“Our role is to extract and interpret the average and aggregated view of hedge funds (HF) through statistical filters and to put the replicating positions [in the funds],” said Mathias Mamou-Mani, managing member & co-portfolio manager at Dynamic Beta investments (DBI) during an interview on 27 February 2024. He affirmed that their strategies will not provoke sleepless nights for investors: “It does what it is supposed to do.”
Multi-strategies: a historical disappointing story
Mamou-Mani started the interview with a short history of the multi-strategy segment at asset managers. He explained that it started off with funds-of-funds which underperformed on the back of two layers of fees coupled with Ucits constraints, which limited their investment universe (e.g., investments in commodities are not allowed).
[Traditional asset managers] are more followers than innovators
It was followed by the emergence of the macro global absolute return strategy (GARS) funds, which raised around €10bn by the end of the 2010s thanks to the--failed--promises to achieve minimally 4% over Libor with little volatility.
Lastly, the risk premia strategies based on diversified and uncorrelated quantitative analysis promised “roughly to offer the performance of stocks with the volatility of fixed income,” said Mamou-Mani.
Multi-asset management: better with traditional asset managers or hedge funds?
“The multi-strategy mandates are much broader for hedge funds than at traditional asset management firms where the managers are less reactive given their large structure,” stated Mamou-Mani. He thinks that the latter will be late into the “new game in town” and may have missed the low-hanging fruits. “They are more followers than innovators.”
the only way to beat [hedge funds] is to charge less fees
Fund performance replication: a relatively recent concept
Mamou-Mani noted that their approach captures the dynamic allocation by HFs from e.g., US equity to emerging market equity, value to growth, event-driven, etc. He thinks that the reactivity of HFs to move in the newly growing segments at the right time will have bigger bang on the overall performance than trying to figure out the fund with the best abilities to beat its benchmark.
Mamou-Mani thinks that hedge fund managers exhibit a cumulated collective intelligence that is superior to the average market or the traditional asset management industry.” He added: “the only way to beat them is to charge less fees.”
DBI acts as a sub-advisor for the fund distributed by IMGP but also SEI, a large UK asset manager, which distributes the strategy through the SEI Liquid Alternative Fund launched in 2015. The latter is a flagship fund for DBI in Europe with around €1bn in assets under management.
Mamou-Mani explained that following a change of the law in UK which limited the cost of investing in hedge funds, SEI turned to DBI for its alternative investment solutions as it aimed at an all-in cost structure below 1%.
Performance for the replicators
As per an SEI presentation, the SEI Liquid Alternative Fund achieved a cumulated performance of 59.11% since inception in 2015 until YE23 against 32.53% for the .
Mamou-Mani claimed that the fund has become the reference fund as it “outperformed most multi-strategy funds.” Referring to tracking the multi-strategies segment, he noted that the HF replicators were the best performer in the last 5-7 years, followed by the fund-of-funds and then by the traditional “hedge fundies.”
The strong performance of the other “HF replicators”--such as Goldman Sachs and Credit Suisse--show that the concept works, argued Mamou-Mani.
The secret sauce: the correlation in the mix
SEI Liquid Alternative Fund’s direct competitors and the broad HFRI index replicating HFs strategies both have high correlation to the market (0.7 to 0.8). On the other hand, the SEI Liquid Alternative Fund distributed by IMGP delivers a stock market correlation of 0.2, a level DBI thinks offers some protection from weak stock markets.
The low level of correlation is achieved through a hybrid strategy which invest 60% into its diversified multi strategy, “a broad-based HFs replication strategy,” and 40% into their managed future strategy.
Mamou-Mani claims that the managed futures strategy, which is sometimes referred as CTA, is perfectly uncorrelated (around 0) with the stock market. As described in our previous , the CTA strategy uses technical analysis and computer models looking at past patterns and “complicated relationships” between financial products.
Importantly, DBI extracts HFs’ views and replicates them into well-known and liquid equity futures, an approach that enables them to outperform HFs, net of fees. Beyond their high liquidity, the investment in futures greatly limits the counterparty risk and enables the fund to accumulate large cash positions that are “currently remunerated at 4% to 5%.” The fund is offered in dollar and other currencies (hedged or not).
The SEI Liquid Alternative Fund is Ucits compliant and does not invest in commodities. Rather, it takes positions on the Australian and the Canadian dollars as commodity proxies.
Smoothening the volatility from the stock market
Mamou-Mani thinks that the positive performance of the fund in 2022 (+4.1% against -2.2% of its benchmark and -13.08% for MSCI World Index) is a testimony of the resilience of the approach. He affirmed that heavy positions on rates and currencies in the managed futures strategy (+18%) more than offset the equity losses on the diversified multi strategy (-4%).
Mamou-Mani observed that both strategies tend to perform every year in the opposite direction, which means that the worst yearly performance has been around “50bps” for the fund.
The Ucits IMGP DBI Managed Futures Fund is also commercialised separately in Europe and was launched a year ago. The AUM stands currently at “€80m” and is a clone of its US equivalent which has around “$750m” in AUM.
Hedge funds in different flavours
Mamou-Mani claims that DBI is the only firm in the US that implemented their HF strategies in exchange-traded funds (ETFs), which is supported by the high liquidity of the futures. He also plans to launch ETFs in Europe, but thinks that the market may not be yet ready for the product.
DBI considers setting up some indices replicating HFs that may be used to create ETFs.
Replicating private asset funds
Through their analysis of benchmarks, Mamou-Mani could easily replicate private equity by investing 1.3X in small-cap equities with an annual net asset value. He recalled that the same exercise led DBI to conclude that you need to invest 1.7X the Nasdaq to replicate the performance of venture capital.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .