Investors seeking exposure to fixed income and credit can select from a wide variety of strategies and vehicles, ranging from passive index-tracking products, such as ETFs, to benchmark-conscious long-only funds, absolute return funds, total return funds, hedge funds, structured credit vehicles and even private equity funds.
Algebris manager Alberto Gallo argues that “a relatively unconstrained approach, with flexibility to express macro views and invest long or short across a wide range of liquid rates and credit asset classes, is essential for the macroeconomic and financial market landscape of early 2017 where government bonds offering very low or negative yields are clearly a source of huge negative convexity.”
Indeed, Gallo’s UCITS fund, which has so far raised $400 million, is up 5% since inception in July 2016 and has already profited from a core 2016 theme of shorting government bonds, before rotating to reflation trades this year. He thinks that a traditional, long-only, benchmark-constrained strategy (that can only over-or under-weight sectors or securities) would be a straitjacket. Such semi-active strategies, subject to tight tracking error constraints, have been dubbed “closet trackers” and face competition from passive tracker products, such as ETFs, which Gallo views as “cheaper, but vulnerable to herd behaviour and low returns.” Therefore he envisages that “only low-cost or genuinely active strategies with many degrees of freedom over asset allocation and security selection will survive.” Performance to date, versus peers identified by Algebris, is shown in Fig.1.