By Robert Maharajh Former Investec fund manager Paul Brain and his team are preparing to launch a...
By Robert Maharajh
Former Investec fund manager Paul Brain and his team are preparing to launch a strategic fixed-interest hedge fund.
The group, now known as Partners Asset Management, formerly ran the top-performing Investec US Dollar High Income Bond fund, which over three years to 1 January 2001 was ranked first out of 130 funds in the offshore North American bond fund sector.
The Investec fund was a dynamically-managed vehicle which actively switched between different classes of debt, with up to 100% allowed in sovereign, corporate or emerging market debt.
The new fund will follow this model but will use short positions and leverage to take fuller advantage of opportunities in markets.
Brain said: "The Investec fund was successful because we were given flexibility to asset allocate depending on our perception of the economic cycle, which meant that we did not have to be in markets we thought were not likely to perform."
In 1998, the fund had little emerging market or high yield debt, whereas in 1999 it moved back into these asset classes. In 2000, it benefited from being heavily weighted in Treasuries.
This process, based on the avoidance of risky assets, should be ideal for a hedge fund, Brain believes.
The new vehicle, the Stellar High Yield fund, will target annual returns of 15-20%, and will close initially at about $100m.
It will be able to operate up to 100% leverage, although this will be primarily used to provide opportunities for shorting rather than as a means of gearing up exposure.
The addition of shorting abilities will provide an exponential increase in investment opportunities, according to Brain.
He said: "Running the Investec fund we had a greater opportunity than most fund managers, who can only move along the duration curve. We could also move across asset classes, or down the credit curve. Of course, you can only take advantage of these opportunities if you have a team with the right skill set."
The investment process combines a global top-down approach for asset allocation with a bottom-up approach to stock selection.
The decision-making process starts with a global macro view, which feeds through into asset allocation.
Relative value models are then used and this leads to formation of a country and sector view, with the process culminating in individual stock selection.
The group now favours high yield, Brain said. "We have been out of this area for some time and by the end of 2000 we had less than 10% in corporates. Now, however, we see US interest rates as likely to fall substantially, possibly by another 1.5%, which should see spreads narrowing dramatically."
The fund, which will have a minimum investment of not less than $100,000, will have a 2% annual charge with a 20% performance fee, or for investors prepared to lock in for three years, 1.5% a year, with a 20% performance charge.
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