Tim Haywood outlines the strategies and thinking behind Julius Baer Investments' range of hedge funds.
Tim Haywood has overall responsibility for the investment performance of all accounts at Julius Baer Investment Limited. These accounts range from cash-plans through international and global bonds to single hedge funds, focusing on the bond and currency investment universes. Tim joined Julius Baer in January 1998 from Orient Overseas International Ltd (OOIL) in Hong Kong where he was CIO for 4 years. Before OOIL, Tim worked for Chemical Global Investors Ltd in London. Tim's professional investment experience began in 1987. He has an MBA from the University of Cranfield and is a graduate of Edinburgh University.
HW: What is the background to the hedge funds at Julius Baer?
TH: Julius Baer Investments Limited has 4 single strategy fixed income hedge fund strategies with combined assets of USD 2.6 billion and a total of five funds.
Julius Baer Diversified Fixed Income Hedge Fund: A diversified portfolio of fixed income and currency instruments and derivatives in predominantly relative value trades with limited directionality and uncorrelated to traditional markets. The fund is managed by Tom O'Shea and myself. The current AUM is USD 1.87 billion in the fund, USD 2.07 billion in the strategy. The fund is currently closed.
Julius Baer Global Rates Hedge Fund: This Global Macro strategy focuses primarily on fixed income and currency markets and looks to build a diversified primarily directional portfolio of fixed income and currency positions. The managers are Adrian Owens and Andrew Snowball. The current AUM is USD 289.5 million in the fund, USD 509 million in the strategy
JB Credit & Emerging Markets Hedge Fund: The fund uses issuer, intra-sector and inter-sector arbitrage techniques; undertakes controlled currency plays; and uses derivatives actively in the emerging and high yield bond and equity markets in order to enhance returns and/or limit risk. The managers are Paul McNamara (Portfolio Manager) and Darren Reece (Portfolio Manager). The current AUM is USD 232.7 million.
JB Convertible and High Yield Hedge Fund: The fund invests in convertible bonds of all credit ratings and in corporate bonds usually rated BB or below. Interest rate, credit and equity risks may be variously hedged out. Greg Hopper and Henry Hale are the fund managers. The current AUM is USD147.5million.
HW: How and where do you distribute your funds? What is your current and targeted client base?
TH: Julius Baer Investments Limited in London has a four-person sales/marketing/client service team. Two individuals within this team cover sales/marketing and have a global remit to develop a diversified client base. The other two focus primarily on client service, marketing support and administration. We have a number of 3rd party marketing agents that we work closely with for specific geographic regions including Australia, Korea, Japan, South America, Mexico, North America, Spain and they are fully incorporated into our business management and planning process. The client base is currently largely fund of hedge funds and private banks so we are currently focusing on attracting other client types including institutions, consultants, family offices, foundations, investment advisory and pension funds across the world.
HW: What is your investment process?
TH: Major global macro-economic themes are discussed by the portfolio management team, with specific ideas researched by individual managers using fundamental analysis. Factors such as market risk appetite and liquidity are taken into account to arrive at a strategic or tactical allocation within each fund as appropriate. The relevant sector specialist then monitors the position for the life of the trade.'
Ultimate responsibility lies with the managers and the CIO ensures all customers are treated fairly.
HW: How do you generate ideas your funds?
TH: The majority of ideas are generated by the portfolio managers themselves using fundamental economic analysis with some trade ideas generated by sell side research from the 'street'.
HW: What is your approach to managing risk?
TH: Each portfolio manager is expected to manage their own risk profile within the overall aggregated risk guidelines (i.e. Total VaR and FX VaR) of each fund, applying stops wherever possible. There is also regular interaction with the three-person risk management team who prepare daily risk reports and also have formal meetings with the PMs of each fund weekly. Stress tests and DVO1 reports are discussed, together with the overall themes, level of diversification, gearing, total VaR, FX VaR etc.
HW: How/against what do you benchmark the performance of your fund?
TH: These are absolute, not relative, return vehicles and therefore they have no benchmark in the traditional sense of long-only fund management. The hurdle rate for each of the funds is 3 month Libor (or equivalent for the particular currency share classes: Euro, GBP, JPYEN, CHF) and they each have a target return. Returns can be measured against their relevant peer group by using available hedge fund indices.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
TH: Diversified - offshore: target: Libor plus 7%-10% per annum. 2005 Performance (net of fees) as at 31/12/05: 8.39%. Annualised performance since inception of 12.91%.
Global Rates: target: Libor plus 15% per annum: 2005 Performance (net of fees) as at 31/12/05: 16.55%. Annualised since inception of 12.14%.
Credit and EM: target: Libor plus 10% per annum: 2005 Performance (net of fees) as at 31/12/05: 10.74%. Annualised performance since inception of 18.41%.
Convertible Bond and High Yield (launched July 2005): target: Libor plus 10% per annum: 2005 Performance (net of fees) as at 31/12/05: 5.32%.
Performance outlook for 2006 is broadly positive across all strategies. Specifically: Within EM - long local bias, long protection on hard currency equivalents; Convertible Bonds - technically appealing; FX - increasing volatility; Interest rates - fading headwinds in certain major markets; Credit - bearish outlook, so aim to buy more protection.
We do not expect management style to change going forward.
HW: What opportunities are you looking at right now?
TH: The following is indicative of the positioning and outlook as at end-January 2006 for the JB Diversified Fixed Income Hedge Fund:
G13: We think that interest rate markets are moving closer to 'fair value' and accordingly have reduced the overall 'short bias' of our strategy. Nonetheless we think that there are markets that are still 'expensive' and are continuing to maintain our short bias either relative to other markets (i.e. Australia relative to Canada and Europe) and/or outright long. For the Euro we still do not expect to see a Fed-style tightening phase. Nonetheless with data in the European economy coming in on the strong side we expect the ECB to remain very much 'in play' throughout the course of 2006 and therefore there could be further interest rate increases to come. It is one of the more attractive yield curves and think that the short side is more exposed to rate increase pressure. Regarding the US we expect to see a period of slightly firmer economic data and are therefore tactically shorting this market. In Japan we continue our long break even inflation bonds and short JGB play.
EM: Mexico: macro economic story: we have been long both the interest rates and currency in 2005 and expect more investment activity in this in 2006.
Currency: US: Positioning for a weaker currency as we see the end of the Fed tightening. The NZD trade has been important for a while as we anticipate further weakening as RBNZ looks to cut rates. Nonetheless the latter process may not happen for some time and combined with increase in market shorting of NZD then the path for the NZD may not be straight down. In terms of the UK the housing market continues to show signs of recovery along with other economic indicators despite much market commentary that the Bank of England will cut interest rates again in 2006.
HW: What events do you expect to see in your sector in the year ahead?
TH: The continuing focus on absolute returns.
HW: How will these changes/future events impact on your own portfolio?
TH: We are launching products to meet these needs.
HW: What differentiates you from other managers in your sector?
TH: We have 4 different hedge fund strategies so effectively one has to look at 4 different sectors:
Diversified Fixed Income - Relative Value: Lower gearing than many of our peer group. Look to invest beyond G3 into G20.
Global Rates - Macro/Directional: Do not invest in equities, real estate, commodities and therefore a fixed income and currency product offering. More of a G10 player with sprinkling of EM at the margins. Do not normally invest in credit.
Credit and EM: Few managers combining these asset classes. Credit uses arbitrage style within primarily European investment grade universe. Local currency investments utilised in Emerging Markets whereas others primarily use hard currency investments.
Convertible Bond and High Yield: Few managers combining these asset classes. Offsetting benefits of short vol and long vol products. Significant outright bias to part of the convertible sector.
Our managers are either former economists or long-time practitioners within their sectors. Thus nearly all ideas are self-generated.
HW: Do you have any plans for similar/other product launches in the near future?
TH: Absolute Return Bond Fund (ARBF) - in USD, GBP and JPY. We manage a UCITS III Luxembourg SICAV that was launched in April 2004 targeting Euribor plus 2%-3% per annum. It now has assets in excess of Euro 2.2 billion. We wish to roll this out across other currencies.
(Interviewed on 19 April 2006)