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INTERVIEW-UPDATE 1-O'Shaughnessy AM close to U.S. sales deal

Published 12/05/2008, 08:16 AM
Updated 12/05/2008, 08:20 AM

* Former Bear Stearns manager to seek sales tie-up in Europe

* Plans to launch new global market-neutral hedge fund in H1

* Weighing prospect of three-year hedge fund lock-ups (Adds details)

By Claire Milhench

LONDON, Dec 5 (Reuters) - United States-based quantitative investment firm O'Shaughnessy Asset Management (OSAM) said it is close to a deal with a "very large" mutual fund distributor in the U.S. as part of a global push to build its sales platform.

Jim O'Shaughnessy, chairman and CEO of OSAM, told Reuters the agreement will be announced in January, after which he will spend more time in Europe looking for a similar partner.

O'Shaughnessy is also seeking a sales partner in Australia, and possibly Asia. "If it ends up being just Australia then we would try to find a strong Japanese or Chinese bank for Asia."

OSAM already has an deal with Royal Bank of Canada, which owns 11 percent of OSAM, to sub-advise a suite of mutual funds.

O'Shaughnessy said the top priority was institutional investors, but he also wanted to reach retail investors in a way that was not prohibitively expensive. "That means partnering with distributors who are looking for talent on the alpha generation side," he said.

The firm, which managed $7.5 billion as of September 30 across a range of strategies, was formed when O'Shaughnessy and his team left Bear Stearns Asset Management in 2007. OSAM uses quantitative analysis to pick stocks and seeks to generate 'alpha' returns above the average market return.

HEDGE FUND PLANS

The firm is also planning to launch a second hedge fund in the first or second quarter next year, he told Reuters at the CFA Institute's European conference this week. The first, the O'Shaughnessy Pari Passu fund, launched on September 26 this year and invests across asset classes, with a net long strategy.

Acknowledging that it hadn't been the easiest time to launch, O'Shaughnessy said he was exploring the option of three year lock-ups: "What we have seen this year is that investors, however sophisticated, are their own worst enemy. We want rational partners who truly understand our process."

The 2009 launch will be a global market-neutral fund investing almost exclusively in equities, he added. "We are trying to develop a robust package of businesses so our hedge funds won't use more than two or three times leverage, which may put us with the lower volatility crowd. But that might be of interest after what's happened," he said.

Quant investing has attracted heavy criticism in the last 12 months, after performing poorly through the August and November 2007 sell-offs, and again in January 2008. But O'Shaughnessy argued that this confused leverage with quant strategies.

"The quants were using too much leverage over too short a time span - the optimisers they employed moved all the quants to the same names, and then levered those names," he said. "We don't use optimisers."

He conceded that this has been an "awful year" for OSAM, but insisted he would be sticking to his strategy. "Times like this can rattle us as people, but they do nothing to our stock selection methodology," he said.

OSAM's Value Opportunities Fund is down 27.42 percent in the 10 months to end-October. The Russell 3000 Value benchmark is down 32.25 percent in the same period.

O'Shaughnessy's model is currently pushing him to overweight healthcare stocks such as Pfizer and hold certain consumer discretionary stocks. "That may sound surprising, but we are talking about the deep discount retailers like Costco and Wal-Mart."

He remains underweight on energy and IT in most portfolios, saying that these are either too richly valued, don't have enough momentum, or don't pay a high enough dividend yield.

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