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Alternative Investments - October 18, 2005

Interview with Patrick Fenal, Chief Executive Officer of Unigestion in Geneva

In this month’s interview, Patrick Fenal, Chief Executive Officer of Unigestion in Geneva, discusses Unigestion’s support for the Edhec Risk and Asset Management Research Centre’s activities, the links between research and business in the asset management industry, the minimum variance concept in investment management and the complementarities between private equity and hedge funds.

Patrick Fenal

Patrick Fenal joined Unigestion in 1978 and held various positions in the area of asset management (including bond manager) before supervising the hedge funds activities. He currently heads Unigestion’s hedge funds investment committee and is a member of the Edhec Risk and Asset Management Research Centre’s International Advisory Board. Unigestion supported the Edhec Asset Management Days in Geneva in April of this year and will also be a partner of the Edhec Hedge Fund Days 2006, which will be held at The Brewery in London from February 14th to 16th next.

Having been a leading partner of the Edhec Asset Management Days in Geneva earlier this year, could you tell us why have you decided to renew your support for the Edhec Hedge Fund Days 2006?

Patrick Fenal: We have decided to renew our support for the Edhec Hedge Fund Days in 2006 for the following reasons. Firstly, we decided many years ago to find a long term partner in the academic financial research worlds. This would help build bridges between the academic and professional communities by informing the industry of the latest research in asset management. We have been since then very happy with the different work done by the Edhec Risk and Asset Management Research Centre. Secondly, we have been impressed by the number of people attending the Edhec Asset Management Days in Geneva this year, but more importantly by the quality of the audience. Finally, we strongly support the idea of exchanging the views of academics with practitioners (Institutions and Asset Managers).

You are a member of the research centre's international advisory board. What is your view of the links between business and research in the asset management industry?

Patrick Fenal: The links are pretty obvious. It is a privilege of age that I still remember when William Sharpe presented the results of his research to the financial community! If we want to have a chance to understand the evolution of our business we have to listen to the research. For Unigestion, the research conducted by Harvard in the early 80s on managed futures in a traditional portfolio was the very first step which led us to introduce hedge funds as a complement for Pension Funds and Insurance Companies...

The same applies to the Minimum Variance theory by Robert Haugen which interested us to such an extent that the management of all our equity long-only products is based on this theory… The research on the use of Private Equity in the mid 90s by Hanspeter Bader (St-Gall) in Switzerland confirmed our early interest in this strategy as a satellite for equity. We also generally work in very close relationship with research centres on asset allocation techniques, which will help our clients and ourselves to better assess the "new" strategies and optimize the different mix.

Research is at the forefront of our business.

As a pioneer in the use of the minimum variance concept in investment management, how do you assess the results of a technique that is also favoured by Edhec?

Patrick Fenal: We started studying the possibility of managing European equities in 1995 after having read some theoretical work by Robert Haugen on the Minimum Variance theory. We believed this observation offered an interesting investment idea very much in line with Unigestion’s management philosophy to optimize risk-adjusted return. We therefore decided to delve deeper into the existing theory and transformed this theoretical work into a manageable equity product.

The first objective of our Minimum Variance strategy is to reduce the expected volatility of our portfolio.

We believe that few investors focus truly on the volatility of their equity portfolios. In the case of active investors, they generally concentrate on choosing stocks that might outperform their benchmark and add those winning securities to their portfolios. Volatility will be more a consequence of their stock picking than a management objective. In the case of passive investors, the objective is the minimization of tracking error. Volatility and losses will therefore be the consequence of the losses incurred by the benchmark.

Our belief is that if a manager takes care of the risk of his portfolio, the performance will be evident on a medium to long-term horizon and we will therefore be able to create long-term alpha for our client. The track record of our product has confirmed this statement.

You have launched a private equity activity and are leaders in the domain of hedge funds. Do you think that there is a convergence between these two alternative offerings?

Patrick Fenal: There are crossovers between the two strategies. On the allocation side, 60% of the HF managers are equity-related and therefore in the same category: highly active equity managers. Not very surprising then that a few HF equity managers are looking to explore less liquid markets and have tried to leverage their organization by adding a Private Equity team.

The general difficulty to find alpha in this strategy can also be a motive to try to get the theoretical premium offered by illiquidity. Distressed was historically a natural crossover for both strategies. The less liquid part was taken care of by PE and the most liquid by HF.

As opportunities are harder to find, the HF community is increasing its illiquidity features on its Funds and therefore tapping the short section of PE deals. Historically the first HF to go to Private Investments were Distressed or Multi-Arbitrage ones.

But Private Equity also migrates into HF! Traditional PE firms are expanding their platform by establishing or backing HF.

We do not think there is a war going on, but rather a combination of convergence and cooperation. Convergence on the time frame and resources, cooperation because select investments will provide HF and PE with the opportunity to team up.