Lyxor Asset Management is set to roll out only the second managed futures fund available for retail investors in Hong Kong after a protracted regulatory registration process.
The fund is an Irish vehicle first launched by Lyxor in 1999. Previously, however, it targeted institutional investors, which in the Asia-Pacific region meant those in Japan.
Lyxor, a wholly owned subsidiary of Société Générale, took the decision that there would be ample demand among Hong Kong retail investors for the Lyxor Epsilon Managed Futures Fund, which it describes as an “over-performing global trend fund”.
It terms of suitability for a less sophisticated audience, SocGen notes that liquidity for the fund is daily, with liquid futures as underlying instruments, plus there is no specific credit risk attached. It is also transparent in that it deals with listed futures.
But owing to the fact that it is a volatile instrument managed systematically and that there is only one comparable product in Hong Kong – Man AHL Guaranteed Futures 3, launched in 2008 – the Securities & Futures Commission (SFC) took almost 18 months to grant permission for its retail distribution, which will be through retail banks, private banks and IFAs.
Lyxor has a tentative fund launch date of May 6 in Hong Kong, on the back of an IPO period from April 6 to 29. Singapore is also mooted for a Ucits III version.
Share classes of the fund are available in Hong Kong dollars, US dollars and Aussie dollars, with Lyxor looking closely at an offshore renminbi option. “We are definitely looking at CNH and we need to find a custodian bank to work with,” says Antoine Broquereau, managing director for alternative investments at Lyxor. "We are working to try and find a good partner."
Asked why he had picked the Hong Kong retail market, he points out the diversification benefits of low correlation to equity and bond markets. He notes that Hong Kong retail investors have a strong bias towards equity, real estate and high-yield bonds.
“We are convinced there is room in a retail portfolio for an absolute return strategy that is going to bring a bit of decorrelation into their returns,” says Broquereau. “We have been managing the fund for a long time and it has been delivering good results. As a fund provider we have to provide regular reporting so people have an idea what the fund is invested in at a specific point in time.”
Broquereau says that although regulatory permission for the fund took 18 months, Lyxor did not have to change much other than the incentive fee, lengthened from six months to a year.
He adds that the target size of the fund is $1 billion with a 15% return. “It is not something we want to market quickly and then close. We are comfortable investors are going to come.”
The fund invests in 51 liquid futures markets with seven sub-asset classes (long and short-term rates, equity indices, currencies, metals, agricultural products and energy). It has a focus on volatility targeting as a risk-control technique, evaluating the volatility of each futures market and monitoring risk exposure on a daily basis.
Broquereau notes that the fund can go from long to short in two or three days in the event of a crisis, or trend reversal, which happened in the wake of the March 11 earthquake and tsunami that struck Japan, when the fund lost 5% between close on March 10 and close on March 16.
“Since the volatility increased very sharply, it [the model] decreased our exposure to Japan very quickly,” says Broquereau. “The crisis was on Friday [March 11]. On Monday there was the first real worry and on Tuesday the market sank 18%.
“On Wednesday our equity exposure [to Japan] was cut by half and on Thursday it was cut to zero. This is very difficult to do if you don’t have a predefined strategy. We spent a huge amount of time deciding whether the process was still right for this kind of situation, and decided it was.”
The Lyxor Epsilon Managed Futures Fund has a minimum initial subscription of $10,000, an initial sales charge of up to 5%, a management fee of 2.44%, admin fees of 6bp and a performance fee of 20%.