In the hedge fund space, techniques such as relative value trading may have been tarnished by the story of Long Term Capital Management, a firm that collapsed over 20 years ago. However, Redhedge released a UCITS version of its relative value fund last month as in an environment with low and negative yielding bonds, investors not wishing to go up the risk spectrum have few options.
“We're not aiming to deliver double digit return with a single digit volatility we are just aiming for the lowest amount of volatility possible,” Andrea Seminara, founder of Redhedge, told fundeye.
Mr Seminara spoke about the roots of his firm’s name. It was inspired by his grandmother, who used to say “pay five cents more, but get it in red” as red denotes quality in her home country of Italy (Mr Seminara himself grew up just outside Milan).
The firm’s relative value strategy is really about capital preservation with the least amount of volatility. During the market meltdown of 2020, the largest drawdown the original relative value fund saw was just 12.5 basis points in August.
The fund seeks bonds that are behaving ‘irratically’ and not trading at fair value which will be due to technical reasons. Unlike other hedge funds which make money by going long a company they believe is going to do well and shorting one that isn’t, this is not how Redhedge works.
“For us, the shorts and the longs are not too different centres of profit so we wouldn't buy a company that we like to short the company that we don't like. Our approach is purely arbitrage,” said Mr Seminara.
This is to say that that the firm looks for bonds that are very similar but for some reason are mispriced. Seeking anomalies in the pricing of bonds is key to the funds success and this is partly due to the fact after 2008 banks ability to absorb the buying and selling of bonds is limited according to Mr Seminara.
Who is this product for?
Mr Seminara said that his main clients are wealth managers although with the release of a UCITS version of the fund there’s been a pick-up in attention from institutional investors such as pension funds, “because the nature of our conservative approach” he said.
UCITS have certain investors protection rules which can impact certain hedge funds when they convert to UCITS liquid alternatives although given the emphasis on capital preservation these restrictions haven’t caused too many problems. However, one area that has been a slight issue is liquidity, with a 20 percent cap on cash positions.
“It required a little bit of adjustment in our risk management model,” said Mr Seminara.
The impact of Covid on the fund was negligible as mentioned but lockdown has caused some problems, keeping the market suppressed.
“I strongly believe that because people are not seeing each other, there’s no credit volatility, no one is doing anything,” said Mr Seminara.
He added that before lockdown, he would go for dinner with analysts and other market participants to discuss ideas that would ‘stimulate the brain’. He added that everyone ‘is sick’ of online conferences, watching endless PowerPoint presentations which is a poor replacement for physical meetings where people can discuss the market.
Of course now lockdown restrictions have been lifted, Mr Seminara is optimistic about things going forward. He thinks that there will be a pick-up in volatility which is obviously good news for a fund which trades on its low vol benefits.