An investment boutique, based in Paris and operating in Private Equity since 1991, and in Credit since 2008 has decided to launch a UCITS fund domiciled in Dublin with a weekly liquidity.
It has been long since we expected them to replicate their Cayman based flagship strategy which has returned an annualized net return of 9.5% with a volatility of 4.2% and a maximum drawdown of 2.4% since inception in 2009.
The investment team has an extensive experience and has remained unchanged since the mid-2000.
A Long/Short Credit Portfolio
The fund is a Long-Short Credit portfolio. Its investment universe is made of the European Currencies High Yield issuers. The market exposure is actively managed in a range from +125% to -25%.
While most of the time the beta of the fund fluctuates between 0.5 and 1.0 it can also express strong negative view by being net short. The team stopped to use single names CDS since 2008 due to the basis effect risk. Therefore, they are long and short cash bonds for single names exposure and they use different hedge instruments to manage the market exposure: CDS Indices, Equity put options, Implied Volatility Futures, Liquid HY ETF, or the iBoxx Liquid HY index.
Beta management through volatility
Market volatility is their main indicator to manage the beta of the portfolio. According to their research, credit spreads are negatively correlated to an increase of volatility but are reacting with a delay compare to other asset classes, like currencies and equities. It allows them to adjust the portfolio quickly to peaks of volatility. Here is the way the Cayman fund went through the different significant volatility periods since 2009:
Performance during market stresses
Source: WS Partners, Fund Manager
Alongside the active management of the beta, the other added value of the strategy comes from their credit picking. According to the figures of their Cayman fund they did very well on both sources of alpha.
In Conclusion
We have added the fund in our Watch List with the aim to upgrade it into our Master List for the following reasons:
- Long / Short Credit with an active market exposure; We believe it is a sensible way to keep an exposure to the High Yield debts in the current spread tightened environment.
- Experience and stability of the team
- “Early birds” share class for the first investors
However, we need to perform further due diligence to review the constraints associated in transferring such strategy from a Cayman structure to a UCITs one.