BlueBay Credit Alpha Long Short Fund

Best Performing Relative Value Credit Fund

Originally published in the April/May 2013 issue

“It was extraordinarily easy to navigate the markets in 2012” says Bluebay Credit Alpha Long Short manager Geraud Charpin, who points out that there were opportunities in every single asset class and strategy traded by the fund: corporate spreads, sovereign spreads, rates and currencies and all threw up compelling entry and exit points thanks to plenty of volatility. The fund was both net short and net long at different times in 2012, within its range of six years duration either long or short. As well as big macro moves, relative value opportunities arose from growing dispersion within credit, with some names doing well and others doing badly. Firing on all cylinders helped to produce the 26% return in 2012.

The fund started 2012 with a long credit tilt to take advantage of the deep value apparent after the indiscriminate and aggressive 2011 sell-off related to the tsunami, Berlusconi and the US government lock-down. The ECB’s long-term refinancing operation (LTRO) programme was a key catalyst for taking on corporate and sovereign exposure; Charpin argues that the ECB is more transparent, with more readable and predictable communications, than those coming from European politicians. But this dynamically managed fund does not simply buy and hold. By March 2012 the manager was turning cautious, partly due to events in Spain, where political tensions, poor communication and the budget deficit contributed to rising risk aversion. The fund shorted Spanish corporates, which were trading at very tight levels versus governments. Currencies did not play a big part in the portfolio in 2012, although shorting the euro in March 2012 was a profitable trade. The fund stayed net short for around three months, and returned to a more constructive stance after Mario Draghi’s “whatever it takes” speech over the summer.

Although the second half of 2012 was a lower conviction period, openings for relative value trading were still numerous. If high correlations in 2010 and 2011 left limited chances for relative value trades to make money, 2012 was different. Two examples of corporate credits moving in the opposite direction of the general market rally were Lexmark and Peugeot, which widened 400 and 300 basis points respectively, on poor results. The harsh treatment of companies such as Safeway that borrowed to reward shareholders, also demonstrated how credit investors were becoming much more selective.

Before joining Bluebay in 2008, Charpin headed up the European Credit Strategy for UBS and he has also held credit roles for BNP Paribas, Dresdner and NatWest. He views Bluebay’s core competitive advantage as lying in corporate and sovereign bonds. On the corporate side, running $20 billion of assets gives Bluebay access to CEOs, CFOs, conferences, syndicate desks and excellent service from the sell side. In sovereign debt, the firm maintains a close dialogue with policy-makers including Federal Open Market Committee (FOMC) members, the ECB and politicians. Whatever he is trading, Charpin likes to “hear the story from the horse’s mouth”.

For 2013 Charpin sees many of the same market drivers that applied in 2012. The tensions between developed and emerging markets and the transfer of growth to the latter remains a dominant theme. Quantitative easing is happening nearly everywhere in the developed world now, with Japan the latest to get involved. This theme could lead to inflation and asset bubbles, creating potential short candidates. The subdued economic growth climate increases competition between companies, and the widening divergence between winners and losers will continue to produce long and short trade ideas.

Meanwhile the sovereign crisis is very much alive as we see from Cyprus and Italy. All in all, Charpin envisages a rich opportunity set for his team’s flexible trading style.

The fund is currently dominated by investment-grade sovereign and corporate debt in both the long and short books. Geographically, Europe makes up most of the portfolio with North America the next largest weighting and very little at present in emerging markets. Most of the fund’s holdings could be liquidated within a day and none would take more than a week to exit, the firm estimates.