Fund - Banque Privee Edmond De Rothschild


Few banks in Geneva can lay claim to the kind of pedigree generally associated with Banque Privée Edmond de Rothschild (BPER). With Rothschild family roots dating back to the late 19th century, the bank also functions as the LCF Rothschild Group’s global headquarters for its network of 18 offices in 12 countries. The whole group manages a combined total of $13 billion in alternative assets.

A good deal of BPER’s reputation stems from its highly successful FoHFs operation, which originated in 1969 when the firm’s legendary George Karlweis pioneered the hedge fund industry’s first FoHF. And, despite all the predictions of the inevitable demise of FoHFs, widely propagated following the financial crash, BPER retains its firm belief in the value of the traditional model. As Alexandre Col, head of the Investment Funds Department at BPER since 2000 and a member of the bank’s executive committee, asserts: “It’s not the fund of funds model, but rather some of the funds of funds managers, who have failed. So it’s important to distinguish between the structure and those who are responsible for implementing it.”

Col and his associates are keen to point out that BPER did not impose any gates, side pockets or NAV suspensions during the worst period of 2008 to 2009, nor did it hold any investments in the string of blow-ups, most notably the Madoff fund. In fact, only 20 underlying funds in the portfolio were liquidated or suspended, representing 6.6% of total assets, a result well under the industry average.

Given the highly liquid nature of its Prifund Alpha range of FoHFs, partly due to the firm’s policy of not employing any leverage, all redemption requests were honoured on a monthly basis during the financial crash. While the firm lost around 35% of total hedge fund assets, of which 25% was due to redemptions and 10% to performance, they have climbed back to $7.7 billion, including $5.2 billion in the Prifund suite of FoHFs, $550 million in the Asian Capital Holdings fund, $250 million in dedicated accounts and $1.7 billion in the advisory service.

Col attributes BPER’s comeback to the firm’s ability to uphold its commitments to its clients during the turmoil, and says: “For the past two years, investors have been more concerned with reputation than returns.” Nevertheless, Col believes that BPER could easily double its asset size, as it has access to substantial capacity in its key underlying managers.

Many of BPER’s funds have delivered outperformance – even during the difficult years of the crash and the subsequent climb back from tumultuous market conditions. BPER’s overall performance enabled it to win the InvestHedge Group of the Year awards in 2007 and 2010. Prifund Alpha Uncorrelated, the flagship FoHF with $3.2 billion in assets, has an annualised return of xxxx%* since inception in 2001 and has only registered one negative year – in 2008, when it declined by xxxx%*. Over the past decade, the fund has doubled investors’ money by generating a return of more than xxxx%*. The smaller Prifund Alpha Europa vehicle won the InvestHedge European Strategies Award in 2009 for returns of xxxx%* and was also nominated in that category in 2010. The $138 million FoHF invests with 23 managers, but the top five positions comprise almost 40% of the portfolio.

Since 2000, BPER’s 45-strong investment team, which includes 13 portfolio managers and analysts as well as five members of the Investment Committee, has built the portfolios by means of an innovative pooling system, a distinguishing feature of BPER’s investment process. Essentially, it separates the bottom-up manager selection from the key top-down allocation of assets by strategy, style, region and sector. Investment decisions concerning each underlying fund are made regardless of any macroeconomic overview; instead, only the intrinsic qualities of the manager are taken into account. In the final analysis, the Investment Committee retains the power to veto the choice of underlying managers.

While the various strategies are isolated within the 15 pools, which are primarily managed on a bottom-up basis, the Prifund sub-funds also participate in the top-down analysis. In practice, the pools can be regarded as small FoHFs and each has a clear mandate such as event-driven, CTA or long/short. Moreover, pooling is driven by a computerised accounting system, which also helps to determine the allocation weighting process for various specific strategies.

“Within a particular strategy, one portfolio manager is charged with determining the allocation to managers,” explains Col. “So you can really isolate the top-down from the bottom-up because when we calculate how much we are going to allocate to a particular strategy, we don’t think about how much money we are going to give a manager at this level; we only think about how much we are going to invest in that particular strategy. Once we have decided on the amount, the portfolio managers are in charge of allocating that money to specific managers. So here the bottom-up input re-appears. If you don’t take that approach, how can you really assess what is the actual weighting of the top-down decision at the bottom-up level and where is the equilibrium point?”

Since portfolio managers are basically responsible for managing risk, there is no fundamental separation of risk management, portfolio management and operational due diligence. Col expects his portfolio managers to approach risk with a good measure of common sense and intuition. However, some alterations have recently been implemented.

“About 18 months ago, we formally split risk control into three separate parts,” explains Marc Sbeghen, a portfolio manager. “One part comprises portfolio managers and analysts who monitor the underlying funds, but we have also created an operational unit and an investment risk unit. Before we submit an investment file to the Investment Committee, based on our analysis, we first need to obtain the approval from the operational team. Once we get the green light, then we can present the funds.”

The pooling system proved to be very adaptable during the financial crisis. As Jaume Sabater, a portfolio manager, points out: “Although our business is very much driven by manager selection, in years like 2008, you need a more top-down element to define your allocation. We also took the decision, during that period, to make our portfolios more concentrated in funds of funds like Prifund Alpha Diversified.”

With more than 200 underlying funds throughout the Prifund group of products, the degree of diversification varies greatly. For example, the global multi-strategy Prifund Alpha Diversified fund with $920 million in assets allocates to 180 managers – practically the firm’s entire menu – while the $176 million global equity portfolio of Prifund Alpha Volatility holds 70 to 80 managers. In contrast, a European or US long/short strategy may allocate to only 20 funds. Nevertheless, the top 20 positions in Prifund Alpha Diversified may account for 40% to 50% of the portfolio.

As Alexandre Pini, the portfolio manager of Prifund Alpha Diversified, states: “This vehicle has been very popular with institutional investors, particularly Swiss pension funds, as it meets their asset allocation needs. Also, the diversification offered by the fund enhances the liquidity of the portfolio, which proved, for example, to be very helpful during the crisis of 2008 when some investors had to redeem.”

Historically, BPER proved to be early in identifying rising hedge fund stars, such as George Soros and Michael Steinhardt, long before they became legends in their own time. Today, however, Col does not see a particularly large pool of new brilliant managers on the horizon and prefers to stick with well-known brand names, such as Millennium, Paulson, SAC and Brevan Howard, with which the firm has been associated for as long as 15 to 20 years.

“Although we have invested with a few new managers, mostly in the long/short strategy, we like well-
established managers because they are currently more likely to attract talented traders who are looking for a new home,” says Col. “These managers also have the resources to negotiate the best terms and conditions with prime brokers and other service providers.”

Col’s attachment to the classic FoHF model influences his dislike of managed accounts and UCITS products. “Many of the big problems arising from issues like Madoff or Amaranth could have been more easily avoided by simply applying the correct due diligence and investment process,” says Col. “After all, many of the feeder funds allocating to Madoff were similar to managed accounts. Moreover, the better liquidity that managed accounts promise comes at a huge price. Suppose you tell your manager to divest all your assets during a crisis. You may suffer an additional 50% loss because the manager will sell everything at a desperate price at the worst time. He may find a buyer at a 70% discount compared to what he could perhaps sell easily two weeks later. It’s also worth noting that some firms promoting managed accounts are the same ones that failed in doing their job in 2008 with the fund of funds business model.”

While Col is prepared to consider UCITS products in the future, he remains unconvinced of their current value. “There is a huge gap between UCITS returns and the main hedge funds, and you also find that you don’t have enough managers or strategies to implement your portfolio,” says Col.

In an industry known for highly active staff turn-over, BPER’s professional team has remained unusually stable with most of the key staff working together for the past decade. To a large degree, this success can be attributed to the nurturing of a supportive corporate culture within the investment department.

“It starts with hiring university graduates, who spend their first couple of years in a demanding junior analyst position, and then we give them responsibilities and participation in the investment process,” says Pini. “Consequently, they feel very much part of the collective decision-making process, which is based on discussion and consensus.

“The Rothschild culture is also very entrepreneurial. When I joined, Prifund Alpha Uncorrelated was only a project, but I was involved in the entire process of creating the fund. By involving people, the business vision is shared among the staff. It’s also helpful that Alexandre Col, who is very accessible, takes a hands-on approach and this attitude has permeated the whole department.”

*For performance and contact details, contact Shaun Rajiah +44 20 7779 8367

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