Looking for new investment opportunities for 2018 uncorrelated with the "normal" asset classes? Well, then SEB believes it has just the thing for you. As of today SEB's latest addition, a fixed income relative value hedge fund, is open for business.
And the fund's purpose is very tangible: "We will generate a return in the range of 4-8 percent with a volatility target of 4-8 percent," says the fund's CIO, Bo Michael Andersen, who has worked with Fixed Income since 1996.
A Fixed Income Relative Value Hedge Fund is not just a Fixed Income Relative Value Hedge Fund. It can differ in many ways, and in the "SEB Eureka Fixed Income Relative Value" fund, the belief is that the fund differs from the existing products in the market in several ways.
"In part, we will have a broader strategic approach and utilize a broader range of instruments. We will gear ourselves lower than what is typical, as we aim to offer a product that is less correlated to other asset classes, and we have our strategies focus on tail risk and on highly stressed scenarios, so we avoid being hit unnecessarily hard when and if the markets one day get very stressed," explains Bo Michael Andersen. In addition, Eureka operates exclusively in Scandinavia.
With a broader instrument, Bo Michael Andersen believes that instead of classically investing in mortgage bonds and covered bonds and having a relatively high gearing, the Eureka people will also benefit from government bond markets, as well as interest rate spreads between the different regions and at the same time being geared 5-10 times.
The banks' risk taking expanded
The reason for launching a hedge fund now is found in the large amount of regulation of the banking sector over the past few years. It has made it significantly more expensive for banks to absorb and deal with risk in their own books. One man's loss is another man's gain:
"This means that we periodically have and will see some rising volatility in the fixed income markets not least, which historically have been fields where banks have been very large. Now banks have become smaller in these fields due to regulations, and it is visible from the banks' balance sheets that they have reduced their risk quite drastically, and that creates some opportunities for other investors. And that is why we are doing this now," Bo Andersen explains about the reason behind the fund's launch. A fund that has been on its way a little longer delayed by regulations, increased demands and uncertainty about how the chips would fall once MIFID II came into force.
Thus, funds such as Eureka and its colleagues will warehouse some of the risk in the market that has previously been warehoused with banks.
At SEB, it is estimated that the fund based in Luxembourg will amount to DKK 5-6 billion with a soft cap. Of this, it is expected to reach around DKK 3 billion within 2-3 years. The fund is initially seated by a number of institutional investors with more than DKK 1 billion.
Nordic customers are expected to show the most interest initially, but as the fund is based in Luxembourg, there are plans to apply for marketing authorizations for the fund outside the Nordic region.
Base currency is Danish kroner, but there will also be capital classes in Swedish kroner and Euro.
Costs will be 0.8 percent plus a 20 percent performance fee.
The fund is run by Bo Michael Andersen and Tore Davidsen.
English Edit: Marie Honoré