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Alternative Investments - February 20, 2006

Interview with Xavier Lépine, chairman of Alteram

Since 1999, Xavier Lépine has been chairman of Credit Mutuel Nord Europe’s three asset management companies: Alteram (a hedge fund asset management company with €1.4 billion in assets under management); Multifonds, which deals with traditional long only mutual funds and has AUM of €8.5 billion; and Nord Europe Private Equity with €0.16 billion in AUM. Amongst his previous roles, from 1999 to 2001 he was chairman of the board of directors of Fortis Investment Management France (FIMF), the French asset management arm of Fortis (€110 bn in assets under management). He also founded FP Consult, an asset management company dedicated to emerging markets which was successfully sold to FIM. He has also participated in the financing of several high tech firms. Xavier Lépine has a Master’s Degree (DEA) in monetary policy and international finance (Université Paris IX Dauphine).

Xavier Lépine

The Alteram Optimal Equity fund was launched in Paris before Christmas. Why did you decide to set up this product and what original features does it have?

Xavier Lépine: To make it easy, investors are always seeking the best of both worlds, i.e. to be long only when the market rallies and to be long/short when the market collapses. We have tried, and hopefully succeeded, to cope with these two requests. The rationale behind the product is:

(a) Long/short managers produce beta with regard to the equity market in managing their exposure (beta)

(b) Therefore, the correlation between long/short and long only is highly predictable through precise knowledge of their beta.

From this obvious observation, we decided together with EDHEC to apply the principle of a dynamic core satellite approach when the core is the Eurostoxx 50 and the satellite is the long/short. The dynamic part, and this is the innovation, is produced through a systematic approach by applying the CPPI method (Constant Proportion Portfolio Insurance) to optimise the proportion between the long only and long/short strategies.

What is your current vision of hedge funds? Their performance in the last three years has been below that of previous years. Why do you think this is so? EDHEC considers that the ‘capacity effect’ in the hedge fund industry is exaggerated. What is your opinion on the subject?

Xavier Lépine: Hedge funds are exposed to a lot of betas, some of which are traditional, i.e., for example, market trends, and others which are more “hidden”, like for example volatility, convexity, spreads, etc.

For the last three years, it so happened that some of the betas to which hedge funds are exposed (such as volatility and credit spreads) were not favourable to hedge funds while others (market trends) were still favourable. The results of the two were satisfying in the sense that the hedge funds delivered what they were supposed to deliver, i.e. more than twice the risk-free rate for arbitrage and more than two-thirds of the bullish trend in the equity market. Therefore, even if the performance is analysed (by some people) as being below that of previous years, we do consider that hedge funds continue to deliver realistic expectations.

EDHEC also considers that hedge funds are more betas than alphas. Do you share that point of view?

Xavier Lépine: I fully share EDHEC’s view. Considering the small dispersion of monthly results between hedge funds when you categorise them properly, it is clear that they are more beta than alpha producers. However, like in the long only world there are good… and bad managers, i.e. some of them produce positive alpha vis à vis their beta, some of them produce negative alpha…

There is a lot of talk at the moment about the convergence between private equity and hedge funds. Is Alteram planning to launch hybrid hedge fund and private equity funds?

Xavier Lépine: Real estate, private equity, hedge funds – these three asset classes provide very interesting supplementary beta. We have already launched a fund called Diademe Innovation which is a combination of private equity and real estate. Private equity provides long-term capital gains while real estate (office renting) provides regular yearly high return, while both of them are long-term duration asset classes. Introducing hedge funds together with private equity would definitely be an interesting product for investors. However, until now we have not had the legal framework to do it safely and properly.

You have been a partner of EDHEC’s for a long time. Why have you supported EDHEC and what is your current view of the relationship between EDHEC and Alteram?

Xavier Lépine: The demand for alternative investment strategies has been growing for as long as the long only benchmarked strategies were disappointing. But, if you want an industry to really emerge then you definitely need benchmarks – for both portfolio construction and marketing “explanations”. Our first “rencontre” with EDHEC took place at an early stage for both of us and we fully shared this view. In other words, our fund approach by strategy met their research on efficient benchmarks. The story started at that point and we continued to support them as the second logical step (after benchmarks) was to determine the specific risk factors of the alternative strategies. The third step is now to use EDHEC technology inside our new product, i.e. Alteram Optimal Equity. I’m definitely convinced that we will continue to write the story with EDHEC in the very near future, but let’s keep something secret for the next issue!