In September 2003 and after 6 years in Proprietary trading, Emmanuel Terraz feels ready to launch a strategy capitalising on the steady growth of the Index markets since the eighties. The fund is Market Neutral, each position is hedged via Futures, ETFs or a basket of equities with daily liquidity and aims to provide Money Market plus type of returns. Dexia Index Arbitrage Fund is a UCITs since inception, registered in France, where Dexia Asset Management is based.
Emmanuel, could you explain us how you generate returns?
The fund takes advantages of statistical arbitrage strategies on equities based on a rigorous analysis of the stocks rebalancing in the indices. The rebalancing can happen periodically every quarter, half year or year or due to specific events such as spin-offs, mergers, credit rating changes. The particularity is our discretionary approach using quantitative analysis refined by qualitative analysis.
The quantitative side allows us to screen the markets and evaluate price opportunities very efficiently ; the qualitative aspect gives us the skill to manage the timing of investments and understand intrinsic risks of each position.
Has this mix of quantitative and qualitative been a plus for the strategy in the last 10 years?
I believe that managing our strategy can be assimilated to flying a plane ! Today planes fly mostly on auto pilot because the complex and as well simple flying rules have been encoded. The complexity comes under stress situations where a human skill is needed to appreciate the risks and find concrete unknown solutions...Landing under adverse conditions requires a human intervention and can be very successful despite the high level of risk to fail! Our 10 years experience dealing under different market cycles has given us the opportunity to test the efficiency of such mix of decisions.
Can you give us a concrete example ?
In general, 2008 crisis was for all of us an opportunity to experience un-predictable market reactions and un-predictable market volatility. Systemic risks show us that what we called « unlikely» can happen ! 2008 forced us to re-define the size of the positions for example in order to continue to have market exposure but not fully invested to avoid being over exposed in an irrational market.
The Volkwagen short squeeze in 2008, making it worth more than any other company in the world, is a good example that a Fund Manager must be ready for the unbelievable.
What did you learn in these past 10 years that will be useful for the coming ones ?
We have experienced positive and adverse markets; we have experienced large fund withdrawn, moving in 2008, from 1,4 billions to 600 millions under management in couple of months. One thing I have learned is the pressure of the assets under management; I believe that a fund manager can not satisfy all his investors' needs and requirements. My philosophy is to remain consistent with my fundamental values and trust in managing my strategy. I must say that the top management at Dexia AM was always supportive and never too muchintrusive in the way we managed our strategies. They even protected us, the fund managers, during difficult time where they had to deal with critical issues, allowing us to continue to do our job without external pressures.
How do you see the 10 years ahead?
I feel like a craftsman. My job is to fine-tune my strategy everyday to adapt to market changes, to new rebalancing factors Capacity has always been an issue. Out of a portfolio of € 1,5 billion under management, our portfolio would typically be € 300 million long and € 300 million short with the balance in cash instruments. Market opportunities are larger in the US because of the size of the markets and large market players such as the pension funds, rebalancing their portfolios.
Is the UCIT format appropriate?
We always believed in the UCIT vehicle at Dexia AM and have one of the larger range of UCITs funds under one brand. I never used leverage and value the high liquidity of the fund for investors. The UCIT format has allowed us to have a large range of investors.
About Emmanuel Terraz
Emmanuel Terraz, 42, is Dexia Index Arbitrage Lead Fund Manager. A graduate of the EcolePolytechnique, he worked from 1997 to 2003 on proprietary trading desks at Sociƒ©tƒ©Gƒ©nƒ©rale in Paris and at Barclays Capital in London. At Barclays Capital, he was global head of Index Arbitrage in the Equity Derivatives department. Emmanuel joined Dexia Asset Management in 2003. He was responsible for developing the fund Dexia Index Arbitrage, which he has managed since its inception in 2003.
About Dexia AM
Dexia Asset Management is an asset manager specialized in financial analysis, fund management and institutional and private mandates. Dexia AM is a first-tier, pan-European player managing EUR 73 billion (as at end June 2013) in assets, distributed among a full range of investment vehicles, including traditional management, alternative management and sustainable management. Dexia Asset Management has management teams in Brussels, Luxembourg, Paris and Sydney and sales teams throughout Europe, Australia and the Middle East.