The UCITS IV-compliant Dexia Long Short Credit fund launched in October 2009. The fund builds its long and short positions by screening for investment opportunities in the broad investment grade and high yield corporate bond markets of Europe and the US. The minimum high yield rating for net long credit exposure is B-.
Since inception, the fund has returned 11.56 per cent flat compared to 1.64 per cent for Eonia (as at Feb 2012). It has a historic Sharpe Ratio of 2.82. Last year, it delivered 3.98 per cent, and was able to keep volatility to within 60 to 70 basis points.
The fund offers daily liquidity, and subsequently trades only the most liquid securities from the most developed markets. In terms of strategy, the fund looks to take profit on inefficiencies between investment grade and high yield markets. But rather than pursue a pure arbitrage strategy, it actually combines two.
As Patrick Zeenni (pictured), Portfolio Manager, explains: “It’s a very opportunistic fund with quite a high turnover and is composed of two different strategy buckets: relative value (arbitrage) strategies, and directional strategies where we aim to capture market trends.
“When there’s dispersion in the market, relative value trades work well, and when there is directionality in the market, directional strategies work well by going long or short and taking profits where possible. This certainly helped the fund’s performance last year.
“The two strategy buckets on average are weighted roughly equally within the portfolio, in terms of gross exposure and contribution to performance.”
Containers and Packaging, and TMT are the preferred net sector exposures in the fund, with 5.8 per cent and 4.8 per cent respectively. The main credit exposures on the long side are in Rexam, Kinross Gold and UPC Germany, with key short positions in Omnicom and British Telecom.
Towards the end of 2012, the directional part of the strategy performed strongly, thanks to long exposure to peripheral utilities, corporate names in Spain and Italy. Overall, last year was a case of being long the periphery, short core Europe; the opposite, says Zeenni, of 2011.
“On the long/short side, money was made thanks to refinancing by issuers taking into account the low rate environment. A lot of issuers bought back their short maturity debt and issued longer maturity debt. We were positioned to capitalise on this and made some nice profits on the long side,” confirms Zeenni. What also worked well were selective long/shorts as well as negative basis strategies.
Another issue that might come into play this year is M&A activity, with Zeenni suggesting that strong investment grade names looking to grow could buy high yield names, presenting another source of opportunities for long short strategies.
“Ultimately, we combine efficient market timing with bottom-up fundamental bond picking, and use dynamic tail risk hedging to dampen volatility. That’s one of the key points of the fund. We always want our directional bucket to be partially hedged through options.
“Currently around 50 per cent of the fund’s gross exposure is in the relative value bucket. The idea is to shift gross exposure further into relative value as there’s less directionality in the market than last year.”
On winning the hedgeweek award, Zeenni comments: ““This award is testimony to the unique positioning we have built for Dexia Long Short Credit with our team: delivering consistent performance with controlled volatility.”