Relative Value Investing and Fixed Income Markets

Relative Value Investing and Fixed Income Markets:

If someone has a chat with inexperienced investors, there is the perception that more sophisticated investors and hedge funds are mostly engaged with directional strategies, similarly to trend-following.?

Although many funds and CTAs are engaged with such strategies, it is also a fact that large family offices, multi-billion hedge funds and institutions prefer to focus on lower volatility strategies that can offer both consistency and are also very liquid. Can you imagine, for example, managing a multi-billion-dollar fund and trying to exit a position in equity markets? It is one thing to drive a normal car in the city and another thing trying to round a corner with a large truck.

Therefore, since government bonds and interest rate derivative markets belong to the most liquid and largest financial markets, it is natural that hedge funds and large institutions are of course seriously involved in this space.?

Relative value, fixed income and the use of derivatives provide strong alpha opportunities that are not strongly dependent on short-term macro-economic conditions and the direction of asset markets.?

Practitioners in RV investing mostly focus on three factors:?

? The level of yields in Fixed Income?

? The shape of the yield curve?

? The credit spreads?

Further opportunities could be potentially identified, if we add to our "game” the level of volatility and inflation.?

A very basic approach for an investment strategy when trading the yield curve and interest rates usually can include the following steps:?

1. The path of the yield curve: You need to have a view on the direction of interest rates and the monetary policy set by central banks. Instead of a directional trade in bonds, an investor can trade whether the curve will flatten or steepen.?

2. Maturities: We have the choice of different maturities to implement a trade, usually the 5y30y spread trade is more popular, however it could be more volatile. Options can be used to implement butterfly trades since they can be less risky and add convexity to the trade.?

3. Be duration neutral: What you don't want to happen is that either leg of the trade is too sensitive to duration risk, so you want to be as neutral as possible.?

At Laz Partners, we are particularly interested to hear from experienced Macro RV portfolio managers, with solid and proven track records. Ideally, we would be looking to speak with candidates with at least 2-3 years of experience running their own books, preferably managing at least $150m-$200m with a Sharpe of 1.5 and above.?

Our understanding of Macro space allows us to liaise with some of the top hedge funds in the world, where we work in close partnership to help them build out their teams. If you have the experience, please be sure to reach out to [email protected] for an initial chat.