Investors looking for investment returns uncorrelated to the performance of equity markets can profit from arbitrage opportunities in yields on US Treasuries in the Yield Curve Opportunity
Investors looking for investment returns uncorrelated to the performance of equity markets can profit from arbitrage opportunities in yields on US Treasuries in the Yield Curve Opportunity Fund, according to the fund’s sponsor, Magnum Global Investments.
The new fund seeks to generate high absolute returns by taking advantage of discrepancies occurring along the US Treasury yield curve. It is based on a strategy used by its management team in generating cumulative returns of 160.1 per cent over the past 32 months, with only one down month, compared 68.7 per cent for the S&P 500 in the same period.
The fund’s manager is Peter Powers, a registered floor broker on the Chicago Board of Trade and a former vice-president in institutional fixed income at Dean Witter and financial consultant at Smith Barney, assisted by a 12-strong trading team.
The team monitors and trades the entire 22-and-a-half hour trading day (all open positions are closed by 2.30 pm daily and new positions are established from 3.30 pm onward), maintaining strong risk measures to limit loss, while delegating trading among experienced futures traders and former CBOT floor traders.
The fund’s strategy is executed in the Treasury futures market using contracts listed at CBOT, and uses a proprietary model to identify discrepancies in the yield curve, comparing values of Treasury instruments of differing maturities to determine whether any particular instrument is comparatively undervalued or overvalued against others along the yield curve. Arbitrage techniques include the simultaneous sale and purchase of Treasury futures contracts, creating a spread among commonly-traded Treasury notes and bonds.
‘Spread positions are utilised to arbitrage temporary yield curve discrepancies,’ Powers says. ‘Our trading is non-directional. It is not important for the strategy to discern market direction, only to evaluate relative value in regard to historic yield curve behaviour.’
In its 32-month history, the strategy has yielded an average monthly return of 3.06 per cent, with its only losing month limited to a 3.68 per cent decline. As part of its risk management, the fund closes positions to cash before the end of each trading day. It also heightens risk controls during major market announcements such as Fed meetings and significant economic data releases or during significant global events.
The fund’s sponsor, Magnum Global Investments, was founded in 1994 by chairman Dion Friedland and focuses on identifying and sponsoring leading hedge funds.
