Fund & Asset Manager Rating Group · 2015-04-30 · Fund & Asset Manager Rating Group Olympia Capital Management July 2010 3 Olympia Capital Management Rating Key Rating Drivers M2

Fund & Asset Manager Rating Group

www.fitchratings.com 9 July 2010

Fund of Hedge Fund Managers France Full Rating Report

Olympia Capital Management

Summary Fitch Ratings has placed Paris‐based Olympia Capital Management’s (OCM) ‘M2’ Asset Manager Rating on Rating Watch Negative (RWN).

The RWN placement reflects the increased financial pressure and the reduced financial flexibility that the company is experiencing due to the leveraged nature of the balance sheet at the holding company level. Although Fitch recognises OCM’s efforts to cut costs, the company faces pressure to rapidly increase its revenue base, find new growth opportunities and profit from somewhat normalised market conditions to resume generating performance‐related fees. The RWN also factors in some staff instability in key research positions. The RWN will be resolved once further clarity is obtained regarding the progressive realisation over 2010 of OCM’s business plan and budget, notably in terms of revenues, net subscriptions and redemptions in its investment vehicles and effective cash flows.

Nevertheless, the rating continues to reflect the experience OCM has acquired in fund of hedge funds (FoHF) management since its debut in 1989, a demonstrated resilience to various and adverse market cycles, the strong processes in place for hedge fund selection, portfolio construction and risk management and the recent upgrade of the operational/IT platform.

In early 2010, the announced and realised reorganisation of the corporate governance structure — the creation of a surveillance board to oversee a three‐ member executive committee — is contributing to a more effective and transparent decision‐making framework.

Financial results continued to weaken in 2009, which showed a complete full‐year effect from falling assets under management (AUM) since 2008. The latter decreased 30% in 2009 to USD2.7bn. The result was a sharp deterioration in operating profits (EBITDA) to just slightly positive. Fitch notes however that OCM was able to operate an intelligent cost reduction programme, so that fixed management fees cover operating costs, although the company made sure this would not negatively affect its core value‐generating assets — key individuals, research, IT system development, and client service. OCM’s hedge fund research and selection process is strong and rigorous while its portfolio construction and risk management process remains well structured and supported by advanced quantitative systems for portfolio optimisation and top‐down/bottom‐up understanding of risks. Overall, net client flows have improved and inflows offset outflows in early 2010; key staff departures in research were replaced with quality individuals; development of new products continued apace; and there has been progress in quantitative research, IT system development and operations optimisation.

OCM’s rating excludes the other entities that form part of the larger Paris‐based Olympia Group (ACH) holding company. OCM’s investment universe is global and spans the whole spectrum of alternative strategies. As of end‐2009, OCM managed about USD2.7bn in assets, of which 90% was in FoHFs, with a client base that was mostly institutional and concentrated in Europe. It employed 62 staff, of whom 16 were alternative investment professionals.

Rating Watch Negative (28 April 2010)

1 2 3 4 5

Rating Criteria

Source: Fitch

Technology

Company & staffing

HF/manager selection

Portfolio and risk management

Investment administration

'M2' Definition Asset manager operations demonstrating low vulnerability to operational and investment management failure

Analysts Olivier Fines +33 1 44 29 92 75 [email protected]

Aymeric Poizot, CFA, CAIA +33 1 44 29 92 76 [email protected]

Related Research Applicable Criteria

• Reviewing and Rating Fund of Hedge Fund Managers, 22 June 2009

• Reviewing and Rating Asset Managers, 18 June 2009

Other Research • Hedge Funds Quarterly Newsletter Q2 2010,

June 2010

mailto:[email protected]:[email protected]


Olympia Capital Management July 2010 2

Manager Profile

Olympia Capital Management Olympia Capital Management SA (OCM) constitutes the main subsidiary of Paris‐based Olympia group (ACH), which is involved in fund of hedge funds (FoHF) management, traditional fund of funds as well as private wealth management. Created in 1989 and registered with the AMF, the FSA and the SEC, at end‐2009 the firm managed approximately USD2.7bn in assets, of which 90% was FoHFs.

The company is physically present in North America and Europe through local subsidiaries, with a client base that is largely institutional and mainly located in Europe. Although 45 of the 54‐strong staff (June 2010) are concentrated in Paris, research analysts are mainly located in overseas offices (London and New York), facilitating a global reach of underlying managers. The firm also maintains a representative office in Zürich, mainly for sales and marketing activities.

Main address 25 rue Balzac – 75008 Paris – France Ownership Olympia Group (voting rights)

Mgt and emp. = 47% Private equity fund = 53%

Website www.olympiacapitalmanagement.com Founder (member surv. board) Marc L. Landeau Type of organisation Investment management firm Executive Committee: Year founded 1989 Chairman and CEO Laurent Dupeyron Domicile, place of incorporation France CIO Guido Bolliger, Ph. D. Registration(s)/jurisdiction(s) AMF general agreement (1997),

FSA UK (2001), SEC US (2004) CFO Arnaud Beyssen

No. of portfolio managers and analysts (alternative investments)

15

No. of employees (June 2010) 54

Assets under Management

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2002 2003 2004 2005 2006 2007 2008 2009

Private mandates Traditional fund of funds Fund of hedge funds

Total AUM Growth

(USDm)

Source: OCM

Financial institutions

48%

Private banks 21%

Retirement schemes

19%

IFA 6%

Corporates 5%

Other 1%

AUM Breakdown by Client Segment (As at Apr 2010)

Source: OCM

Switzerland 44%

France 38%

South Africa 3%

UK 3%

Monaco 1%

Luxembourg 1%

Italy 1%

Other 9%

AUM Breakdown by Investor Location (As at Apr 2010)

Source: OCM

Multistrategy FoHFs 84%

Theme‐based FoHFs 13%

Traditional FoFs 3%

AUM Breakdown by Product Line (As at Apr 2010)

Source: OCM



Olympia Capital Management

Rating Key Rating Drivers M2 (RWN) Strengths • Longstanding specialisation and experience in fund of hedge funds management, since 1991. • Sound risk management, portfolio construction and allocation processes • Comprehensive HF selection and research process with distinct quantitative, qualitative and operational due diligence contributions • Quality attained by operational and IT platform; degree of straight‐through processing (STP) now high; large teams with good resources Challenges • Leveraged balance sheet posing threat to long‐term economic viability – need for stability and growth in the long term • The firm was able to sustain itself in 2008 crisis, but still suffers from FoHF portfolio cleansing and investors scepticism about FoHF model • Some staff instability in research team

Score Company & Staffing 3.25 Fitch continues to view OCM as a well‐run firm, exhibiting a long and uninterrupted experience in managing FoHF portfolios (19 years) with quality professionals at all levels and an enhanced governance structure since 2009. However, the 2008 financial crisis and the firm’s leveraged balance sheet have, and continue to, pose threats to its economic viability. • Particular ownership structure where private equity fund, Sagard, holds 53% of voting rights; uncertainty remains after end of PE deal • AUM affected by crisis (about half market effect, half client redemption), overall down from USD6.0bn in 2007 to USD2.7bn in 2010 • Financial results most affected in 2009 with full effect from crisis; EBITDA down from EUR20.8m to EUR1.1m • Model still focused on FoHF with new product initiatives — targets institutional mandates from pension funds or private banks • Some staff instability in research in 2009, but it was rapidly able to recruit; now need to foster medium/long‐term stability • Staff generally well experienced and qualified, strong quantitative and technical bias

Hedge Funds/Manager Selection 2.00 Constitutes the core of OCM’s value chain. Has always been rigorous, insightful and driven by a well‐understood process. Sourcing benefits from analysts’ location in the world’s greatest HF centres and from senior managers’ market knowledge and penetration. • Multi‐dimensional internal rating system for hedge funds performed by dedicated independent teams • High level of documentation of selection process; governed by regular committees • Insightful quantitative input for HF selection; focused on alpha generation and diversification effect • Sophisticated quantitative tools and systems for HF style/performance/risk analysis; and improving these further • Operational due diligence of good quality with three dedicated analysts based in New York and London

Portfolio and Risk Management 2.25 Well‐balanced combination of bottom‐up qualitative analysis with advanced quantitative techniques used for portfolio optimisation and risk management. Highly committee‐driven, the framework aims for a complete understanding of ex‐ante/ex‐post risk and return features of portfolios. • Five professionals dedicated to quantitative research and risk management • Process centred on a series of regular committees to review top‐down and bottom‐up decisions • Comprehensive HF monitoring using returns‐based analysis (factor model), market sensitivities and holdings (full transparency) • Good/improved liquidity management and rather conservative redemption terms of FoHF portfolios

Investment Administration 2.00 An area of constant progress over the last three years, the entire middle/back‐office platform has reached a good degree of straight‐ through‐processing, flexibility and scalability. The firm’s communication with investors has remained valuable and transparent. • Adequate level of transparency for client reporting with good quality of information disclosed • Good and sizeable operations department; has further refined and automated processes • Ability to handle multiple third parties and vehicle structures; has further streamlined main service providers • Valuation of funds’ net asset value (weekly and monthly) outsourced to administrators but systematically checked internally • Numerous and thoroughly documented operational procedures

Technology 2.25 Also an area of progress, the IT environment exhibits strength and scalability. Integration of systems has continued to improve and current developments should further enhance the degree of STP and quantitative research capabilities. • Generally good quality of IT systems in place; several internally developed tools for specific use • Front‐ to middle‐office position monitoring and order management system efficient and robust • Decision‐making tools for risk analysis and allocation optimisation powerful and scalable • Finalisation of the implementation of new MO/BO application (Omega) has improved degree of STP and automation of trade processing • Business continuity plan is professional and tested annually



Company & Staffing Shareholding & Financial Standing Olympia Capital Management (OCM) is the main subsidiary of the Paris‐based Olympia Group holding company (ACH), involved in fund of hedge funds (FoHF) management, traditional fund of funds as well as an array of financial services for high net worth (HNW) individuals and some life insurance brokerage. Fitch rates only the activities of the OCM entity and, specifically, FoHF management.

One of the oldest firms active in the field of FoHFs, OCM was founded in 1989 and its founder is still a major shareholder in the holding structure. A leveraged management buy‐out operation (LMBO) was completed in 2006, which resulted in a French private equity fund taking a large stake in the holding (53% of voting rights), with the founder still retaining 36% of the capital, the rest being split among almost all employees of the group. The private equity deal was originally meant to end in 2009/2010 and no definite decision has been made yet as to the route the shareholders should choose. Options are still open for OCM; that is, if it decides to remain independent or prefers a direct tie to a large financial institution. In early 2010, Fitch notes the announced reorganisation of the corporate governance structure — the creation of a surveillance board to oversee a three‐member executive committee — has taken place and contributes to a more effective and transparent decision‐making framework.

In 2009, the complete financial effects from the crisis were felt. End‐of‐period total assets under management (AUM) reached a six‐year low, at USD2.7bn, down from almost USD6.0bn in 2007. It is fair to estimate about half of that fall was due to net client redemptions, the other half stemming from the performance effect. However, Fitch still notes two positive factors. First, clients leaving have mostly been concentrated in the banking and structured products sectors — for obvious reasons of Basel 2 regulation and the dire need for cash — whereas the assumed longer‐ term and stickier institutional clients (such as pension schemes) have remained somewhat stable. Second, the flow of net subscriptions/redemptions has progressively and noticeably improved in the second half of 2009, to almost equilibrium in early 2010. Admittedly, OCM now needs to capitalise on a better market environment to sustain and subsequently accelerate positive inflows into its investment vehicles.

Consequently, financial results continued to weaken in 2009 ‐ operating profits (EBITDA) deteriorated sharply to end the year just slightly positive. Fitch notes however that OCM was able to operate an intelligent cost reduction programme (which significantly affected staff expenses (‐24% in 2009) and general administration), so that fixed management fees cover operating costs, although the company made sure it would not negatively affect its core value‐generating assets ‐ key individuals, research, IT system development, and client service. At this stage in 2010, Fitch’s rationale for placing OCM on RWN is to highlight the reasonable stress the company is under, which is due to, and compounded by, its leveraged balance sheet. The current agreement with banking lenders and shareholders has guaranteed, according to Fitch, short‐term solvency, stability and freedom in operating its investment management activities in normal conditions. However, the agency recognises that OCM will have to comply with its own business plan for 2010‐ 2011 in terms of new client money, reasonable performance and overall cash flow generation, in order to secure longer‐term viability and, clearly, avoid a new round of cost reduction measures.

The business remains fairly diversified and does not excessively depend on performance‐related fees — the USD585m AUM flagship fund does not charge such fees. OCM derives revenues from a variety of institutional clients as well as private banking networks, today largely located in France and Switzerland. The top five clients represent about 40% of both AUM and revenues. The firm had traditionally

• Fitch continues to view OCM as a well‐run firm, exhibiting a long and uninterrupted experience in managing FoHF portfolios (19 years) with quality professionals at all levels and an enhanced governance structure since 2009.

• However, the 2008 financial crisis and the firm’s leveraged balance sheet have, and continue to, pose threats to its economic viability.



developed relationships with third‐party banking groups to manage the asset side of structured products based on its FoHFs which, as expected, has also caused OCM severe asset withdrawals in 2008 and 2009 following a sharp “deleveraging” cycle in these vehicles. The proportion of these products in total AUM has however always remained reasonable.

Experience in the AM Industry OCM started operations in 1989 in Paris. The oldest currently active FoHF (OCM’s flagship vehicle, Olympia Star) was launched in 1991 and thus today has a proven continuous track record of 18 years. Over time, the firm successively gained authorisation and registration to conduct investment activities in France (AMF‐ registered) in 1997, the UK (FSA) in 2001 and finally in the US (SEC) in 2004. The product range has progressively expanded from the original multi‐manager and multi‐strategy fund of funds to more specific and single‐strategy products (global macro, long/short equity and commodity/energy themes). The vast majority of assets are still held in offshore investment vehicles but the firm continues to develop a France‐registered line of funds and has recently launched a Luxembourg vehicle. Worthy of note is the firm’s capacity to manage large institutional mandates and offer pure advisory services. The firm is present in several locations around the globe and Fitch highlights the fact that analytical staff are located in major markets such as New York and London.

2008 and 2009 have been a difficult period for OCM, as for the industry in general. Total AUM have fallen from USD6.0bn (USD5.4bn in FoHF) at end‐2007 to USD2.7bn (USD1.9bn in FoHFs) at end‐2009. However, Fitch observes that the performance of OCM funds has been generally better (2008) or in line (2009) with the industry average and that the firm has been proactively managing its client relationships to ensure a continued effort in communication and transparency. The effect has been that the firm has suffered relatively less in terms of direct asset withdrawals (share redemptions), which mainly stemmed from private clients and the “deleveraging” of linked structured products — with a “snowball” effect on OCM’s large multi‐ strategy vehicles. All in all, and thanks also to OCM’s fairly diversified investor base, the firm did not have to alter the liquidity schedule of its funds (notably through gates and/or suspension of redemptions) until late in Q1 2009.

Arguably, 2008 was mostly spent managing liquidity, portfolio cleansing/repositioning and communication. Liquidity and performance improved in 2009, but clearly OCM needs to continue its renewed research cycle to demonstrate it can adapt to changing conditions in the way alternative investments are being marketed to clients. In Fitch’s views, OCM has been strong enough not to be forced to renounce what made its intrinsic philosophy and investment approach, i.e. all centred around in‐depth research of hedge funds and insightful portfolio construction. In 2010, OCM’s current research effort and strategy can be summarised as follows:

• to continue to recognise OCM’s core competence as a provider of, and specialist in, FoHF structures — both multi‐strategy and thematic;

• to diversify and smooth medium‐term revenue sources through scalable advisory mandates;

• to continue to develop its newly launched competence in its Dynamic Alpha offering (highly quantitative and liquid risk‐regime‐based strategy/approach making use of managed accounts, exchange‐traded funds (ETFs)/replicants and a layer of risk overlay);

• to diversify revenue sources through traditional fund of funds.



Corporate Independence and Governance The 2006 private equity deal was certainly a major change in OCM’s corporate structure and governance, not least because of the introduction of a significant portion of debt. Fitch found that the firm has not lost operational independence and remains free to define its medium/long‐term strategy. Also, the fact that employees are almost all shareholders in the group helps foster longer‐term stability of staff.

Another decision that was under discussion for several years is the change in the governance structure. In effect, the original founder of OCM and the acting chairman of the group’s board of directors ceased their executive functions in favour of supervisory responsibilities in mid‐2009, thereby marking a shift to a “full‐ blown” supervisory board and executive committee structure. In parallel, a new executive committee was formed with the head of business development and marketing (also now chairman and CEO), the CIO and the CFO. From Fitch’s point of view, this change was necessary to ensure OCM’s longer‐term development and today contributes to a more effective and transparent decision‐making framework.

The agency notes that the firm benefits from complete independence in the way it chooses its third‐party service providers (fund administrators, custodians, data providers), this procedure including quality checks and frequent reviews. In the case of dedicated mandates, OCM may agree to work with imposed third parties, which, in turn, justifies the relatively large size of its middle‐ and back‐office teams.

OCM group’s board features one independent member, who also participates in the audit and compliance committee, headed by the group’s chairman. In turn, two truly independent directors are appointed to the offshore investment vehicles’ boards.

Staffing Total Olympia group staff reached 54 in June 2010, of whom 47 were dedicated to the FoHF activity. Of that total, 15 were specifically FoHF investment professionals; that is, analysts, portfolio managers and risk managers. The agency notes positively the location of analysts in the most relevant markets around the world.

There was more significant turnover in OCM’s staffing in 2009, with two key departures in its operational and strategic due diligence research departments. Although both positions were eventually rapidly filled with highly qualified professionals, transition risk remains a concern. In addition, cost reduction measures have affected investments, operations (middle office, IT), marketing and general administration departments to varying degrees. Clearly, there is little room left for cost cutting in staff, without risking harming the core basis of competence. OCM thus needs to re‐engage in long‐term stabilisation of staff at all levels.

OCM — Total Group Staff Most relevant figures; as at June 2010

Location Departments NY London Paris Zürich Investments (FoHF) 3 3 3 Risk/Quant (FoHF) 6 Middle and back office 7 Marketing, sales and product dev. 1 7 2 Other activities (non‐FoHF) 7 Other (legal, IT, administration) 15

Source: OCM

In general, investment teams are currently properly staffed and show a high degree of industry experience (about 10 years on average) and qualification. Noteworthy is



that six individuals have been in the hedge fund industry for more than 10 years. Staff profiles are often highly quantitative in nature with prior experience in the hedge fund space.

Fitch notes the closure of the Hong Kong office in 2009, as a cost efficiency measure.

The quality of senior management is significant. The CEO, also head of sales, marketing and business development, hired in 2008, has more than 17 years of experience, notably in the hedge fund derivatives business. This person plays a critical role for the sourcing of hedge funds and for the maintenance of strong relationship management with large institutional investors.

The CIO, with a Ph.D. in finance and about 15 years’ experience in the industry, has continued to set a strong focus on quantitative research, with probably a heightened attention on top‐down allocation in 2009, from both a portfolio and risk management perspective. The head of quantitative research and risk management (about nine years’ experience in economics and quantitative research, notably modelling hedge fund/alternative return patterns), appointed at the end of 2008, proved quickly adept in the role and has been instrumental in furthering the inputs from quantitative research and the development of the Dynamic Alpha product.

Admittedly, Fitch will remain attentive to further needs for cost cutting measures. In addition, as expressed by OCM, it will be important for the firm to progressively foster a greater balance between pure quantitative research and fundamental research, notably through the recruitment of individuals with more direct market experience and a rather qualitative approach.

Hedge Fund/Manager Selection Sourcing Sourcing of hedge funds at OCM has its roots in the market experience and network of contacts brought and maintained by senior managers. The founder was personally at the origin of the seeding of several funds and obviously maintains a certain degree of involvement from the supervisory board — if not out of necessity, at least because of his strong interest in the industry.

More generally, all analysts are expected to participate in conferences and maintain strong relationships with local intermediaries, including prime brokers and capital introduction agents. Historically, the firm used to conduct about 300 manager contacts per year, which eventually translate into about 30 to 40 full‐ blown due diligence processes per year. The firm needs between two and three months to complete a due diligence procedure. In normal market conditions, the agency could report about 20 to 30 new manager approvals each year.

Sourcing follows a generic three‐step process, from the initial and ongoing qualitative research by analysts worldwide, followed by mandatory in‐depth quantitative analysis conducted by a dedicated team in Paris, which will lead eventually to an introduction report being presented during the weekly pipeline committee. This committee is formally the instance when decisions are made as to whether a sub‐fund requires a full‐blown due diligence procedure prior to eventual investment. It gathers all members of the investments department. Worth noting is that reports of rejected funds are also maintained for later review. Fitch highlights the fact that analysts are physically located in the most relevant locations in the world for researching and approaching hedge funds, that is, New York and London.

In early 2010, the firm had investments in about 120 vehicles for about 100 authorised investment firms. Calendar 2008 has been mostly spent managing the liquidity schedules of FoHFs, reducing market exposures and ensuring no major disruption to the subscription/redemption terms offered to clients. Given a large number of underlying hedge funds have reduced their own liquidity or imposed

• HF/Manager Selection Constitutes the core of OCM’s value chain. Has always been rigorous, insightful and driven by a well‐understood process.

• Sourcing benefits from analysts’ location in the world’s greatest HF centres and from senior managers’ market knowledge and penetration.



suspension of redemptions to ensure their very survival, OCM is currently still undergoing portfolio cleansing, although the largest part was accomplished in 2008 and 2009.

The announced objective for 2009 and 2010 had been and remains to bring underlying investments to about 90 vehicles while resuming more traditional research activities — i.e. to discover new hedge fund opportunities. Not surprisingly, research efforts in 2009 have been focused on underlying hedge funds providing good liquidity terms, long/short managers with little market exposure, global macro traders with a rather discretionary approach and, more opportunistically, previously closed vehicles progressively reopening to investments. Although cash management remains a critical topic and part of OCM’s investment process, the firm is still today usually 100% invested in its FoHFs, with little leverage, i.e. although the firm still considers using a “cash buffer” in the future, this is not yet the case.

In 2010, key research and sourcing themes are clearly driven by the following considerations.

• Liquidity Management: Continue improving the liquidity profile of FoHFs using managed accounts (platforms such as Lyxor, Innocap and AlphaMetrix), liquid underlying HFs, such as L/S Equity and medium/long‐term discretionary global macro traders.

• Reinvestment Cycle: OCM is currently researching opportunities in distressed credit strategies, fixed income arbitrage and emerging markets managers. More generally, the firm is looking for HF managers with a true alpha‐generation engine in a context of renewed opportunities through relative value, market neutral positioning and fundamental research analysis. This stands most chance of proving successful thanks to a strengthened collaboration between the strategic research and quantitative research capabilities, i.e. better and more rapidly ascertain the genuine alpha and diversification features of a manager/fund.

In early 2010, the largest multi‐strategy vehicle had about 23% of its investments in underlying HFs with at least a seven‐year track record and 16% in vehicles with less than three years’ history.

Hedge Fund Selection Fitch continues to view the quality of hedge fund selection and portfolio construction as the core of the value chain in OCM’s investment process. The backbone of the process consists of a proprietary rating scale for the three dimensions of the review; qualitative/strategic, quantitative and operational. Funds are thus either rejected or assigned a quality rating of ‘A’, ‘AA’ or ‘AAA’. Fitch notes generally the incremental improvements brought to the process over the last three years and more specifically the efforts that were made to gradually improve the balance and coordination between the top‐down and bottom‐up approaches and thus also between quantitative and strategic/fundamental research.

Once the introduction report written by analysts confirms specific interest in the proposed sub‐fund, a formal quantitative due diligence is launched by the relevant department in Paris. The objective is to assess whether the subject fund does generate excess return and to what extent the subject fund adds diversification to the portfolio. The study is done using advanced IT systems and models developed in a MatLab‐based environment.

A specific proprietary tool, called Aggregated Risk Tool (ART), is used to break down returns and risks to understand in greater detail the sensitivities to an array of pre‐specified factors, providing a better understanding of how beta and alpha are present in each fund. The model notably incorporates enhancers such as the Kalman Filter to correct the distribution for typical errors (erroneous observations) in the collected data. This process continues to be regularly enhanced since the



arrival of the incumbent head of quantitative research in 2008. In effect, new factors were developed for sensitivity analyses (the systems can now capture a set of macro/CTA (Commodity Trading Advisors) and credit‐related factors) and the presentation of outputs was improved with better aggregation and access.

Should the quantitative due diligence prove successful, then the process moves on to the qualitative/strategic due diligence and the operational due diligence (see next section). The on‐site strategic due diligence, with at least one analyst (often two), follows a detailed Q&A questionnaire and reviews the investment process, risk management, capacity issues, liquidity concerns and provides a qualitative assessment of the experience and edge the manager may demonstrate. Each procedure results in a detailed report (20 pages long), rather standardised, and in which the analyst is required to give a formal opinion as to the pros and cons of the manager under review and, ultimately, provide a rating. All reports and documentation on managers and funds are stored in the historical proprietary database, called MRPS.

Looking at documentation, Fitch could assess the evolution in analysts’ work during the crisis and in its aftermath. A strong focus was set on establishing the risk of liquidity mismatch and the risk of strategy execution, i.e. style drift, strategy misrepresentation and real correlation or market beta. The agency highlights that OCM has not had exposure to any of the most publicised hedge fund blow‐ups or frauds in recent years.

Specifically in 2009 and 2010, the agency could substantiate general enhancements in the HF selection framework. Basically, it has been OCM’s objective to improve in the following areas.

• The company aims to spend more time with subject HF teams to better ascertain factors such as coherence, style adequacy and reliability; to more systematically require access to underlying positions and discuss these positions with the HF managers, and finally, to more systematically require from analysts that they form and communicate an opinion on subject HFs — thus a greater commitment of analysts on the HF sectors they cover.

• OCM aims to foster a greater collaboration and coordination between the three layers of research (ie, due diligence processes now more regularly involve members from strategic/fundamental, operational and quantitative research departments). The intended purpose is to more constantly cross the opinions and inputs from the three teams to limit the risk of surprise and provide a greater and faster assessment of appropriateness;

• The quantitative research team has endeavoured to further enhance its degree of integration within the general selection process. The idea is clearly to incorporate comprehensive and more easily usable quantitative inputs earlier and throughout the research process. This objective was notably achieved using a newly‐developed monthly Quant Book, which synthesises the bottom‐up, top‐ down and risk assessment views of the quantitative research team on the industry, the sectors, the FoHF portfolios and the underlying HFs.

Operational Due Diligence The operational due diligence is led by three dedicated analysts, located in New York, London and now also Paris, since 2010. They focus their attention on sub‐ managers’ business sustainability and quality of the organisation as well as on the assessment of the funds’ legal structure and administration. Again, the analysts first review the answers to a preliminary questionnaire which, among other elements, also endeavours to ascertain that the manager has sound relationships with external service providers such as fund administrators, prime brokers, custodians and legal counsels. The on‐site visit usually involves two analysts and, as is the case for the strategic due diligence, results in a rather standardised report



and a specific rating. Fitch notes that the operational analysts hold a veto right on any proposed fund/manager. As also discussed later, update reviews are initiated two or three times a year for each underlying manager.

The crisis has prompted some adjustments to operational due diligence procedures. Naturally, greater attention is directed to reviewing and criticising debt financing terms of managers, third‐party relationships (service level agreements (SLAs) and contractual relationships with custodians, prime brokers and fund administrators) — in this regard, OCM requires external and independent fund valuation — and the presence of independent directors on funds’ boards.

The team has experienced some changes in 2009‐2010. A new head was named, now based in Paris — thus closer to operations and clients — highly qualified, experienced and already known to OCM, as he had been assuming the same role in the company in earlier years (until 2007). As discussed, the agency will closely monitor how intended improvements to the process will be gradually implemented, which include efforts to:

• further standardise and refine the due diligence (DD) questionnaire with a heightened focus on the general administration of HF managers, third‐party relationships, liquidity constraints and the contractual/legal framework;

• make the operational DD report more precise, providing a clearer overall picture, immediately usable and eventually deliverable to outside parties such as clients;

• work on a better IT integration and scalability of operational research work.

Portfolio and Risk Management Portfolio Construction The task of constructing and managing portfolios is mostly in the hands of the CIO, along with a senior portfolio manager, although largely discussed with all investment professionals. The team of two has responsibility over the implementation of allocation decisions and the main body where such decisions are made is the strategic asset allocation committee (SAAC). The SAAC meets monthly and gathers all investment and risk management staff. The emphasis is clearly set on the formal and exhaustive review of all current investments, from a bottom‐up perspective. Indeed, a specific and in‐depth report (20‐30 pages) is systematically produced, synthesising the conclusions, observations and analysis components of the meeting, along with the investment decisions that resulted. From a practical point of view, Fitch observes that a great degree of accountability continues to be required from the CIO.

Although, in effect, the CIO retains the final call on investment decisions, the agency also reckons that a greater emphasis on collegiality and discussion was initiated since he took office in mid‐2008. The SAAC is also interested in defining strategic asset allocation from a top‐down standpoint — it has been OCM’s objective in the last two years to foster its capacity in this area, thus the works it has conducted on the refinement of its portfolio construction process and the development of its dynamic risk allocation expertise. All hedge fund strategies or alternative segments are reviewed and provided with an analysis and conclusion, which takes the form of a general positioning on each strategy (bear, bull, neutral). This strategy and sector analysis is complemented by a purely fundamental review of markets, which benefits from the input of an external macroeconomic advisor and the existence of a quarterly top‐down committee where strategies and positioning are reviewed.

Generally and in a cohesive manner throughout portfolios, Fitch observes a high degree of discipline in the way OCM purchases and sells underlying funds. The SAAC remains the most official and streamlined process for suggesting the purchase or

• Well‐balanced combination of bottom‐up qualitative analysis with advanced quantitative techniques used for portfolio optimisation and risk management.

• Highly committee‐driven, the framework aims for a complete understanding of ex‐ante/ex‐post risk and return features of portfolios.



disposal of a fund; however, any analyst or portfolio manager can request a meeting of the sell‐list committee if it is estimated that specific events affecting a particular fund may warrant immediate disposal (such as a shift in style, management change, etc.), with necessary prior approval of the CIO. Historically, turnover of sub‐funds in OCM funds of funds has remained at relatively low levels, that is, between 10% and 20% on an annual basis — obviously, the specific situation of 2008 and 2009 has imposed higher selling levels to manage both liquidity needs and portfolio repositioning.

SAAC committees have been progressively enriched over time. Essentially, more emphasis is now placed on the inputs from the quantitative research and a greater deal of commitment is required from analysts in recommending an investment in, or a divestment from, a fund. The available documentation also gained in precision and scope, with a heightened attention on the compelling changes to portfolio allocation, i.e. changes to investment rationale on any sub‐fund, reasons to exit a sub‐fund and quantitative flags on any sub‐fund behaviour (market sensitivities, style drift). Finally, the recent addition of the quant book facilitates discussions and allows a more direct focus on the key elements that should drive analysts’ arguments.

More specifically, Fitch notes the process for selling/disposal of HFs was made more precise and decisive. The objective is to force a decision (keep or sell) in a maximum given time (six months) once a HF is first put on “watch” — which can be assigned for various reasons by any analyst in any of the three research departments (strategic, quantitative and/or operational DD).

OCM uses a portfolio optimisation tool developed by the risk/quant team, called “O2‐Optimizer”, notably during live sessions of the SAAC, to help gain a rapid view of best theoretical portfolios, from a risk‐adjusted return perspective (efficient frontier, with risk captured via value‐at‐risk (VaR)). Again, the system is refined thanks to enhancers such as the Copula model applied to the “t”‐distribution and an application of the principles of Black‐Litterman to bring an additional layer of qualitative judgment on data series (with analysts).

Risk Monitoring Risk monitoring at OCM is exercised at multiple levels within the organisation and, as such, is embedded in the broader investment process. First, fund analysts on the strategic/qualitative side are organised by strategy and are assigned a specific coverage perimeter (on average, about 10 to 15 funds per analyst). A rigorous process for reviewing invested funds and managers is in place. Indeed, Fitch could substantiate from two to three annual reviews per year for each fund, with the same depth as the initial due diligence — the agency also assessed the consistency of reports and the higher frequency of meetings with underlying managers during the crisis. A similar observation was made for the operational analysts’ review process. Ultimately, analysts focus their attention on disruptive events or changes, which could alter OCM’s appraisal of a fund’s appropriateness in the funds of funds. The sell‐list committee serves as a useful implementation tool if a rapid reaction is needed.

Second, a specific department, located in Paris, is in charge of risk management and also gathers all quantitative research capacities under the single direction of the head of quantitative research and risk management (hired by OCM in September 2008). Overall, the seven analysts contribute upstream and downstream to the investment process. From a bottom‐up perspective, market risks are constantly under review, both during the quantitative due diligence process and also after investments, at meetings of the SAAC, to assess the risk factors at play and how funds are reacting (using the ART risk tool). From a top‐down perspective, the SAAC sheds light on the necessary changes to asset allocation given current market conditions and also according to the FoHFs risk/return profiles (using the O2–



Optimizer tool). The general technology at hand for research is of great quality, with a clear emphasis placed on in‐house development (four dedicated IT engineers).

Fitch was in a position to substantiate measurable improvements to the quantitative research framework every single year since it initiated OCM’s review in early 2008. Indeed, OCM is able to produce a factor‐based VaR at the level of FoHFs and can back‐test these results to appreciate the accuracy of hypotheses as well as the method used to determine the VaR — this environment is further refined thanks to an archiving capacity in ART (saving past regression results), thus making it possible to measure and monitor the changes to funds’ factor‐based profiles and VaR through time. In current and expected market conditions, this capacity is seen as very positive by Fitch. Models were also further developed, to capture sensitivity of returns to credit‐related (e.g. leveraged loans, mortgage interest rate spread) and global macro factors, which will come in handy as OCM still closely gauges the opportunities in distressed credit and continues to allocate money to global macro traders.

Importantly, the work undertaken in 2009 on dynamic risk allocation has come to fruition. OCM confirms its desire to optimise the equilibrium between pure bottom‐ up HF selection and the top‐down portfolio construction. As a result, the Dynamic Alpha fund (launched in 2010) exploits the firm’s works on a quantitatively‐ and systematically‐determined risk regime indicator (multi‐market and volatility‐based), which then gears the allocation to very liquid instruments such as HF trackers/replicants (these are long beta and thus can be shorted in high risk regimes) and an array of managed accounts as per the sub‐strategy (the satellite portfolio).

Also worth noting is an internally‐developed system (OSYRIS) used to extract the recurrent information elements from monthly reports as provided by underlying managers, thus facilitating the reading of key risk and performance indicators and the tracking of such figures.

Current development areas of the quantitative research team include efforts to:

• further refine the use of Black‐Litterman principles to better capitalise on, and systematise, the monitoring of qualitative inputs into the process;

• capitalise on new risk regime evaluation capacity to eventually develop a full‐ blown and portable risk overlay strategy, which could be adapted to OCM’s portfolios or external mandates;

• further enrich factor‐based VaR with fixed income arbitrage factors;

Finally, liquidity risks are assessed monthly at the SAAC and monitored through the publication of liquidity curves for each portfolio, providing a clear picture of the timeframe necessary to unwind positions. As mentioned, throughout 2008 and 2009, the firm endeavoured to improve the asset/liability liquidity balance of its portfolios; in early 2010, OCM’s flagship Olympia Star I fund reported about 30% of its assets in illiquid HFs (e.g. gates, suspension of redemptions, etc.), with the objective being to bring it back to about 20% by mid‐2010. Such positions are usually valued using a mark‐to‐model approach, which is audited by an external provider (Duff & Phelps).

Thanks to a better integration of order management system ProgMan and back‐ office system Omega PM, the quantitative research team was able to create systematic stress tests based on the liquidity schedule of each FoHF and underlying HFs (on a share‐class basis). Clearly, Fitch views positively this new capacity.



Investment Administration Reporting Fitch notes a good overall level of communication and transparency toward investors. Investment reporting is of good quality, including weekly net asset value (NAV) reports and monthly reports with detailed analysis of risk and performance attribution accompanied by a detailed investment commentary — also provided as an open conference call with question sessions. OCM can also tailor specific reports under certain circumstances. Overall, the team of 15 in charge of sales and marketing (including two in London and two in Zurich) provides adequate client servicing. OCM may provide investors with factsheets on underlying hedge funds on a case‐by‐case basis upon an investor’s demand.

The agency recognises as well that the firm’s new public website, launched in 2009, enhances the access to FoHF documentation. As previously announced, OCM has developed in 2010 an online client access module, which makes it more convenient and quick for clients with that level of service to gain access to all relevant reports, studies and communications that directly relate to their portfolio. In the same vein, the implementation of OMEGA PM as the main position‐keeping system has helped in further streamlining the treatment of subscriptions/redemptions and reporting production procedures.

Administration Investment administration is one area where Fitch has decided to upgrade OCM’s score. Basically, the agency has recognised the constant work and progress achieved over the last three years in the general straight‐through‐processing (STP) of operations and in making the whole organisation (teams, tools, communication, security) as scalable and flexible as it is today.

Procedure wise, any monthly SAAC meeting results in decisions being made relative to the asset allocation in funds of funds. As a consequence, an order sheet is generated detailing the complete set of information needed by custodians and administrators to operate the orders. Such a document is automatically produced by ProgMan, which is the main front‐office application used for portfolio monitoring and order management. With certain custodians, the procedure for subscriptions and redemptions in the underlying funds with the registrars is completely outsourced, while others may require specific forms to be prepared by OCM and then dealt with by the sub‐custodian. OCM receives contract notes from underlying funds as an “interested party” for control purposes.

NAV calculation is outsourced to external administrators and today centralised with CACEIS France and Luxembourg for open‐ended funds, which allows OCM a greater deal of purely electronic communications and shared user interface. All NAVs are internally cross‐checked (mirror NAVs) — they are provided generally on a monthly basis for subscriptions and redemptions (weekly estimated NAVs are also sent out, but purely for information purpose). CACEIS is also used as central custodian for open‐ended funds, although OCM has been used to working with other depositary institutions (e.g. Credit Suisse, HSBC, State Street) when it comes to segregated mandates.

Fitch notes the completed implementation of the Omega PM software package as the mainstream position/book‐keeping system has enhanced the entire STP chain. The system handles both the asset side of FoHF administration (underlying hedge funds accounting and NAV calculation) and the liability side (subscriptions/redemptions and client accounts). As OCM has been working closely with the external vendor to adapt Omega PM according to its own specific needs, the system today has reached an advanced level of automation for the administration of FoHFs and their underlying investments in hedge funds.

This notably entails equalisation shares, lock‐up periods, gates and liquidity restrictions. In effect, the system maintains a unique account/file for each

• An area of constant progress over the last three years, the entire middle/back‐office platform has reached a good degree of straight‐ through‐processing, flexibility and scalability.

• The firm’s communication with investors has remained valuable and transparent.



underlying hedge fund with a complete set of information as described above. Fitch could substantiate further improvement in this framework as the NAV calculation is now taken charge of directly within Omega PM for the largest part of funds, which enhances the determination of fees and performance — although some work remains to be done for performance fees and some offshore accounts, the only areas where calculation spreadsheets are still used as intermediaries. Final completion is expected before the end of 2010.

Position reconciliation with administrators and custodians is undertaken monthly and managed completely through Omega PM, which also handles the treatment of contract notes and order sheets sent out to relevant third parties.

The presence of a relatively large team of seven operators in the middle and back offices is still justified by the fact that the firm continues to work with a number of third parties (custodians, fund administrators), which is linked to OCM’s capacity to tailor investment solutions and offer segregated mandates (notably advisory) in a fairly secure environment. Additionally, cash reconciliation remains a manual process, although Omega PM is meant to handle this task as well in the future. All in all, the gains observed in the degree of STP has made it possible for the middle‐ office/back‐office staff to devote more time to other value‐added functions, such as system and process development, direct participation of the middle office/back office in SAAC meetings to facilitate order management and the quality controls executed on external service providers.

Finally, currency management follows a rigorous procedure whereby FX exposures are fully hedged with weekly adjustments. After validation by portfolio managers, FX orders are handled by the middle office or the trading desk of Olympia Capital Gestion in Paris and dealt with bank counterparties — today monitored through Omega PM, which helps to determine the quality of FX bid/ask quotes. As for the derivatives potentially used (such as equity index futures and options) by OCM for hedging and tactical asset allocation, Omega PM is able to account for such instruments and manage margin calls.

Technology Technology in general is the other area where Fitch has upgraded the score, in clear conjunction with the investment administration framework.

Front Office Most of the systems used by OCM’s investments team have been internally developed. ProgMan is the main front‐ to middle‐office system, used for portfolio monitoring and order generation. It is sufficiently flexible, well designed for FoHF management and provides numerous reporting features (liquidity, allocation). Other front‐office tools include quantitative and risk management applications developed by the quant team, namely ART (Aggregated Risk Tool) for return‐based statistical analysis of hedge funds and FoHFs, OSYRIS, to extract and monitor indicators from underlying funds’ reports and O2 for allocation optimisation. Overall, very few spreadsheets are used by analysts and portfolio managers, who therefore benefit from an efficient and secure platform. Fitch has witnessed improvements to this set‐up, notably in the way these various systems are integrated, which has enhanced internal communication and the quality of investment decision‐making.

Middle and Back Office Omega PM is now the mainstream back‐office system, used for position‐keeping. It has replaced Aramis on most tasks and should have fully superseded it by the end of 2010. This new system today permits a high degree of STP and provides a fairly complete coverage of the administrative tasks involved in managing FoHFs and their underlying positions. Fitch recognises the enhanced flexibility Omega PM has brought to OCM, clearly streamlining and making more secure the various tasks performed and controlled by middle‐ and back‐office operators.

• Also an area of definite progress, the IT environment exhibits strength and scalability. Integration of systems has continued to improve and current developments should further enhance the degree of STP and quantitative research capabilities.



Data Management All research reports and documentation on underlying funds are stored in the historical proprietary database, called MRPS, while FoHF positions and administrative information on underlying funds (for use in the payment and settlement process) are now handled by Omega PM, in turn feeding both the O2‐ Optimiser and ProgMan. In 2010, Omega PM was further deployed and installed for use by any analyst at any OCM office, facilitating the input of data when appropriate directly by analysts — e.g. operational and administrative data linked to liquidity schedules and third parties. Overall, Fitch recognises the progress made in data centralisation and management.

Integration The overall degree of IT integration has improved noticeably. Thanks to the implementation of Omega PM and also the work of quantitative research since 2008, Fitch noticed several areas of heightened integration, notably the front‐ to back‐ office chain (STP) and the enhanced inter‐operability of the various risk management and portfolio optimisation tools. As long discussed, Fitch has witnessed in 2010 real progress in the integration of front‐office/OMS ProgMan and middle/back‐office Omega PM. In effect, investment decisions made during SAAC meetings (ProgMan) are now more rapidly and efficiently processed into Omega PM via automated file communication, which noticeably improves general order management and reconciliation procedures. Fitch will monitor over time the robustness of these enhancements and their completion.

A forthcoming area of integration could be in quantitative research. Indeed, rationalising and combining the O2‐Optimiser with the ART risk aggregation tool could improve decision‐making even further.

IT Security The IT development policy is well managed by dedicated teams, in conjunction with quantitative research, who remain in control of the IT environment and its security. Overall, the agency notes little in the way of unilateral front office developments, especially as the set of tools available is already of good quality and flexible enough.

A business continuity plan (BCP) is in place and based on clear back‐up procedures, a remote and secured site for data recovery and work stations for critical positions, departments and individuals. The plan is tested annually.



Appendix 1

Key People

Laurent Dupeyron Chairman and CEO Member of executive committee Head of Business Development and Marketing Joined OCM in 2008 Involved in financial industry since 1993

Laurent Dupeyron graduated from the Ecole Supérieur de Commerce de Toulouse (France). He holds an MBA from Georgia State University (USA) and is also a post graduate in Finance at Paris Dauphine University (France). From 1993 to 1996, he worked for Société Générale in the Structured Products Group Department. Then he joined Goldman Sachs London (United Kingdom) in Equity Derivatives Sales and became Co‐Head of Equity Finance Group in 2003. Prior to that, Laurent Dupeyron was from 2001 to 2002 Head of the Equities Division at Goldman Sachs Zurich (Switzerland). Before joining Olympia Capital Management, he was Head of Equities, structured products, sales and marketing for French‐speaking Europe at Goldman Sachs London from 2005 to 2008.

Guido Bolliger, Ph.D. CIO Member of executive committee Joined OCM in 2006 Involved in asset management since 1995

M. Bolliger holds a BS degree in management science from the University of Neuchatel in Switzerland and an MS degree in economics and finance from the University of Geneva in Switzerland. He has been through the Doctoral Program in Finance of the International Center FAME in Switzerland before obtaining his Ph.D. in finance from the University of Neuchatel. M. Bolliger has been a Mutual Fund Manager at Banque Cantonale Vaudoise in Lausanne, Switzerland, in 1995. He then was an Index Fund Manager and Quantitative Analyst at Synchony SA in Geneva from 1996 to 1998. Since 2003, he has been assistant and then Invited Professor of Finance at the University of Neuchatel in Switzerland. From 2004 to 2006, he was also Senior Quantitative Analyst at Julius Baer Investment Fund Services in Zürich. He joined OCM in January 2006 and headed the Quantitative Research department as well as Risk Management with the title of Deputy CIO until he was appointed Co‐CIO in June 2008.

Arnaud Beyssen CFO Member of executive committee Joined OCM in 2001 Involved in financial industry since 1999

M. Beyssen is a Certified Public Accountant (CPA) and holds an advanced degree in accounting and finance (DESCF) from Institut Supérieur de Commerce de Paris (France). Prior to joining OCM in 2001, M. Beyssen had been an auditor at F.G.S.C. in Paris from 1996 to 1999 and then Senior Auditor at Deloitte Touche Tohmatsu in Paris until 2001.

Florent Pochon Head of Risk Management and Quantitative Due Diligence Joined OCM in 2008 Involved in financial industry since 2000

M. Pochon holds an MSC degree in quantitative macroeconomics from DELTA (EHESS, Ecole Normale, ENSAE, Ecole Polytechnique) and is a graduate from ESSEC Business School (AACSB accreditation). He was an economist at the French Ministry of Finance from 2001‐2004 before joining the Economic Research Department of Natixis as Quantitative Economist, where he developed asset allocation, credit market and hedge fund quantitative analysis and models.

Karim Benjelloun Head of Operational Due Diligence First joined OCM in 2005 and since 2010 Involved in financial industry since 1994

M. Benjelloun is a graduate from Ecole Supérieure de Commerce de Rennes (France) and holds an MBA from Rutgers, New Jersey State University, NJ, USA. Prior to joining Olympia in 2010, he was a Structural Risk Senior Analyst, Alternative Investments (FoHFs) for UBP in London until 2009. Prior to that, since 2005, he had already headed OCM’s operational due diligence department. He began his career as a proprietary trader (fixed income) in 1994 for BMCE Bank in Paris and then spent several years in the auditing industry.

Founder and member of the group’s surveillance board

Marc Landeau Founded OCM in 1989 Member of group surveillance board Involved in financial industry since 1968

M. Landeau holds a BA degree in economics from the University of Geneva in Switzerland and an MBA from Columbia University in New York. M. Landeau was Assistant Vice President in the Private Management Division of Banque de Paris et des Pays‐Bas in Paris from 1968 to 1970, then was CEO of Club Français du Livre from 1970 to 1979 and, before founding OCM in 1989, was Managing Director of Drexel Burnham Lambert SARL in Paris from 1981 to 1989. He was formerly Vice Chairman of AIMA.

Source: OCM



Appendix 2

Main Funds

Fund (April 2010) Registration Inception AUM

(USDm) Profile Historical volatility since

inception (annualised) (%) a Target return

(in %, p.a.) Olympia Star I Offshore Jan 1991 585 Diversified FoHF 7 Libor + 3‐5 Olympia Star Lux Luxembourg Apr 2010 221 Diversified FoHF n.a. Libor + 3‐5 Olympia Special Opportunities Offshore Mar 2006 68 Diversified concentrated FoHF 8 10‐15 Olympia Stratégies Diversifiées France Feb 2005 84 Diversified FoHF 6 EONIA + 4 Olympia Global Macro Fund Offshore Jan 2007 26 Theme FoHF 5 Libor + 5‐8 Olympia Dynamic Fund Luxembourg Mar 2010 4 Dynamic risk allocation fund n.a. Libor + 4 Olympia Long Short Equity Lux Luxembourg Oct 2009 1 Theme FoHF 6 8‐10 Olympia Energy Fund Offshore Jul 2008 59 Theme FoHF n.a. Libor + 5‐10

The performance measures noted in the above chart represent historical measures. Readers are reminded that past performance is no guarantee of future performance a Historical volatility figures are ex‐post monthly data provided by the asset management company Source: OCM



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Fund & Asset Manager Rating Group · 2015-04-30 · Fund & Asset Manager Rating Group Olympia Capital Management July 2010 3 Olympia Capital Management Rating Key Rating Drivers M2