM AI's approach is to create a vehicule to extract investor value in this asset class using a volatility arbitrage strategy.

How does your volatility management offering position itself in relation to convertible arbitrage funds?

Arié Assayag: Convertible arbitrage is a hybrid strategy combining a long volatility position through convertible and volatility arbitrage on single stocks. We have this strategy which is treated as a multi volatility arbitrage on single stocks, equity indexes and credit. Our diversified volatility arbitrage product has a much wider investment universe. The process of the fund consists of arbitraging volatility on equity index, fixed income and forex, giving investors a broader range of opportunity and strong liquidity.

Is this extension of the concept of volatility arbitrage the solution to the capacity problem that is often evoked in alternative investment?

Arié Assayag: The convertible bonds daily volume is around $6-10 billion, for $100 billion in convertible hedge funds; the volatility asset class is over $1 trillion of daily volume for less than $5 billion in volatility arbitrage hedge funds. Therefore, the scalability of this strategy is very high due to the depth of the volatility asset class. The innovation of this strategy combined with the exceptional opportunity in the volatility arbitrage asset class is an example of the potential of hedge funds evolution. The capacity in hedge funds investments is critical. Innovative scalable strategies, such as volatility arbitrage, will contribute to providing more capacity in the hedge funds products.

What level of arbitrage do you undertake in your fund and, more specifically, in addition to beta neutrality, what are the risks covered?

Arié Assayag: We currently have a platform with more than $500 million under management. We have been successful in providing investor conservative and liquid products. We are launching a volatility arbitrage fund with hedge funds standards (monthly liquidity, and 15% objective): it is a diversified volatility arbitrage on equity index, fixed income and currencies. Our strategy is rigorously separating Greek exposure – delta, gamma, and vega. We hedge the delta positions systematically on a daily basis and we consider every investment in VaR and stress test terms.

What was the reaction from the market to this type of management?

Arié Assayag: Most of our competitors have tried to build long volatility funds on single stocks in a hedge funds format. The market realised in a painful way that it could not create long term value for investors this way. It seems that the market has taken a turn on this issue and is now seeking a more balanced approach with long and short volatility strategies. We proved that we can create long term value using a dynamic and balanced allocation between long and short positions. The response of the market is very positive towards our healthy approach.