11 Apr 2014 Filippo Stefanini, Head of Hedge Funds & Manager Selection, Eurizon AI SGR – Total Return Alpha Strategy
Filippo graduated in Management Engineering (1998) at the University of Bergamo. From 1999 to 2001 he was with Accenture where he worked in management consulting within the Asset Management and Investment Banking.
In 2001, he joined Aletti Gestielle Alternative SGR where he participated in the start-up of the company and held various positions until responsible for asset allocation. From 2007 to 2011, he has been an adjunct professor at the University of Bergamo, where he taught Risk Management. In 2008 he entered into Eurizon AI SGR (built-in Eurizon Capital SGR in December 2011) as Head of Research. Since 2012 he is Head of Hedge Fund & Manager Selection at Eurizon Capital SGR. Filippo Stefanini is the author of several books on hedge funds.
LUXHEDGE : First of all, could you kindly introduce Eurizon Capital for us?
FILIPPO STEFANINI: Eurizon Capital SGR is one of the biggest Italian asset manager, with more than €190 billion of AUM ((source: Assogestioni as of 31 december 2013). Backed by thirty years of experience in asset management, we offer investment solutions tailored to the diverse needs of retail and institutional clients, providing a wide range of products that are rigorously managed. Regarding our institutional customers, we offer many products and services including asset management and advisory. Eurizon Capital S.A. is a subsidiary of Eurizon Capital SGR and is established since 1988 in the Grand Duchy of Luxembourg. This entity is specialised in managing and distributing Luxembourg UCITS funds to retail and institutional clients and offers a wide range of products and services.
LH: Eurizon Capital appears as an important actor of the Luxembourg-based universe, with a total of AUM of €559 million in our database. Today, we will focus on your Fund of Funds (FoF), Eurizon Multimanager Stars Fund – Total Return Alpha Strategy.
FS: “Total Return Alpha Strategy” is a sub-fund of the Luxembourg based investment fund “Eurizon Multimanager Stars Fund” promoted by Eurizon Capital S.A. and managed by Eurizon Capital SGR. The aim is to achieve an absolute return: we seek to deliver a yearly performance in excess of EONIA + 3.00% gross of management fee over a time horizon of 5 – 7 years.
In terms of strategy, we pursue a multi-strategy approach and we can invest in any share of UCITS managed by third parties. We aim at selecting primarily UCITS with a focus on funds replicating hedge fund strategies but we use also long only funds and eventually ETFs for tactical exposure to different markets.
LH: Your fund delivered a return of 8.58% (institutional share class) in 2013, for an annualized volatility of 4.88%. Could you have a few words about this performance and how your fund compares to its peers?
FS: The main contributors to our performance in 2013 were long/short equity, long/short credit and global macro strategies and the selection of a few specific managers contributing in a material way to the overall fund results. The comparison between the fund and the broad index as represented in your website shows a superior performance of the fund (+8.58% vs +5.1% of LuxHedge’s Fund of Funds Index) with a slightly higher volatility. In addition to the strategy and the manager selection mentioned above, we also stress a proper portfolio diversification that has allowed us to keep the portfolio volatility broadly in line with the index. We are obviously delighted by those results that rank us among the top components of your index. Regarding the volatility, we managed to keep its level around 5-7% threshold, which is coherent regarding our investment and risk strategy.
LH: We talked about the asset classes that boosted your performance last year. What is your current portfolio right now and why?
FS: We hold at the moment 21 positions in our portfolio, divided in 7 strategies. Of course, we have a bias towards some strategies. Most notably, 38% of our portfolio is oriented towards a Long/Short Strategy, and Global Macro accounts for 19% of our strategy.
The rest of the portfolio is allocated to: High Yield (16%), Equity Market Neutral (8%), Convertible (6%) and Long Only (6.8%).
It is also important to stress that we keep a quite dynamic approach, so portfolio composition can materially change through time depending on our tactical asset allocation.
LH: Regarding your current allocation, it appears that you possess a majority of sub-funds domiciled in Luxembourg. Why did you invest a large part of the assets in Luxembourg domiciled sub funds?
FS: Most of the UCITS funds in our Buy List are domiciled in Luxembourg but this is really a bottom-up characteristic and not one of our requirements.
LH: Could you please detail a bit the process that you use in your investment process?
FS: Our investment process is divided in three steps: Strategic Asset Allocation, Fund Selection and Portfolio Construction.
- Through the strategic asset allocation, we aim at finding the best performance opportunities while keeping an adequate diversification within the overall portfolio. This phase consists of two steps. The first one is to define a strategic allocation based on the macroeconomic scenario and on specific factors that may have an impact on each strategy. This is an annual process. The second step, operated on a weekly or monthly basis, regards tactical decisions, driven by specific opportunities and market dislocations.
- Fund selection relies both on a quantitative and qualitative analysis. With regard to the quantitative aspect we focus on a wide range of risk and return analysis allowing us to properly evaluate the main characteristics of each strategy as well as to compare them to the relevant peer group. We also run peer group analysis in order to identify if the fund is a performance enhancer or a risk diversifier. The qualitative approach consists of a due diligence: we acquire information on the third party managers. The aim is to check the repeatability of the third party manager’s investment process.
- Once the funds are selected, the Portfolio Construction will determine the weights that will be assigned to each strategy and each individual fund regarding several criteria: outlook for the strategy used, impact on the portfolio’s ex-ante volatility, need to maximize diversification and minimize volatility.
LH: How do you manage risk within your fund?
FS: First of all, we consider our risk to be somewhere between the medium and the high level. Our portfolio is exposed to the price fluctuation of the instruments we invest in, so we try to reduce those risks through a broad diversification. By doing so, we can minimize the impact that a single event could have on the overall portfolio.
We use within our portfolio, from a more statistical point of view, the Value at Risk (VaR). This tool helps us knowing the maximum potential loss that our overall portfolio would experience under given circumstances, with a certain confidence interval. Managing the risk in a Fund of Fund is a crucial point since you constantly keep an eye on the funds you invest in. We carefully monitor the third-party funds with a strong focus on risk management. We hold regular meetings with third-party managers in order to assess the quantitative and qualitative aspects that may affect their performance. Most of all, a regular volatility analysis is necessary in order to understand:
- The contribution of each fund to the overall volatility of the portfolio.
- The contribution of each strategy to the overall volatility of the portfolio.
By controlling those two factors, we can reduce the risk of a drawdown in a specific fund or strategy impacting our portfolio in a significant way.
LH: Your fund reported absolute positive returns each year except in 2011, when the fund suffered an important drawdown of -8.2%. While you obviously overcame this difficult period, maybe we could seize the opportunity to discuss this result?
FS: Of course, it’s always important to analyze this kind of performance and understand how it actually occurred. We know that 2011 gave fund managers quite a tough time. In particular, looking at your LuxHedge’s Fund of Funds Index for this year, we noticed that only one FoF actually delivered a slightly positive return, while all the other funds of funds, including ours, suffered important losses, resulting in a yearly average for your index of -5.25%. The main issue is that August 2011 came with a risk-off movement caused by the deepening of the sovereign debt crisis within the Eurozone, coupled with the downgrade of the US debt. The correlation between the different asset classes increased, making futile any effort towards portfolio diversification and asset reallocation. As a result, we suffered losses in several strategies: long/short equity, event driven and risk parity. While we gained from other strategies like systematic futures funds and volatility strategies, we couldn’t compensate the loss. Nevertheless we managed, as you pointed out, to recover from this drawdown and to deliver superior performances ever since.
LH: Can you give us a position of your investor base?
FS: Client base is mainly represented by private clients and institutional clients as insurance companies. We want to expand the fund raising from now on.
LH: Could you please share your view regarding the markets in 2014?
FS: The central scenario for Eurizon Capital SGR is an upholding global economic cycle and a good performance of the equity markets in 2014. In line with this scenario and with the expectation of a good ability to generate alpha by stock pickers thanks to the lower correlation between individual stocks, we believe it is appropriate to maintain a significant allocation to the long / short equity strategy. We also keep a good exposure to event driven strategies. We expect that 2014 will be an interesting year for activists that in US will push corporations to use the record amount of cash sitting in their balance sheets. Instead in Europe we expect the Asset Quality Review will provide an important catalyst for the recapitalization of more stressed banks. Even the M&A activity will provide exciting opportunities.