Allfunds backing managed approach

With Spanish investors in particular having suffered from losses in Madoff-related investments and wary of traditional approaches to hedge funds, the newly created Allfunds Alternative franchise, part of the joint venture between Banco Santander and Italian bank Intesa Sanpaolo, will be focusing on providing liquidity, transparency and regulated investments for clients. As Santander, along with its key rival BBVA, is now pulling back from the hedge funds business – with customers having experienced significant exposure to Madoff vehicles – the main route for Spanish private clients to access uncorrelated investments will be through the new franchise, headed by CEO Borja Largo, also chief investment officer at Allfunds Bank. Allfunds Alternative runs a mixture of services for its clients, all using externally managed vehicles, including single strategy funds, managed accounts, Ucits III funds and discretionary portfolios offering a combination of hedge funds and traditional investments. Its quantitatively driven model is particularly popular in discretionary portfolios for Italian private clients, the so-called GPFs. Around 40 per cent of the €1bn in invested assets comes from Spanish families and the rest from wealthy customers in Italy, the UK and Latin America. Italy has been the toughest market, with €11bn in hedge fund redemptions since 2007. “With an average wealth of €10m, you would expect Italian private clients [invested in hedge funds] to have patience and a long-term view, but there have been huge redemptions,” confirms Mr Largo. Key to the new product offering is the provision of Ucits III regulated, Luxembourg funds for consumption by private clients. Mr Largo understands the restrictions on shorting and the problems of fully replicating hedge fund strategies through such regulated vehicles, but believes many conservative investors will sacrifice some performance for peace of mind. “If you favour pure performance, we can suggest a fund of funds with quarterly liquidity, and the return might be better than investing in a Ucits fund,” ventures Mr Largo. “But if you want to favour liquidity and transparency, you have a narrower universe and you pay a price in transparency. We are not trying to convince somebody that a Ucits fund is better than a straight fund of hedge funds. In good times, private banking clients prefer performance, but in bad times, there is a desire for liquidity.” In between the two, Mr Largo suggests a managed account approach, where managers are invited to join a platform, and their positions can be cloned for access by institutions and private banks. “There is an extra layer of costs,” admits Mr Largo. “But you are paying for the due diligence and fund selection. This has a price.” But Ucits funds also have an extra fee attached to pay for regulatory expenses in Luxembourg, where it is more expensive to register funds than traditional “offshore” regimes such as the Cayman Islands, says Mr Largo. Allfunds Alternative has identified approximately 100 Ucits III “hedge funds lite”, which may be suitable for private clients, but currently deploys only 10-15 of these in its portfolios. “There is currently a boom and a fashion, where every single asset management company is trying to launch a product around the Ucits III theme,” says Mr Largo. “But we have to do some good selection for our clients. The risk is in the selection, not in the type of products. It is a core concept.” Last year, Allfunds tried to create a distressed debt fund, but could not find support from investors. Today, Mr Largo is directing them to investments in event driven strategies, M&A and global macro. “When you have the opportunities, you can’t find the private banking investor. It’s a dilemma you always have to deal with.” Putting aside these reservations, he was encouraged by the first net inflows last year, after 12 months of redemptions in his business. Despite the parent bank’s previous problems with hedge funds, Santander’s private banking clients are expected to provide important business lines for Allfunds Alternative, although third party customers are also being targeted. “Private clients want to get into hedge funds again, but only using regulated products,” warns Mr Largo.