After the synchronised multi-year rally in credit, Lyxor strategists envisage more differentiated return patterns within credit markets in the future. An investment climate with wider dispersion of returns amongst winning and losing credits, will reward approaches based on bottom up company selection. In particular, while selective value is seen in high yield, Lyxor also believes that it is important for investors to have some short exposure.
The Lyxor Credit Strategies Index fund returned 7.73% in 2012. A simulation of its performance since 2002 showed substantial outperformance over the HFRX RV: FI – Convertible arbitrage index.
The Fund provides weekly dealing and diversified exposure to the Lyxor Credit Stategies index, an index of 5 hedge fund strategies, each investing in the credit space with a specific angle: global macro, long/short credit arbitrage, event driven, convertible arbitrage and fixed income arbitrage. Currently the fund offers exposure to 13 funds pursuing these strategies on the Lyxor Managed Account platform which comprise the Index. Index allocations follow an asset-weighting methodology based on assets under management on the platform. These weightings are rebalanced monthly, and capped at 20% or 35% for UCITS compliant rules. The UCITS compliant index tracker currently has costs around 1.2%, in addition to the underlying managers’ fees. A Jersey domiciled tracker following the same index has added costs of 0.70%. As new managers under relevant credit, fixed income and event related strategies move onto the Lyxor platform, they will be included in the index.
All funds on the Lyxor Managed Account platform have to get through multiple layers of investment, risk and operational due diligence from Lyxor’s dedicated teams. Special attention is paid to liquidity and Lyxor takes pride in having kept its promises in 2008 and paid out redemption requests without delay.
A brief description of the 13 funds comprising the Lyxor Credit Strategies Index follows. Return targets for the funds range from 5% to 15% over risk free rates.
Within the arbitrage and long/short spaces, the funds follow strategies including fixed income, high yield, convertible, and capital structure arbitrage. Canyon Capital Advisers has a hybrid arbitrage strategy focused mainly on convertible arbitrage, but can also trade events such as mergers and yield to calls. Canyon has a 15 year track record and its 30 credit specialists follow more than 500 corporate names. Another arbitrage fund is run by Pinebank Asset Management LP, which uses fundamental analysis to identify capital structure arbitrage trades. Pramerica Asset Management Inc focuses on a family of fixed income arbitrage trades, involving spreads across Treasury curves, mortgage backed securities, US agency securities, swaps, Eurodollar, libor, and futures. Multi-strategy credit funds are currently the largest group. Observatory Capital Management LLP implements directional and relative value trades across investment grade, high yield, sovereigns/bank capital, emerging markets and macro. Advent Capital Management LLC also takes both outright and relative value views, in credit, convertibles, distressed, capital structure, equities and special situations. Canyon’s multi strategy credit fund aims to beat major benchmarks but with lower volatility. It is exposed to a broad range of corporate credit instruments, including high yield, distressed securities, direct investments, equities and convertible arbitrage. Scott’s Cove Management LLC invests in high yield and distressed debt with a conservative style: focusing on senior and secured instruments, later stage bankruptcies, shorting, and avoiding leverage. Henderson Alternative Investment Advisor Limited pairs trades, thematic trades and tactical trades, mainly in corporate bonds and credit default swaps. Constellation Capital Management takes both investment and non-investment grade credit risk, in both developed and emerging markets.
All of these managers take a discretionary approach to credit investing. They retain the flexibility to dynamically change their overall exposure and individual holdings as financial market conditions change. They can also reduce, hedge or avoid interest rate duration risk and thus mitigate their vulnerability to any sell off in government debt, which could be caused by an eventual exit from Quantitative Easing.