Hedge fund delivers 19% return by betting only on safest bonds

OSLO: The best returns are not in the riskiest stocks but in the least risky bonds. But you can’t get them without leverage.

That philosophy helped Asgard Fixed Income Fund deliver a 19% return in the past year.

“That’s the core of our strategy,” Morten Mathiesen, 45, chief investment adviser at Copenhagen-based Moma Advisors A/S, said in a phone interview last Thursday. “The best risk-adjusted returns are actually the low volume trades.”

With negative interest rates across Europe and the European Central Bank slowly mov- ing toward scaling back stimulus, risks are high for bond investors. But Mathiesen, who advises the fund, largely ignores the direction of interest rates.

The fund has delivered returns of 14% a year since its inception in 2003 and is beating key bond indexes. Bloomberg’s government bond index has returned 5% per year over the past decade.

“We try not to speculate whether rates will go up or down,” he said. “We’re typically fully hedged.”

Mathiesen uses a proprietary model to forecast and pick the best risk premiums in short-term, high-quality bond markets. Most of the fund’s bonds are AAA rated, such as Danish mortgage bonds.

“We’re long risk premiums in fixed income,” he said. “We have a strong bias toward the Nordics. We invest in anything that has a risk premium that doesn’t involve credit risk.”

The 600-million-euro fund bets on yield spreads, country spreads and money market spreads in the European fixed income markets. The biggest bet is Scandinavian covered bonds but the fund has decreased holdings due to “a lot of spread narrowing.” To offset the interest rate risk the fund hedges the bonds with derivatives and is only exposed to the spread.

The spread is usually small so the fund must borrow money to boost the return.

Current leverage is about 11 times and has been as high as 25 times, according to Mathiesen.

The volatility target is about 6%. “We’ve been successful in providing alpha,” or excess returns, he said. “We’ve produced a higher risk-adjusted return than what the carry should justify in the positions we hold.” — Bloomberg