AXA IM plans "tail risk" hedge fund launches

LONDON Tue Nov 8, 2011 12:10pm EST

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LONDON (Reuters) - AXA Investment Managers (AXA IM) is planning to launch a series of funds of hedge funds that it hopes can protect investors from shock market events and longer-term market trends, after a volatile summer in which such funds have reaped bumper returns.

Francisco Arcilla, who heads AXA IM's 4 billion euro ($5.5 billion) fund of hedge funds unit, told Reuters the firm plans to launch a fund early next year based on its Tail Hedge strategy -- which currently runs money from a couple of institutional investors -- and market it externally.

Tail risk hedge funds typically buy cheaply-priced, long-dated put options -- contracts that give them the right to sell a security.

They usually buy these contracts when they are deeply 'out-of-the-money' -- in other words, the price at which they can exercise that right is well below the current market price -- and hope that over time market conditions change in their favor.

To fund this, they sell very short-term put options, which give the holder the right to sell at close to the current market price, and bet they won't have to pay out large amounts before the puts expire.

Such hedge funds can often lose small amounts of money in more stable market conditions but then make huge gains during sharp market sell-offs.

For instance, 36 South Capital Advisors, which specializes in such strategies, saw its Kohinoor Series Two fund make 73.3 percent in 2008's market chaos, but then lose 1.87 percent in 2009's market rally.

AXA IM's Tail Hedge has returned 12 percent in the nine months to end-September, compared with a 5.3 percent loss from the average fund of hedge funds, according to Hedge Fund Research.

Arcilla said that Tail Hedge currently has between 400 and 800 million euros in assets, but that the new fund could grow to "several billion" in size.

It invests with fewer than ten managers, often in specially-designed funds, although this is likely to rise.

"Ninety percent of these (funds) are not stuff you can buy off the shelf. They're either tailored to our own specification or it's a share class (where) we've put constraints and we sometimes invest alongside the manager," Arcilla said.

The fund will also look to take profits during volatile periods and then buy into funds that can pick up protection in other market areas at cheap prices.

"It's about, at any given point in time, what is the cheapest protection. It's relative value, not conviction," he added.

Arcilla said the firm plans to launch further funds later next year based on other areas of risk, for instance the risk that the often-inverse relationship between equities and bonds breaks down.

"The idea is a product range around tail hedges, looking at different types of underlying events," said Arcilla, who joined the firm a month ago from EIM, the Swiss-based firm founded by high-profile executive Arki Busson.

"Historically, asset allocation has centered around the notion that there's a risk-free rate. For the last 20 years, if I say I'm in bonds, then I'm a conservative investor. But in the next 30 years (this may change)."

AXA IM is part of French insurance group AXA.

($1 = 0.727 Euros)

(Reporting by Laurence Fletcher; Editing by Jon Loades-Carter)

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