Tactical calls and structured products
“From the start of Patrimoine, significant performance has been generated from dividends (via Delta One and knockout structures) and structured products, such as long term, non-call autocalls, which have provided useful convexity and high coupons,” says Armstrong.
Longchamp understand how to use the idiosyncratic risk/return profile of structured products to trade markets from different angles. For instance, they may express a leveraged long delta view with limited risk; monetise high implied volatilities after a selloff by using autocalls, or wager on an unduly pessimistic dividend forecast embedded in a product.
Longchamp are experts at creating their own structured products, and they also allocate externally to those from banks. In April 2024, dividends apart, there was 26% in structured products, of which 40% is in the well diversified Longchamp Autocall Fund and 60% in direct products that express views on more specific markets, such as SGI European Repo Carry, based on an index run by Société Générale. “This exploits the term structure of repoes,” says Armstrong.
Dividends
Inefficiencies and opportunities in structured products can arise from banks’ need to recycle risks, such as dividends. Longchamp has identified a product based on dividends paid by Société Générale, which is basically a kind of exotic call option on Société Générale dividends structured to give upside above a dividend strike, par if dividends match the strike, and zero if no dividend is paid. The product can also be redeemed early for an annual coupon of 18.56% under some scenarios and is not leveraged.
Dividends have been most interesting in Europe or on some single FTSE 100 stocks in the UK, but Longchamp have not noticed interesting discounts in the US or Japan, where they prefer to invest directly into stocks.
Longchamp have identified European dividend futures and structured products are often deeply discounted which gives a high probability of realized dividends exceeding those embedded in the future or structure. “This opportunity set does fluctuate and by April 2024 discounts on dividend futures had largely disappeared,” says Armstrong. Nonetheless, Longchamp are ready to revisit the space if value returns. “We remain alert to a market selloff and/or high autocall issuance, which could force liquidation of dividend positions and once again lead to under-pricing of long-term dividends that could become a useful stock replacement strategy,” says Armstrong.
Dispersion
“Equity dispersion, i.e. short correlation, can express a macro view such as performance divergence between cyclicals and defensives, or it may turn out to provide protection as seen in 2022, when the VIX did very little but single stock volatility exploded,” says Armstrong. A classic dispersion product, short index volatility and long single stock volatility, performed well in 2022 as implied index volatility did not increase but single stock volatility realized well above strikes as the market bifurcated between growth and tech stocks declining while some value and commodity stocks rose. Lower correlations within the equity market suppressed the VIX. “High cash versus low cash dispersion products were one winner,” says Armstrong.
Notably these products are not ETFs. The allocation to ETFs is capped at 20% and has never exceeded 3%.
Tactical macro calls
Alongside these newer and more exotic asset classes or sub-asset classes such as dividends and dispersion, Longchamp’s macro views can be more traditional and has expressed directional views through plain vanilla options, such as a call on Japan’s TOPIX equity index or more exotic option such as a “worst of” calls product on European equities. The product has also owned a US yield curve steepener, which involves some carry costs but is seen as a useful portfolio hedge. Longchamp’s expertise in QIS strategies is also used to structure low carry hedges. “Our discretionary macro calls evaluate all relevant parameters and potential dislocations,” says Armstrong.
Closed end funds
Patrimoine has an appetite for listed closed end funds at a discount to net asset value, which may also pay high dividends and might engage in buybacks. These could include Dan Loeb’s London Stock Exchange-listed Third Point Investors Ltd. Historically Longchamp invested in another LSE listed fund, Boussard and Gavaudan’s B&G Holdings, and exited after strong performance. They have recently owned private equity and real estate funds trading at discounts. The fund currently owns Petershill Partners PLC, which takes stakes in alternative asset managers. In May 2024 listed real estate funds were the biggest CEF allocation.
Arbitrage and quant
Longchamp can allocate to convertible arbitrage or merger arbitrage, and quantitative strategies such as CTAs, but has not recently been active in these strategies.
Investor base
One quarter of EUR 33 million assets in Patrimoine belong to Longchamp staff and the rest are sub-allocations from other mandates: 37% from private banking and 38% from institutional clients. It is not currently possible to invest directly into Patrimoine.
Patrimoine is a small part of firm assets of circa EUR 3.2 billion partly because it is not marketed directly but also because some clients prefer Longchamp’s daily dealing products and cannot accept weekly liquidity. “However, the weekly liquidity is important to maintain strategic flexibility,” says Armstrong.
The Longchamp Patrimoine Fund’s investor base is mainly former capital markets professionals, high net worth individuals and external family offices including one linked to the luxury goods industry.