Hedge funds pin hopes on French revolution

Date: Thursday, July 12, 2012
Author: Lionel Laurent, Reuters

France's small band of hedge fund managers, long dismissed as risk-addicted buccaneers in their home market, are betting on a renaissance as investors burned by stocks and sovereign debt look elsewhere for returns.

It is a Europe-wide trend but one that matters in France, where big investors such as insurers and retirement funds - holding 2 trillion euros assets - are more risk-averse and put less into hedge funds than peers abroad.

The optimism of some hedge fund managers is even trumping fears for the future of French finance under Socialist President Francois Hollande, who has pledged to tax top earners more and crack down on risky trading.

"More French assets are going to go to the hedge funds. It is inevitable," said Amit Shabi, co-founder of Bernheim Dreyfus, a fund that makes bets on whether mergers succeed or fail. "The only question is how long it takes. It may be one year or five."

Although the 2008 crisis and ensuing euro zone debt turmoil have left their share of hedge fund victims by the wayside, Shabi and co-founder Lionel Melka said that in a world of rock-bottom interest rates, rough stock markets and a flight to sovereign safety, hedge funds' risk-return image was improving.

Other "hedgies" agree, though they acknowledge there was a wall to climb given investors' lingering risk aversion and as insurers like AXA (AXAF.PA) and CNP Assurances (CNPP.PA) struggle with tougher capital requirements under "Solvency II".

"There is huge potential, especially if (state bank) Caisse des Depots and if insurance companies invest more," said Guillaume Rambourg, former star trader at London-based Gartmore who set up his Verrazzano Capital fund in Paris last year. The Caisse manages 295.1 billion euros in state-guaranteed savings.

"But it is going to take time. Hedge funds are still seen as speculators. It could take three months or three years."

SIGNS OF APPETITE

There are already signs of increased investor appetite.

Some 42 percent of French insurers say Solvency II will likely lead to an increase in their hedge fund holdings, with 5 percent saying the opposite, according to a November survey by the Economist Intelligence Unit for BlackRock (BLK.N).

It is a more favourable reading than for Britain and Switzerland, where closer to a third of respondents saw a likely rise in hedge fund holdings and 5-6 percent forecast a cut.

And it underlines the catch-up potential of France, where hedge fund managers have 3.7 percent of global assets under management, compared with 4.9 percent in Switzerland and 18.3 percent in Britain, according to data from research firm Mathema.

"There is a need for an alternative source of returns," said Alexander de Bruin, senior analyst at Darius Capital Partners.

The flipside is that French hedgies, despite reporting encouraging meetings with investors, are still having to work hard to turn good intentions into cash.

Insurer AXA has "no plans" yet to significantly ramp up its 1 percent exposure to hedge funds, a spokesman said, while CNP declined to comment.

To overcome what some see as a lack of understanding about hedge fund strategies and an absence of advice about where to invest, hedge funds are promoting less opaque products under the Europe-wide "UCITS" label, which enforces transparency and the ability for investors to withdraw funds rapidly.

"We should see the emergence of very big UCITS funds...Especially after the 2008-2009 crisis when some investors in (non-UCITS) offshore funds found their assets blocked," said Fabrice Seiman, head of Lutetia Capital.

NOUVEAU MAYFAIR?

Some of this optimism is also being backed by measures to promote Paris as a place to do business: Finance lobby Europlace is awarding seed capital to hedge funds like Bernheim Dreyfus.

Efforts by French regulators to attract funds to Paris have also made it cheaper and quicker to set up a fund in the French capital than across the Channel in Britain, some fund managers say.

But even if Paris's hedge-fund ranks are expected to swell as former traders from banks like Societe Generale (SOGN.PA) and BNP Paribas (BNPP.PA) set up their own funds in the wake of staff cuts and prop-desk closures, few expect the city ever to match better-known hedge fund hubs like Mayfair in London.

"There is a lack of access to an international investment base," said London-based hedge fund advisor Jonathan Aiach, adding that Paris also had fewer types of funds than in London.

All of which means even the most bullish in Paris believe that regular Eurostar trips will always be necessary to raise funds from abroad, regardless of how domestic appetite changes.

"There is less competition here than in London and there is support on hand to grow, but we will still have to count on investors abroad as well as the French," said Fabrice Dumonteil, managing director of Eiffel Investment Group.