The Arbitrage Fung (USD) produced a return of +1.40% for the month, bringing the total return year to date to +2.03% and the 12 month rolling return to +13.37%.
Five of our six themes were profitable in March, producing a strong overall result.
Merger & Event Arbitrage generated the best return. All four Fixed Income Arbitrage managers made money. Despite the traumas suffered by both Greek Bond investors and Greek citizens as they watch the EU rescue wrangle conclude, volatility in Government Bonds declined further. This is not to say that opportunity declined as there was money to be made from the continuing normalisation of price relationships across the volatility surface. March was the first month in which new US Treasury issuance was absorbed by a market free of influence from the QE programme. Whether this was the reason or not, participants report reduced appetite for new bonds and an increase in pricing concessions on new issues in order to encourage their absorption. This translates into wider spreads on the simplest form of the classic fixed income arb trade. In recent quarters, one of the four managers in the theme has lagged its peers systematically, and we have therefore redeemed this holding. There is no shortage of talent in the field.
Mortgage rates rose, but by slightly less than US Treasury yields, which suited the tilt in the optionality incorporated in one of our managers portfolios, but both of our Mortgage Arbitrage managers were profitable. Our second manager spent the month rebuilding his portfolio following the accelerated buyout of delinquent Freddie Mac bonds in February. In this theme too, we have initiated a manager change, adding a firm with a demonstrable trading aptitude.
Our Instrument Arbitrage manager finds markets particularly interesting when there is a marked change in the flow of investments into or out of the Asian region. Flows to Emerging Markets from the west have stepped up in recent weeks. Increasingly frantic media speculation about the prospect and timing of a possible change in China’s currency management programme has added further spice. Events elsewhere in the region have also produced anomalies in short term market reaction to Toyota’s recalls, the prospect of large scale capital raising by China’s big Banks, a disruptive earthquake in Taiwan and an unexplained explosion on a South Korean naval ship which killed 40 crew members. Convertible Arbitrage generated a small positive return.
Our Volatility Arbitrage manager lost money during this first month of his inclusion in the portfolio, although the impact was tempered by the limited 2% allocation. Equity market vol declined in the face of broad rises in the indices, fixed income vol fell as previously discussed and foreign exchange markets quietened down as anticipation of a move in the RMB grew.
We have added an additional Merger & Event Driven Arbitrage manager. This fund embraces complexity, but without surrendering liquidity and adopts an extremely thorough approach to the construction of its trades and to the diversification of its portfolio. We expect it to consider opportunities right across the market capitalisation range and to have wide geographic coverage.