BlueBay Asset Management’s Global Credit Alpha Long/Short strategy has generated a commendable track record since launching almost a decade ago, taking an active catalyst-driven approach to trading corporate and sovereign credit markets.
With a broad investment mandate, and no restrictions on geographies, sectors or ratings universe, the liquid credit long/short strategy has never suffered a single down year since its November 2011 inception.
What binds the portfolio together, says Senior Portfolio Manager Geraud Charpin, is the liquidity profile of its investments.
“It’s the ability to get in and out of a position within a couple of trades – generally within a day, potentially up to a week,” Charpin tells Hedgeweek, adding that positions are a mix of around 40 per cent USD, 40 per cent euros and 20 per cent other currencies. “The types of credits can range from a AA-rated US pharmaceutical name to a CCC-rated Chinese real estate company – provided it is liquid.”
Horizon
Specifically, the strategy looks to unearth catalysts which drive price moves by between 1-3 per cent over a one to three-month investment horizon.
“The catalysts we tend to look for are either fundamentals, or it could be valuation-driven, ESG-driven, or it could be technical cycles, based around supply and demand,” Charpin says.
“It’s not a tactical fund where you invest in opportunities now. It’s a fund that’s designed to work over all cycles. In order for that to be the case, you need to have a wide investment universe and a wide opportunity set, because if you have a niche market, you have constraints, it’s very specific in terms of what you do and that means there’s not going to be opportunities all the time.”
The strategy’s relatively broad mandate and active trading strategy has proven key when it comes to risk management and generating uncorrelated returns, according to Charpin, who began his career as a credit analyst in investment banking during the late 1990s, holding roles at NatWest Markets, Dresdner Kleinwort and BNP Paribas in London. He later became Head of European Credit Strategy at UBS in 2004, where he focused predominantly on hedge fund strategies, before joining London-based BlueBay in 2008.
Whilst the world’s 10 largest hedge funds ended 2020 down 1.85 per cent last year as a result of the Covid-driven market sell-off, with funds managing more than USD1 billion falling 2 per cent, the Global Credit Alpha Long/Short strategy generated a 21.51 per cent return last year.
On the back of this return, its AUM has risen some 151 per cent between June 2020 and June 2021, from USD160 million to about USD402 million, driven both by performance and client inflows. Longer-term, the fund has notched up an annualised return of around 9.93 per cent since inception, in line with its target performance, and in 2021 it is up 2 per cent year-to-date.
“Because we’re looking at catalysts, because we’re looking at specific events, bottom-up events, it’s allowed the fund to perform well in different environments,” Charpin says, reflecting on the track record.
“The point is not to be driven by market beta. What we’ve demonstrated over time is the correlation between our return, the returns of the fund, and the returns of the underlying asset class – the return of equity, the returns of global credit benchmarks etc – is super, super low.”
Idiosyncratic
The portfolio generally holds as many shorts as longs, and typically looks for anomalies between fundamentals and valuations, occasionally taking sector-wide views, going short entire industries.
“At one point, autos were one such sector – a few years ago and up to last year that was a sector view we held,” he adds. “Real estate is another one that we generally are quite wary of – it’s a sector that’s refinanced all secure bank debt into unsecured capital markets debt. You have lots of new issuers with little transparency in terms of ESG governance. It’s relatively opaque, they all made big acquisitions at the top of the market in terms of valuations and they’ve benfitted from low rates.
“With rates coming back up, and with the amount that has been issued, we think there is a risk there.”
More recently, there has been little volatility in credit markets, with money that has been driving flows predominantly passive investments. As a result, the strategy’s approach is much more idiosyncratic and bottom-up driven than being particularly theme-focused at present, with a sizable portion of the anomaly-based opportunities currently emerging in cyclical sectors.
“When passive investors buy something, for them it’s irrelevant whether the valuation of a name is expensive or not, or whether the credit is improving or deteriorating. So you effectively create anomalies between the valuations and the fundamentals, and that’s what we're trying to unpick.”
Looking ahead, Charpin acknowledges that the “jury is still is very much out” this year as to whether some of the anomalies and trends identified will unlock.
The spread of Covid-19 variants, and question marks surrounding economic reopening, continue to drive uncertainty across markets. He points to the potential divides opening up between developed and emerging markets as a result of vaccine progress, adding that until there is more clarity, “it will be difficult to create volatility for the themes to really express themselves in credit.”
“The dominoes are almost suspended in mid-air,” he remarks. “They won’t be falling until you know for certain one way or another whether the economy is reopening and life is going back to normal, or it’s not. So investors are blocked from making big decisions, because they simply don’t know.”
He adds: “Everybody’s still looking at the variant in the UK, cases are going up, and people are focused on whether the vaccine will remain effective. So the proper reopening of economies is still suspended somewhat.”
“So this has been a period where we have clearly been looking at risk, but keeping it low, and really we have been starting to try and pick out the anomalies that we could spot in the market, because when nothing's happening that’s when those anomalies start to develop here and there. But it could go very fast – the fourth quarter and even the third quarter could be very different to Q1 and Q2.”
Adrenaline
Geographically, the fund’s investor base is concentrated mainly in Europe, along with pockets of allocators based in Asia. It is a mix of institutional and family offices.
Assets under management totals USD402 million, and has a total capacity of between USD750 and USD1 billion. “We obviously have an environment where there has been very little opportunity – it’s more of a waiting game right now, and that can be difficult to generate performance, so that’s why we need to manage it carefully,” he notes.
Still, with high market valuations causing investor nervousness, market participants are looking increasingly towards strategies that rely less on market levels and more on the volatility of assets to generate performance, Charpin observes.
As a result of the strategy not only weathering but thriving throughout last year’s market turbulence and economic unpredictability, he believes allocators are now beginning to take a “fresh look” at funds such as BlueBay’s.
“From our perspective, for a long period of time, people were not interested in a long/short strategy focused on credit. But after last year, the interest has really come back – investors have realised that many of these kinds of strategies can do very well, and they are seeing it in a different way.”
He continues: “We hear a lot about volatility, and when things start to move that’s when it gets exciting. Not only is there adrenaline there, but you also need to understand as many things as you can and understand the ins and outs of what is happening in order to make that judgement call and understand your investment and reposition accordingly.
“The period we’ve had since February is super rare in that that we’ve seen an extended period with not much happening and the market has been somewhat lethargic. But we have a pretty broad investment universe, so that forces you to look at pretty much everything, and stay on top of all the information, and that’s quite exciting. You always learn something new.”
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