Lyxor setting sights on U.S. market

Lyxor Asset Management SA is bringing its campaign to become a top 10 global money manager to the U.S. in 2010.

“Size is going to be the key,” said Laurent Seyer, CEO of Paris-based Lyxor. “In order to be global, we need to be in the top 10. We need to create a global player in this field.”

Mr. Seyer did not specify a time period for his goal, but consultants and bankers estimated Lyxor would need to increase its assets under management by about tenfold to have a chance at reaching that goal. Lyxor reported $118 billion in assets under management as of Sept. 30. BlackRock Inc., New York, the world's largest manager, had about $3.2 trillion under management at the same time.

Lyxor's U.S. expansion plans are likely to focus on two categories: exchange-traded funds, which had $54 billion as of Sept. 30; and managed accounts and hedge funds of funds, which together totaled about $25 billion in assets under management.

“We're the second-biggest ETF provider in Europe and the fourth largest in the world,” Mr. Seyer said. “But we're not yet in the U.S. That is one of our goals — to find a way to be present in the U.S.”

Lyxor's ambitions will likely include an acquisition, according to several bankers. Mr. Seyer declined to specify whether the firm will grow through an acquisition in the U.S., but he did not rule out such an option. “What we decide will depend on what opportunities exist,” he added.

The firm's assets are still predominantly sourced from Europe, which accounts for about 65% of its total assets under management. Asia is the next largest region with about 15% of total assets under management. The remainder is spread throughout the rest of the world, including the U.S. (Lyxor officials declined to break out the assets under management from U.S. institutional clients.)

Officials at parent company Societe Generale SA did not include Lyxor as part of the merger, announced earlier this year, that combines a large chunk of Societe Generale Asset Management with Credit Agricole Asset Management.

“The rationale was that there is added value in Lyxor remaining independent as a niche player,” Mr. Seyer said.

In September, Lyxor acquired SGAM's U.S. alternative asset management unit as part of the global restructuring. The move added about $30 million to Lyxor's total assets and allowed the firm to directly market to clients in the U.S. for the first time. Mr. Seyer added: “This gives us more room for maneuvering.”

In November, Lyxor appointed Michael Bernstein as relationship manager to market the firm's strategies to institutional clients and consultants.

Product innovation is how Lyxor will differentiate itself among competitors in the ETF sector, Mr. Seyer added. The firm had been among the first managers to provide ETFs that invest in such areas as emerging markets including India, various frontier markets and thematic funds such as global water-related stocks.

However, Lyxor doesn't have as strong a brand in the U.S. as it does in Europe. “It's not an incumbent in the (U.S.) ETF market,” said Aaron Dorr, managing director of Jefferies Financial Institutions Group based in New York. Managers such as BlackRock, formerly Barclays Global Investors, have such “a strong lock on the plain-vanilla products that in order to be successful, new groups entering the ETF market have had to differentiate themselves with niche products,” he said.

In addition to BlackRock, which had 53% of the market share with $337 billion in ETF assets under management in the U.S. as of Sept. 30, State Street Global Advisors, Boston, was the second largest in the U.S. with 20% of the market share, or $127 billion. Vanguard Group Inc., Malvern, Pa., reported $77 billion, or 12% of the market share, as of the same date, according to data from BlackRock's global ETF research and implementation strategy team.

Vanguard, in particular, has successfully competed against SSgA and BlackRock on pricing, according to Burton Greenwald, managing director and independent asset management consultant at B.J. Greenwald Associates, Philadelphia.

“It's going to be very challenging for Lyxor to successfully enter the ETF field” in the U.S., Mr. Greenwald said. “This is a crowded field with no lack of new entries recently.”

Earlier this year, Pacific Investment Management Co. LLC, Newport Beach, Calif., established a series of active and passive bond ETFs. In December, officials at Baltimore-based T. Rowe Price Group Inc. also announced that the company would enter the ETF market, most probably launching active ETFs, according to initial filings with the Securities and Exchange Commission.

Compared with PIMCO and T. Rowe Price, Lyxor has neither the same brand recognition in the U.S. for its passive strategies nor possibly the performance track record if the manager decides to introduce certain active strategies, according to sources. However, Lyxor benefits from its extensive distribution network in Europe, an established record for product innovation and ties to an investment banking parent company with a strong balance sheet.

Another strength that could help Lyxor flex its muscles in the U.S. is managed accounts, or segregated hedge funds. In addition, Lyxor also manages traditional hedge funds of funds, funds of managed accounts and hybrid hedge fund strategies.

“All of our funds of funds, which incorporated managed accounts, went through the crisis without any liquidity mismatch,” said Lionel Erdely, Lyxor's CEO for the U.S. “We were able to offer weekly liquidity throughout.”

Following the Lehman Brothers Holdings Inc. bankruptcy in September 2008 and the scandal surrounding Bernard L. Madoff Investment Securities LLC that broke in December 2008, institutional investors in general were dealt several blows related to severe underperformance and lack of transparency in addition to higher-than-expected counterparty risks. On top of that, they had to contend with gating and redemption restrictions because of liquidity problems. As a result, many are turning to managed accounts to provide better risk management, more liquidity and increased transparency.

“There continues to be growth opportunities in segregated and managed accounts,” Jefferies' Mr. Dorr said.

The trend has benefited Lyxor. Mr. Seyer added: “We are getting more and more institutional interest, especially among U.S. endowments and pension funds. We see enormous potential for us on that side.”

With about 115 hedge funds included on Lyxor's managed accounts platform, the firm is one of the largest in that market in terms of assets under management. Globally, consultants who specialize in managed accounts estimate that one-tenth of the $100 billion in the sector is managed by Lyxor. The firm recorded about $5 billion in new asset inflows in managed accounts globally in 2009. Mr. Seyer declined to name clients in the U.S.

“If you're looking for an industry gorilla, it's Lyxor,” said Richard Tomlinson, managing director of Tomlinson Investment Consulting, a London-based independent consultant focusing on managed accounts. Lyxor “has been in business for a long time. ... While the firm suffered redemptions (during the financial crisis) like everyone else, it has also been raising a lot of new assets.”

Segregated hedge funds are estimated to account for about 5% to 10% of total hedge fund assets, but that could double within the next two to three years, according to consultants. Among U.S. institutional investors considering a move are: the $201.1 billion California Public Employees' Retirement System, Sacramento; the $83 billion Teacher Retirement System of Texas, Austin; and the $16 billion Utah Retirement Systems, Salt Lake City (Pensions & Investments, Oct. 5).

According to several sources, Lyxor's fee structure could be a hindrance for clients. The firm typically charges a 1% management fee and 10% performance fee for traditional hedge funds of funds. For managed accounts, the fee overlay is about 85 basis points, according to Mr. Erdely.

“It's true that some of our competitors are charging slightly less, but what matters is that we've built an established reputation for quality of platform offerings and choice,” Mr. Erdely said. “To have liquidity when you need it and risk management when you need it, we think, is worth a few more (basis points).”