Spotting trading opportunities in information-sparse bond markets

Published on 1 May 2019

Overcoming information gaps can allow investors to buy for longer term trends and seize trades when they present. Sean George, chief investment officer of Structurinvest Fondkommision, explains how he makes those decisions, what he bases them on, and the risks that information gaps create in the investment process. Market data provided by MTS.

Dan Barnes Welcome Trader TV fixed income – your insights into the trading climate for professional bond investors. Im Dan Barnes. The infrequency with which many bonds trade can mean some investment strategies don’t get off the starting blocks, with traders pushing back on their portfolio managers. To find out how an investment manager can manage this information disparity and deliver returns over the long and short term, we’re speaking with Sean George, chief investment officer at hedge fund Strukturnvest FondKommision. Sean, welcome back to Trader TV.

Sean George Thank you for having me again. I’m happy to be here.

Dan Barnes Tell me how do information gaps in the market affect your ability to actually trade in the long or short term positions at the moment?

Sean George Our job is to make decisions with imperfect amounts of information. So, what we do is we try and analyze it quantitatively, top down, and bottom up, and try and gather as much information around whatever security or market that we’re analyzing. We maintain our core portfolio, the things that we have on for longer periods of time, but we increase the velocity or the amount of short term, we call them singles, short term trades that we’re trying to just make, you know, 5-10 basis points on. It is a switch, we bought CDS on Societe Generale and sold CDS on Agon. In essence, we went short an Italian asset, along a Dutch asset, and a really to US asset if you if you break it down, and why would we do that? Well, we think the spread at 12 basis points between the two is too tight. And with the headlines out of Italy and these European elections coming up, we can get some volatility surrounding Italy, but it’s not a market-directional trade, and it’s more of a nip and blip, as we would call it. So, we have a lot of those kind of trades in our portfolio that we’ll put on and we’ll take off.

Dan Barnes When you’re taking both those shorter term, opportunistic positions and the longer term positions, does that place any strain on the sort of data sources that you’re using?

Sean George So any trade that we put on, we put it into our model portfolio; that’s our actual portfolio with the addition or subtraction of the risks that we’re trying to augment the portfolio with. And then we take that data backward looking and try and feel the volatility, look at the metrics that the portfolio comes out with. We monitor stuff from within the volatility of our portfolio. And obviously the data that’s going in is very, very important. And I’m not paid to say this, but Citi Velocity does have a great source where we can get very good data. But then we also have to go through and check the data. So, being a market participant for 23 years,  you go through and think this looks right, but then even though you get data that is good, you’re going to still see some spikes and then you’ve got to take take that into consideration when you’re making the evaluation for trades.

Dan Barnes How do you manage the time it takes to actually run that process?

Sean George We do it fast. Longer term core trades are generally like deep credit or our documentation trades, so we don’t necessarily, like if I’m going to put on our BS6425s, which is our first position we put on, I might have that on for two years, just because I think the the asymmetrical payout for holding that bond is so high. So, I’m not in as much of a, ‘I got to have this on now,’ because we spent a lot of time on documentation, or if it’s Altice, which was our best high yield, long this year. We spent a lot of time on the credit side of things. Obviously, we’re going to model the volatility, but like the Generale-Agon trade, that I want to put on right now, because the relative levels have gotten to an area where it makes a lot of sense. I’m paying basically 12 basis points to be short Italy, and Italy’s wobbling and we have some macros going on throughout Europe. So, then I’m in a hurry and I need an answer now. There’s about 15 minutes to get that back. But once again, the size of that trade is smaller than a proper core that sits in the book until it’s played out.

Dan Barnes So that has less market impact?

Sean George Yeah exactly.

Dan Barnes So what are the risks that an asset manager faces when trying to manage those opportunistic and the longer term trades together.

Sean George Time. You want to make sure that you are indeed thematically positioned correctly, and you’re not too focused on the nip and blips. You’re like, ‘I think I can make 5, 10 basis points on this. That’s great.’ But if you missed the macro theme or a sector theme or a geographical theme, well, then you’ve missed the big trade. So, the short term opportunities are there to enhance your thematic trade. In ETFs are selling too much into the market and not realizing that, OK, you’ve knocked it down 3 points, stop selling the same bond. Well, that’s when it comes up on our quantitative scan that, ‘hey, this bond has dropped too much versus the sector,’ and then we jump in and go, ‘wow, that bonds dropped 3 points, the rest of the sector is flat. What’s going on?’ You pick up the phone. ‘Hey, it looks like there’s some structural selling of that bond, OK? This seems to be a short term situation. Model it, look at what it does to the vol. OK, we’re OK with the credit. This is just a short term blip.’ And then we step in.

Dan Barnes It sounds like that will be something that would be very difficult for larger asset managers to do if you segregating trading and investment perhaps?

Sean George Well, I’m not a believer of segregating trading and portfolio management. You miss so many opportunities and also you miss the things that are probably the most dangerous. And then when you go on comp, 32 dealers in comp. Well, 32 dealers don’t have an axe on that bond.

Dan Barnes Yes.

But some of them are going to try and get that ax and they’re going to change the price before the transactions has happened. And you don’t have that problem when we’ve decided to go into something, because I can see the 2 or 3 guys or girls that are axed in that bond or that CDS, and I go to them, and then I’ve still got my best execution, I’m still MiFID-compliant, because I can see the screens, I’ve asked more than one person. And everybody wins.

Dan Barnes Sean, that’s been great, thank you very much.

Sean George Thank you very much for having me again.

Dan Barnes I’d like to thank Sean George of Struturinvest Fondkommision, and of course you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET.