Return on Knowledge
Danske Capital Luxembourg
Danske Hedge Fixed Income Strategies
February 2011
Agenda
The Basics
Examples of current strategies
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Risk
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Danish government-guaranteed bank issues
Svenske bostäder I (Swedish mortgage bonds)
Svenske bostäder II (Swedish mortgage bonds)
Outright interest-rate call on long EUR swap rates
Relative Value 10s30s yield curve steepening on a forward basis
Relative Value Danish government rich compared to German government bonds
Relative Value USD interest rate curve (5-year vs. 2-year)
In general
Scenario analysis
Historical utilisation
Exposure
Current allocation of risk
•
2011 forecast
•
Historical returns
2
2
Portfolio Managers and Strategy Team
Michael Petry, Chief Portfolio Manager. Born 1970.
Michael Petry is Portfolio Manager of the Danske Invest Hedge Fixed Income
Strategies fund. Michael joined Danske Capital in November 2005 from a position as
Senior Dealer with Danske Markets where he worked as a market maker in swaps and
options. At Danske Markets he has previously worked with derivatives sales. Prior to
this, Michael worked as a Portfolio Manager with Danmarks Nationalbank (the Danish
central bank). Michael has 17 years’ experience within Fixed Income and bond markets
and holds a Graduate Diploma in Business Administration (Economics & Financial
Planning) from the Aarhus School of Business.
Tom Rosenkrans, Senior Portfolio Manager. Born 1974.
Tom Rosenkrans is associate portfolio manager of the Danske Invest Hedge
Fixed Income Strategies fund and primary portfolio manager of the Danske
Invest Hedge Mortgage Arbitrage hedge fund that focuses on investment in
Danish mortgage bonds. Tom has more than nine years of experience within
the financial markets and primarily focuses on Fixed Income and bond
markets. Tom was previously employed by the Ministry of Finance. Tom
holds a MSc in mathematics and economics from the Copenhagen Business
School.
Carsten Cilieborg, Portfolio Manager. Born 1978.
Carsten Cilieborg works as an analyst with the Global Fixed Income dept. of Danske
Capital. Carsten is a member of the research team behind the Danske Invest Hedge
Fixed Income Strategies fund and is also a member of the research team behind our
global bond portfolios. Carsten prepares quantitative and strategic analyses of the global
fixed income markets on a regular basis for the Danske Invest Hedge Fixed Income
Strategies fund. Carsten has seven years of experience within the financial markets, and
prior to joining Danske Capital he worked as an analyst with the Treasury Dept. of
Danmarks Skibskreditfond (Danish Ship Finance). Carsten holds a MSc (economics)
from the Copenhagen University.
The team has a solid and well-balanced mixture of experience from different areas of
the financial markets as well as a sound theoretical and educational background. The
combination of experience and theoretical knowledge adds value to the investment
process.
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Risk Management Team
Per Søgaard-Andersen, Chief Analyst. Born 1957.
Per Søgaard-Andersen is Chief Analyst with the Alternative Solutions and
Risk Measurement team in Danske Capital. The team is responsible for
development of risk models for a number of Danske Capital’s products,
including hedge funds. Per has more than 22 years of experience within
the financial markets. Before joining Danske Capital, he worked at
SimCorp, ABN-AMRO, Nordea and SAMPENSION. Per SøgaardAndersen holds a Ph.D. from DTU (the Technical University of
Denmark).
Rasmus Majborn, Risk Analyst. Born 1973.
Rasmus Majborn is Risk Analyst with the Alternative Solutions and Risk
Measurement team in Danske Capital. The team is responsible for
development of risk models for a number of Danske Capital’s products,
including hedge funds. Rasmus has seven years of experience within the
financial markets and holds a MSc in mathematics and economics from
the Copenhagen Business School.
The team is highly dedicated with the monitoring and managing of portfolio risk. The
state of the art Value-at-Risk based risk management model is so superior, that the
portfolio managers use the model actively in the decision-making process to evaluate
portfolio impact in terms of diversification effects.
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The Basics
Objectives
Per Søgaard-Andersen is Chief Analyst with the Alternative Solutions and
Rasmus Majborn is Risk Analyst with the Alternative Solutions and Risk
Measurement team in Danske Capital. The team is responsible for
development of risk models for a number of Danske Capital’s products,
including hedge funds. Rasmus has seven years of experience within the
financial markets and holds a MSc in mathematics and economics from
the Copenhagen Business School.
To generate attractive absolute returns by investing in primarily
Scandinavian and European Fixed Income Markets. The value is
mainly created through relative-value and convergence strategies
Risk Measurement team in Danske Capital. The team is responsible for
development of risk models for a number of Danske Capital’s products,
including hedge funds. Per has more than 22 years of experience within
the financial markets. Before joining Danske Capital, he worked at
SimCorp, ABN-AMRO, Nordea and SAMPENSION. Per SøgaardAndersen holds a Ph.D. from DTU (the Technical University of
Denmark).
Targets
Target return = risk free rate + 4%
Attractive Sharpe ratio
Low correlation with other asset classes
Means
Danske Capital’s long expertise and experience as one of the
leading managers in the Scandinavian Fixed Income Markets
Restrictions
Risk not exceeding 125% of a 10-year Danish government bond
measured by Value-at-Risk
The investment universe as described later
5
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Danish government-guaranteed bank issues
Because of the crisis in the financial sector many banks had to apply for a government-guarantee to raise cash in the capital
markets
Purchase of Danish government-guaranteed bank issues
• And sale of e.g. short-term Danish government bonds with similar maturities
• I.e. no interest-rate risk or credit risk associated with debt issued by the Danish government
• Yield pick-up of 80 basis points
• De facto we have hedged the interest-rate risk through the use of interest-rate swaps (credit risk associated with Denmark)
• The risk is one of liquidity shortages and spread widening in a stressed market
• In terms of risk, bonds are treated as a combination of AAA rated covered bonds and government bonds
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6
Swedish bostäder I
The bond is trading at a relatively high premium in
a historical perspective
120
Cheap>>
100
Turbulence in the SEK money market has been the
driver of the recent spread widening
100
6 mth
The red dots indicate how much the yield spread
may rise on a 3, 6 and 12-month horizon before
leading to a negative return on the investment
3 mth
yiled pick-up (bp)
The investment has been hedged. Thus the return
will be inde-pendent of the underlying trend in
interest rates
120
1 2 mth
80
80
60
60
40
40
20
yield pick-up (bp)
The figure shows the yield pickup on a 4-year AAA
rated Swedish mortgage bond (Stadshypotek)
20
4 -year bostad (Swedish mortgage bond)
0
0
Rich >>
-20
dec-97
-20
dec-98
dec-99
dec-00
dec-01
dec-02
dec-03
dec-04
dec-05
dec-06
dec-07
dec-08
dec-09
dec-10
dec-11
dec-12
Strategy: Purchase of bostad bonds funded through repo trades . Hedging of interest-rate risk through a matching interest-rate swap
Strategy
Buy/Sell
Buy
7
Bond
SM1576 (4½-årig)
Fixed leg
YTM, bond
YTM, swap
3.86
-3.16
Floating leg
3M REPO
3M Stibor
-1.90
2.02
Total
yield
0.82
7
Swedish bostäder II
100
The figure shows the ASW structure for Swedish bostäder
100
1 0 -year SwedishMortgage Bond
90
90
80
Bonds with shorter maturities are more expensive (lower risk premium) than bonds with
longer maturities
80
70
60
60
50
50
<<SwedishMortgage Bonds spread-to-swap curve
40
40
30
30
20
20
10
10
0
However, this trend is reversed around a maturity of 5-6 years
yield pick-up
yield pick-up
5 -year SwedishMortgage Bond
70
10-year bostäder appear relatively expensive compared to 5-year bonds
Primarily because of the lack of issuance of 10-year maturities and heavy issuance of 5year maturities
In our opinion investors are not sufficiently compensated for the (spread) risk in the 10year segment
0
0
2
4
6
8
10
12
14
Time To Mat ur it y (year s)
Strategi:
Buy 5-year bonds and sell 10-years (on an ASW basis) in a spread risk neutral ratio (2:1)
Risk:
The price of 10-year bonds will exceed that of 5-year bonds on an ASW basis
Buy/ Sell
Bond
YTM , bond YTM , swap 3 M REPO 3 M STIBOR
Buy (2 x)
5 -year
4 ,0 7
-3 ,3 7
-1 ,9 5
2 ,1 1
Sell
1 0 -year
-4 ,6 8
3 ,8 2
1 ,7 5
-2 ,1 1
Strategi (2 x 5 year - 1 0 year)
3 ,4 6
-2 ,9 1
-2 ,1 5
2 ,1 1
8
Total
1 ,7 2
-1 ,2 2
0 ,5 0
8
Outright: Long-term EUR forward rates are considered overbought
6 ,0 %
6 ,0 %
5 ,0 %
5 ,0 %
4 ,0 %
4 ,0 %
3 ,0 %
3 ,0 %
2 ,0 %
2 ,0 %
1 ,0 %
1 ,0 %
2 0 y2 0 y
0 ,0 %
apr -0 4
aver age
2 x st d. dev.
0 ,0 %
okt -0 4
apr -0 5
okt -0 5
apr -0 6
okt -0 6
apr -0 7
okt -0 7
apr -0 8
okt -0 8
apr -0 9
okt -0 9
apr -1 0
okt -1 0
Source: Danske Analytics and Danske Capital. Historical performance is not indicative of future performance
The figure shows the development in the level of 20-year rates in 20 years in Euroland since 2004. Long-term EUR forward rates appear overbought. The reason for
this is the risk aversion caused by the South European sovereign debt crisis and fears of recession which have prompted/led to a demand for long-term swap rates by
European pension funds.
9
9
80
80
60
60
40
40
20
20
0
0
-2 0
-2 0
1 0 s3 0 s spot
1 0 s3 0 s 4 yr for ward
-4 0
-4 0
-6 0
-6 0
-8 0
-8 0
-1 0 0
-1 2 0
apr -0 4
-1 0 0
-1 2 0
apr -0 5
apr -0 6
apr -0 7
apr -0 8
Strategy:
Pay 30s and receive 10s with a 4-year forward start. Beta-neutral ratio  no
Strategy has positive roll-down/carry
Risk:
The curve (10s30s) is flattening further because of increased risk aversion
10
steepness 1 0 s3 0 s (bp)
steepness 1 0 s3 0 s (bp)
Relative Value (RV): 10s30s steepening 4y forward
apr -0 9
apr -1 0
underlying interest-rate risk.
10
Danish long dated bonds (30 year) rich compared to Germany
40
40
Denmark cheap vs. Germany>>
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
-5
-5
-1 0
yield spr ead (bp)
yield spr ead (bp)
3 0 -year yield spread Denmark vs.Germany
-1 0
Denmark rich vs. Germany >>
-1 5
nov-0 8
11
feb-0 9
maj-0 9
aug-0 9
nov-0 9
feb-1 0
maj-1 0
aug-1 0
nov-1 0
-1 5
feb-1 1
11
Danish medium term bonds (6 year) rich compared to Germany on a relative basis (vs. swapcurve)
15
15
Denmark cheap vs. Germany>>
10
5
5
0
0
-5
-5
-1 0
-1 0
-1 5
-1 5
-2 0
-2 0
asset swap spr ead (bp)
asset swap spr ead (bp)
10
6 -year asset swap spread Denmark vs.Germany
-2 5
-2 5
-3 0
-3 0
Denmark rich vs. Germany >>
-3 5
nov-0 9
12
-3 5
jan-1 0
mar -1 0
maj-1 0
jul-1 0
sep-1 0
nov-1 0
jan-1 1
12
On the USD curve 5-year looks cheap compared to 2-year. We believe the curve is to steep and position for a
flatter curve
180
180
160
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
5 yr - 2 yr USD (bp)
5 yr - 2 yr USD (bp)
Steepcurve >>
<< Flat curve
0
dec-9 9
-2 0
13
dec-0 0
dec-0 1
dec-0 2
dec-0 3
dec-0 4
dec-0 5
dec-0 6
dec-0 7
dec-0 8
dec-0 9
0
dec-1 0
-2 0
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2011 forecast, strategies and returns
•
Short-term Danish non-callable mortgage bonds
• Perhaps hedged through the use of government bonds
•
Swedish bostäder where the interest-rate risk has been hedged through the use of interest-rate
swaps (attractive spread curve on a 5-year horizon looks attractive)
•
New positions in short-term European AAA-rated mortgage bonds (< 3 years)
•
Relative value strategies
• Higher yields
• Steeper curves
• Country spreads
•
As basic return is provided on the basis of our current holding of Danish governmentguaranteed bank issues and EUR covered bonds
14
14
Return
15
15
Return relative to the FI Arbitrage Hedge Fund Index
16
16
Return relative to other asset classes since inception
aktivklasser siden etablering
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Performance ratios
Performance Measures
Administrative Information
Year
Rasmus Majborn is Risk Analyst with the Alternative Solutions and Risk
Annual Returns
FUM
€ The team is responsible for
Measurement team in Danske
Capital.
St art Dat e
Jan 2 0 0 5
2 0 1 0 YTD 1 2 .4 4 %
Last Report ed ROR
Minimum Invest ment
Management Fee
Incent ive Fee
Lock up
Sep 2 0 1 0
DKK 1 0 0 0 K
0 .5 0 %
2 0 .0 0 %
7 days
2009
2008
2007
2006
2005
Performance Analysis
Tot al Ret urn
6 8 .1 %
Compound A nnual Ret urn
A verage Mont hly Ret urn
W orst Drawdown
Mont hly St andard Deviat ion
Sharpe Rat io
A lpha vs S& P 5 0 0
Bet a vs S& P 5 0 0
9 .4 5 %
0 .8 1 %
-2 2 .4 0 %
3 .2 5
0 .6 2
0 .7 6
0 .2 6
0 .1 4
2
R vs S& P 5 0 0
Up Capt ure vs S& P 5 0 0
Down Capt ure vs S& P 5 0 0
0 .4 8
0 .0 6
6 8 .0 9 %
-2 1 .0 6 %
2 .7 5 %
4 .6 3 %
4 .8 1 %
development of risk€models
a number
1 9 for
2 .0
8 Mof Danske Capital’s products,
including hedge funds. Rasmus has seven years of experience within the
financial markets and
in mathematics
and economics from
€ holds
1 4 a2MSc
.1 8
M
the Copenhagen Business School.
€ 1 3 1 .7 3 M
€ 1 3 4 .4 2 M
€ 5 9 .9 0 M
€ 7 .0 4 M
Correlation Analysis
vs Barclay CTA Index
vs Barclay Hedge Fund Index
vs Barclay FOF Index
vs S& P 5 0 0
vs NA SDA Q
vs Dow Jones Indust rial
vs Russell 2 0 0 0
vs Lehman Brot hers Treasury
vs FT-SE 1 0 0
vs JPMorgan
vs MSCI W orld
-0 .0 8
0 .5 4
0 .5 1
0 .3 8
0 .4 3
0 .3 1
0 .3 2
-0 .3 3
0 .4 2
-0 .1 4
0 .4 1
All data hedged to EUR
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Management and performance fee /issuance / home page
• Performance fee
- 20% of the return above the risk free rate
• Management fee
-1,10% (63,5 bp to Luxembourg)
• Weekly NAV / weekly issuance / weekly redemptions (1 week notice)
• www.danskehedge.com / www.danskehedge.dk
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Awards / nominations
DIHFIS winner of hedgeweek Best Fixed Income Hedgefund award
-Hedgeweek - March 2009
“The fund posted a positive return over the financial crisis with more than 40% and also managed to maintain low volatility” www.hedgeweek.com
DIHFIS ranked 6th best Fixed Income Hegdefund by Barclayshedge based
on a 3 year-period return
- Barclays Hedge - November 2010
DIHFIS nominated by EuroHedge/Euromoney as best Fixed Income
Hedgefund in 2010
-Eurohedge/Euromoney – December 2010
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What happened …. ?
Cheap
What appeared cheap …
Rich
21
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… a massive cheapening of even AAA-rated short-term assets
Cheap
…. became a lot cheaper!
Rich
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Disclaimer & contact information
This publicat ion has been prepared t o be read exclusively in conjunct ion wit h t he oral present at ion
provided by Danske Capit al. Readers should not replace t heir own judgement wit h any informat ion or
opinions herein and should cont act t heir invest ment advisor whenever necessary. Any informat ion or
opinions cont ained herein are not int ended for dist ribut ion t o or use by any person in any jurisdict ion
or count ry where such dist ribut ion or use would be unlawful and, specifically, are not int ended for
dist ribut ion t o or use by any "US Person" wit hin t he meaning of t he Unit ed St at es Securit ies Act of
1933, nor any personal cust omer in t he Unit ed Kingdom.
Danske Capital
Strødamvej 46
DK 2100 Copenhagen
Tel. +45 45 13 96 00
Fax +45 45 14 98 03
http://www.danskecapital.com
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