ABN AMRO Asset Management is launching its first fixed-income hedge funds, targeting high-net worth individuals, private banks, funds of funds and institutional investors such as central banks in Asia and elsewhere.
The first products include a currency fund and a principal-guaranteed currency note, which are managed along identical lines, says Rob Andrew, London-based senior portfolio manager. (He moved there last year after running Asian fixed income in Singapore.)
Later this week the firm will also roadshow an emerging-markets long/short bond fund, managed by Rafael Kassim. A third fixed-income hedge fund is in the pipeline for this year.
"Until now all of our products have been benchmark-orientated," says Andrew. "Our product range isn't complete and we wanted to introduce absolute-return types of products."
Although the firm is new at bond hedge funds, Andrew says it has plenty of experience with the investment process: "We have a proven track record for our investment process as it applies to other products." He points to the firm's currency management when it is stripped out of underlying, traditional fixed-income notes.
The ABN AMRO Currency Fund has an annual target return of 12-15%, a target information ratio of 0.9 (which Andrew says is conservative, compared to what the team has achieved over the past few years) and a volatility of 15%, which is between the 8-10% volatility in traditional bond funds and the 15-17% typical of its equity funds.
The fund will be offered in euro and dollar tranches, with the latter more likely to find takers in Asia. The fund can leverage up to five times, although it has yet to select a prime broker for handling its margin account.
The currency fund relies on a model that identifies trends among currency pairs, although it doesn't try to forecast them. The model relies equally on analysing yield curve slopes, interest rate differentials adjusted for volatility, and spot price trends. It then gives a strong or a weak trend signal and advises the manager to buy, hold or sell a currency pair. The manager does have discretion in listening to these signals; for example, Andrew notes just two weeks ago the model advised buying yen at a time when the Bank of Japan was aggressively buying dollars, so his team decided to hold its fire.
Andrew argues investors are better off investing in the fund, which is more sensitive to short-term interest rate movements; investments in the principal-guaranteed note must also go to zero-coupon bonds for the guarantee. The note is also limited to G11 currencies, while the fund may invest in additional ones, provided there is sufficient liquidity.