Fund - EIM

Background:

Founded by Arpad Busson in 1992, EIM firmly belongs to the elite club of veteran FoHF companies in Switzerland. Based in Nyon, just outside Geneva, it is widely known throughout the alternatives industry as a pioneer in the customisation of tailor-made portfolios for institutional clients.

EIM’s $7.1 billion in assets are managed by 144 staff, of which 43 are investment professionals who operate out of three research hubs in London, New York and Singapore. EIM has traditionally maintained a low analyst-to-underlying manager ratio, partly to meet the clients’ expectations for detailed monthly talks on the management of their portfolios. In a recent structural reorganisation, it merged its US, UK and Swiss teams into a single, more streamlined global investment team.

Although FoHFs account for around 90% of the assets, EIM also has a lengthy experience in managing long-only multi-manager equity and fixed-income programs. And, since 2009, it has launched an innovative process to combine the hedge fund and long-only disciplines.

As Nicholas Verwilghen, president of the executive committee and chief product and solutions officer, explains: “We merged the teams on the hedge fund and long-only sides because the boundaries are disappearing between them. Many long-only companies are integrating upwards into hedge fund programmes, while some classic hedge fund managers are integrating backwards into long-only. However, active long-only managers really want more flexibility but do not necessarily have the experience to run a hedge fund format. For example, if you look at the background of the managers involved in hundreds of UCITS funds, around 60% come from the long-only side and 40% from the hedge fund world.”

In September 2010, EIM launched a Luxembourg-domiciled SICAV umbrella to complement the firm’s tailor-made offerings. The programme has grown quickly to 33 NEWCITS funds, which provide a directional as well as an absolute return range of sub-funds for institutional investors. With plans to expand to 40 products in the near future, EIM now claims to be one of the biggest UCITS players in the industry.

Another key development was the launch of a FoHF, in December 2010, based on EIM’s Systematic Dynamic Allocator methodology which draws on the Lyxor platform for its hedge fund universe. Based on strictly systematic criteria, this standalone product selects the 20 best funds on the platform to construct its portfolio. With approximately $29 million in assets, the fund has outperformed its benchmark (HFRX Global Hedge Fund index), net of fees, since inception.

In order to improve risk management transparency, in 2010, EIM hired Deutsche Bank to help build LumX, a dedicated managed accounts platform. While Deutsche Bank handles much of the servicing, it shares this role with other service providers such as SS&C, Bank of New York and Ernst & Young. Total assets in the funds positioned on the LumX platform stand at around $990 million. To some degree, the impact of the Madoff scandal created a sense of urgency, at the time, to roll out a platform for managed accounts.

“Liquidity issues were never behind the launch of LumX,” says Verwilghen. “If you are a classic hedge fund investor with an offshore vehicle that has quarterly or semi-annual liquidity terms, you will get exactly the same liquidity terms on our platform. So the main intention in providing this platform was to meet institutional investors’ requirements for greater independent control over their investments and full transparency so that that they would not encounter any surprises. A unique feature of the platform, in this regard, is that it has been structured so all the principal service providers are independent from one another – in particular, the custodian, the administrator, the asset manager and the risk monitor. Furthermore, tracking errors between our LumX platform funds and the flagship funds have been negligible. We also decided to make this an investment tool. Clients managed on a discretionary basis by EIM are not charged any additional access or investment advisory fees when investing in LumX funds.”

Over the past two years, EIM has implemented some key changes in its investment process. Most significantly, it has adopted various approaches whereby the managers can combine active and passive fund management. “This is very exciting territory because we have broken down the borders between active and passive. It allows us to reduce the total expense ratios by employing cheaper passive instruments whenever possible,” explains Verwilghen. “We take a systematic approach in which every investment opportunity is analysed with the same criteria. Therefore, it doesn’t matter whether we employ a hedge fund, an actively managed long-only fund or an exchange traded fund. All these elements are just part of the toolbox when we are considering what solution the client needs. The aim is to bring the most efficient methodologies to bear at the right time. In the future, many of our assets might be managed with this approach.”

The fallout from the financial crash took a serious toll on EIM’s assets, which dropped by half from their peak of $14 billion in 2008. Although EIM did not impose gates on its long/short funds, it had to create side pockets for some clients, most of which have subsequently been liquidated. The firm also had a $230 million exposure to the massive Madoff fraud as a result of its investment in three outside hedge funds that held accounts with Madoff. Nevertheless, EIM insists that it has managed to keep its top institutional clients, who have retained their faith in the firm’s due diligence and risk management processes.

“As a result of the infrastructural changes that we have put in place, all our hedge fund managers report to RiskMetrics, an independent third-party platform,” says Bill Glass, head of business development at EIM. “This has significantly enhanced the degree of transparency and fiduciary control that we bring to the process.”

In late 2010, EIM hired John Ward to fill a newly created role as head of operational due diligence. He leads a team of experienced due diligence professionals who were previously part of a combined due diligence and risk management team. Largely, this spin-out was a response to the increasing institutionalisation affecting the risk management functions.

“Risk management now involves independent reporting lines and has to be carried out systematically with a large quantity of tools,” observes Verwilghen. “It’s not very efficient to have the same person head up an independent risk management unit and an operational due diligence team.”

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