Two bond fund managers at Man Group, the London-listed hedge fund company, have increased exposure to floating rate notes to reduce correlation to interest rates, which they saycould become more volatile.
Jon Mawby and Steve Roth, co-managers of the GLG Strategic Bond Fund, say protection in fixed-rate portfolios is necessary as economic stimulus measures become “increasingly ineffectual” and the margin of error within fixed-rate products becomes narrower with each passing round of quantitative easing.
The move reflects feelings among alternative investment managers in the fixed income market who feel sophisticated portfolio techniques are needed in the year ahead.
A rise in rates would need a form of tail risk hedge to avoid becoming “hostage to interest rate volatility”, says Mawby.
“Non-interest rate sensitive products provide a degree of immunisation to a sell off in government yields while giving us the flexibility to allocate to the asset classes which offer the best risk-adjusted returns.”
As well as floating rate notes the fund has also increased exposure to credit default swaps (CDSs) as part of a tactical move to allocate away from duration sensitive securities.
The $191 million (€141 million) fund’s interest rate insensitive exposure is currently around 40% of net asset value, a stance the team held through the second half of 2012.
Mawby says: “If we get a rise in rates, it is important there is a form of tail risk hedge within the portfolio that allows the fund not to be held hostage to interest rate volatility.”
Kevin Maloney, chief investment officer at Gottex Fund Management, a Swiss fund of hedge fund company, recently told Funds Europe that it was time for investors in bonds to look at alternative fixed income strategies if they are going to take action in the coming months to deal with inflation and possible interest rate changes that may erode bond returns.
He advocated floating rate bonds. “Floating rates take away the effects of rising interest rates. Rising interest rates will reduce capital values of bonds. Increasing capital values from reduced rates have been a significant part of total returns in bond markets that is unlikely to be repeated.”
Read the interview here.
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