Still at the frontiers
Helie d’Hautefort is a rarity among currency overlay managers, as he runs a continent-based business, which contrasts with the predominance of US players in the currency field.
He started Overlay Asset Management - OAM as it is referred to universally - in 1998, in Paris. His background is classical – currency trading rooms and treasury management. “I had been a currency option trader for 10 years, having started in New York in 1985.”
His best client at that time was multinational group Peugeot. “I joined them and was in charge of the currency risk and treasury for five years.”
What struck him at the time was that the currency overlay business was at the frontier between asset management and capital markets. “That is a very interesting aspect,” he says. “As typically 98% of the foreign exchange volume comes from traders, why are asset managers interested in the market where the players have a 30 second investment horizon?”
That’s something of a paradox, he adds. “But the fact is investors are increasingly realising the huge impact currency can have on their global portfolios, both in terms of return and volatility.” While foreign exchange may be a by-product of the global investment process, it is a significant contributor to portfolio returns and risk, particularly over the past five years.
“From 1995 to 2001 the US dollar was in a up-trend, so fund managers did not really have to worry about any currency hedging process. But now, for example, with the pound and euro so strong, European investors have to cope with the strength of their base currency and address currency hedging, in his view.”
D’Hautefort says: “As a consequence, we see this business set to grow more and more, particularly as cross-border investment is on the increase.”
He also points to the fact that forex trading levels are now back to the same levels as in 1999 when the euro was launched and currencies in play reduced dramatically. “So there is more and more interest.”
The forex markets are different to traditional investment markets as there are many different participants with no one dominating. “These players with different goals create the inefficiencies in the market, particularly as not all are oriented to making money from the market. This gives us our opportunities,” he adds.
When d’Hautefort came to setting up his own team at OAM seven years ago, he faced the perennial handicap of taking seasoned currency people from trading desks or from an asset management environment where expertise was largely absent. D’Hautefort recognised he needed a mix of the two.
Since he was going the quant route, relying on computer-run models, he needed people with a relevant background. The firm started with seven people – it has since grown to 20.
Although he had many contacts with banks from his Peugeot days, the issue of lack of track record, inevitable with a new operation, was his first hurdle to address. “Our prime clients – and this is still the case today – were professional asset managers who wanted to outsource their currency hedging as it is not a core activity.
“Once these professionals have done their due diligence and are satisfied with your credentials in the market, they are more open and flexible about hiring you than an investor such as a pension fund looking for a three- or five-year track record.” Over 50% of OAM’s client base are from the asset management industry, rather than investors.
“They are a very demanding clientele, as you would expect,” he says.
In 2001, BNP Paribas Asset Management acquired OAM, but has left it to operate independently. D’Hautefort has no doubts about the benefits such a backer brings. “We had missed mandates in the past because we were on a standalone basis. In the US, they may be more open to small entrepreneurial boutiques, but in Europe investors are happier with more established and institutionally backed operations, in order to be sure they have the right manager.”
At the time, OAM had been approached by two major players. “From a future growth point of view, we felt BNP Paribas would be better positioned to support our activities.” This is what has happened, he says. “They are helping us considerably, especially in Asia, where 25% of our clients are now based. The BNP Paribas network provides us with the client-facing services we need,” he says. The firm now provides currency management for some the BNP assets.
OAM’s approach to currency overlay is more towards ‘alpha’ generation, rather than focusing on currency exposure risk reduction. “From the very beginning our view was by generating alpha, you are also reducing the risk. Our in-house system we have built up over the years is different to other managers, who often use blended styles, combining technical, flow, macro analyses and charts. Our approach is to stick 100% to our price-based computer model.”
The core software engine is ‘Expert’, which produces a daily positioning signal, which has been developed into three programmes: active currency risk hedging, a tactical currency allocation and absolute currency performance.
“We know in some market conditions it is not the best style, but our clients know exactly what they are buying. We do not change this, even if we were to think that economic analysis or chart analysis might perform better in a particular period. Our clients can be sure we are following our model.”
Overall, it has performed well, he maintains, with good risk-adjusted returns. “This year has been difficult as the market is very rangy, which it has not been for years, making it hard to outperform.”
More and more clients are looking at pure alpha strategies and the firm has $300m (e244m) in this area, with a new hedge fund range. “We use the same ‘engine’ for the signals as we do for the overlay management, to expand into three hedge funds.” The first was for the European market, the second an Asian fund , which was the first currency one launched under the Japanese regulation some three months ago, and third for our US-based clients,” he says. “The growth we are seeing is very encouraging.”
The major risk in currency overlay is, in his opinion, selecting the benchmark and not the manager. “Our view is that it can be a good idea to combine passive management with short-term programmes, instead of active currency overlay.” The risk is that the benchmark adopted is not right. “By having a passive programme combined with an alpha-generating programme, then you can have best of both worlds. This may be iconoclastic to say, but some major investors are beginning to think about this.”
How has the growth in tactical asset allocation affected currency overlay? “Tactical asset allocation (TAA) is usually done at the fundamental investment process level. Where there is a model approach to currency, it should lead to outsourcing of the currency aspects.”
There are not that many players as yet in pure TAA, d’Hautefort says, and some of these are also established currency managers, such as Goldman Sachs and State Street.
He sees that global managers will need currency overlay as part of their offering. “Currency managers compared to other classes in asset management are more focused perhaps on just the one area.” It is so different to other markets, he emphasises. “You cannot be long only in currencies – if the dollar is rising, sterling is coming down – you are long in one and short in the other by definition.”
OAM’s business still has a primarily European focus, with some US clients, in addition to the fast-growing Asian business. “We are increasing our institutional investor base and working on some big mandates currently, as well as growing the hedge funds.” In time the funds could become a bigger part of the business, especially in the fees that can be generated, even though these are coming under pressure.
The $3bn in AUM does not include the sums that are managed for BNP Paribas AM. “We do not want to mix these assets with those counted for third-party clients.”
There is still the need to get the message out about currency management, and he sees that this is a something OAM and others the industry still need to do. The consultants too are playing their part now.
For the immediate future, d’Hautefort will be focusing on the absolute return programme, whether hedge funds or managed accounts. “We are now using currency options to obtain different return profiles. This area of an option-only programme is being developed as a product.” In the past, clients were worried about options, but that has changed.
On currency overlay, he believes that investors could take a more fund of funds approach. “Experienced investors will look at the styles and at the track records and do their own combination of styles, compared to buying a blended process. They may have a dynamic allocation to these styles.” D’Hautefort sums it up: “They will make their own cocktail.”
The increased interest in TAA should be good for the traditional currency managers, he reckons. “But it is up to us to convince them of our abilities.” Among asset managers, he sees outsourcing of the currency function continuing. “Even if there is an internal team, there is still a case for diversification.”
In five years’ time, where would he like OAM to be? “We want to be over $10bn – this is possible.”