April 2008

PERFORMANCE: Where do you turn in a crisis?

Last month NIKLAS TELL acknowledged that his column has tended to focus more on
traditional funds than on alternatives. Considering the continued
turbulence, he maintains, it does indeed make sense to continue casting the net
slightly wider ... 24-niklas-tell.jpgTHE DEBATE TODAY is if the US will fall into recession (or if it is already there) and how this will affect the world economy. Volatility has increased and investors in equity-based products have learned that the warning in the small print – that markets can fall as well as rise – was printed for a reason. Investors may therefore be forgiven for wondering where to turn in markets like these. Central banks across the world, led by the Federal Reserve, have cut rates and pumped liquidity into the system and credit markets are all over the place.

This is of course the time to highlight the Weavering Macro Fixed Income Fund.

In the days before September 11, 2001, Weavering Capital had positions in the market and protected those using so-called stop losses. We all know what happened and when markets reopened after being closed for several days the stop losses did not really help. Markets opened that much lower and losses were a fact. That was a lesson the team at Weavering used when setting up the Weavering Macro Fixed Income Fund in the fall of 2003. This is a fund investing in the fixed income markets, primarily through interest rate futures and options. “Investment opportunities occur where we feel confident that markets have incorrectly assessed the probability of an interest rate move,” according to a presentation from the firm.

We should start earlier than that though to learn more about the team behind the fund and the company. Before setting up Weavering Capital in London in 1998, Magnus Peterson was global head of prop trading at Swedish bank SEB and was based in London. While at SEB he worked closely with James Stewart, who is now the chief economist at Weavering Capital and a well-known commentator for media companies such as CNN and CNBC.

One of the ideas when setting up its own shop was to launch a hedge fund. However, this being in the wake of the demise of hedge fund LTCM, selling the idea of a new hedge fund was not all that easy. The firm therefore focused more on its macro research efforts, which have always been at the heart of the operation, and sold that to proprietary traders at banks and hedge funds. It was not until 2003 that the Weavering Macro Fixed Income Fund was launched. Since then it has had a great run and annual return since launch has been 11.98% (at the end of February) with an annual standard deviation of 6.87%. The fund has so far had 78% positive months and all months since September 2007 have been positive.

One of the interesting features of this fund came about from the lessons learnt from the events at September 11, 2001, when the team used stop losses to protect the downside. As this did not work in times of extreme events the team today uses an option overlay programme. This means that each underlying position is protected through the use of options. Should markets move against the positions taken, a buffer is created and losses can be contained. This protection is financed by capping the upside leading to lower volatility. This also means that the team at each point in time knows the exact potential downside risk, something that is appreciated by investors.

The investment process at this offering is one of close cooperation between research and trading. The research team has a global perspective and does detailed empirical analysis looking at fiscal and monetary policy. That helps them to develop themes and in cooperation with the traders they generate hypotheses. These are tested and finally established as positions. Trading themes are largely directional, even if the managers do take on some relative value themes.

At the end of February the fund had some $463m in assets and if investors find this offering worth a closer look, sooner rather than later might be a good idea.

• Niklas Tell is a partner at Tell Media Group AB

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