Shades of asset management
Sinopia, HSBC Investments' Paris-based quantitative asset management unit, shares its name with a red-brown ochre pigment that was popular in Renaissance wall painting.
While the faces of some quant fund managers might have been coloured a shade of sinopia earlier this year when they explained the performance of their strategies to clients, Pierre Séquier, newly appointed CEO of Sinopia does not share their embarrassment.
For one, he would have you know that not all quant funds are the same. In fact, he says, there are two very different categories of fund manager in the quant area, and Sinopia's are not the type that have caused themselves trouble.
As is well known, some quant funds ended up last August effectively trading against their own strategy and while some were exposed to the market recovery that took place at the end of the month, others had to de-leverage.
"We have few strategies focused, for example, on stockpicking, and there was no change in the level of risk," points out Séquier, referring to a number of enhanced index funds. "We had a few days that were surprising in terms of performance; overall it was not a good month but not an exceptionally bad month." Some of them were repositioned by the beginning of August, he adds.
"We are in a space where to be extremely transparent about how decisions are made is quite clearly valuable and attractive to a number of investors," adds Séquier. "We start with economic theory… The variables that we use as input are perceived as common sense financial economics and won't be surprising to anybody. Therefore there is some good understanding of what kind of algorithms we use and why we use them because this will allow us to explain what has been the impact of this kind of input in our decisions. I think I would almost claim that this is the exact opposite of the black box label."
Gross of fees, a number of Sinopia's funds outperformed their benchmark over 2007. These include the FI Global-Inflation fund, the BRIC Equities fund, the US Equities fund and the Japan Equities fund.
The firm started in 2007 on thematic equity funds, such as the HSBC Climate Change fund. "There are a few projects around this area, launching equity products that allow investors access to specific themes of investment," says Séquier. "I think that from this point of view the fact that we are process driven allows us to do this efficiently and reactively."
Absolute return has been an important development for Sinopia as investment demands evolve, the CEO continues. "There is demand for customisation of absolute return products in terms of level of risk and performance source from different investors, although clearly this is more adapted to institutional investors," he says.
Just over a quarter - 26% - of Sinopia's €45.2bn assets were invested in absolute return strategies at the end of June last year. "On the absolute return level we have started to move from what I would call a pure mono engine strategy to a more multi strategy and the trend is definitely more towards the combination of different performance drivers," continues Séquier. "I think once again because very often quant managers have placed great stress on risk management, what is important is transparency of the risks that are taken and therefore the ability to have quite a strong idea regarding the impact of any given portfolio on the overall portfolio of an investor. When you use an alternative strategy it is important to know how the strategies are connected in terms of risk.
"Are you going to diversify or are you going to pile on the same kind of risk you are already holding? To have the tools to make a thorough risk analysis is very important. This is definitely something that is of interest and we have seen a lot of demand."
The 130/30 path is now a well trodden one on the part of asset managers, and some investors have followed them. But Sinopia is still reading the roadmap carefully before embarking on any journey in this direction. Nevertheless, Séquier sees such short extension strategies as an evolution of his firm's capabilities on the risk continuum from enhanced passive to long only and a product is in the offing.
"We are looking at [130/30] as a natural extension of what we do in terms of enhanced indexation, which means we are very much focused on the stock selection process," says Séquier. "Active quant typically takes some risk in terms of market exposure, taking some active positions in terms of sector allocation and them making stock selection. Enhanced is neutral on all those common factors, market exposure and sector allocation, and focuses on stock selection; 130/30 is a natural extension for us of enhanced index, removing the short selling restraints that we have in enhanced indexation."
He continues: "We use the same investment process and there is consistency in how decisions are made within a strategy. What is going to be different is very much the level of risk and the type of quant strategy that we have in place in the portfolio. The way we make decisions, the way we see the market, and the way we see that financial markets work, is consistent."
Séquier denies that Sinopia is late to the 130/30 party, and says that his firm is planning a global short extension fund for launch in 2008. In contrast, many other asset management firms have opted for a regional approach with European, North American and Asian 130/30 fund products. The CEO also adds that there is real demand from investors, who recognise that it makes sense to remove some of the constraints that have traditionally been imposed on investment managers.
However, Séquier also stresses the importance of operational efficiency in this area: "We have always been very rigorous in terms of the cost efficiency of our implementation. It is an important issue here and means that when using derivatives, which is something we have done on all the other strategies, we want to make sure that we do this cost efficiently."
A niche area for Sinopia is in inflation linked bonds, which the firm first started to manage in 2000, when it was the first to launch a euro inflation linked fund. This has since been expanded to a global inflation linked bond portfolio. Séquier thinks the diversification of the inflation linked market place is attracting investors, who are aware that an allocation represents a good diversification play within a global fixed income portfolio.
Previously deputy CEO and chief investment officer, Séquier was appointed last December as global CEO of Paris-based Sinopia. He also retains his CIO role. His predecessor, Philippe Goimard, is now CEO of HSBC Investments in France. In 1990 Séquier joined Crédit Commercial de France (CCF), which was acquired by the HSBC Group in 2000. Starting as a financial engineer, Séquier moved to the investment division in 1994 as a senior global bond manager and was promoted to head of research and development in 1999.