In the current low-yielding environment investors can capture alternative returns in the fixed income space by taking both long and short bond positions.
This is according to Armin Bischofberger, one of the managers of the the Credit Suisse L/S Swiss Franc Bond fund.
Together with his co-managers Philippe Wechsler and Sébastien Zöller, the fund manager uses three substrategies in order to capture alternative risk premia: long/short, convergence and liquidity premium.
The first substrategy of the fund is long/short, where alternative risk premia can be captured through access to the repo market.
‘We get the bond we want to short in the market from a repo desk, but from our long portfolio we also provide one of our bonds as collateral, refinance it and get cash,’ said Bischofberger.
He added that in an environment with normal yields investors would usually pay something for this transaction, but as he and his co-managers pay at a rate close to the interbank rate, which is minus 75 basis points, the average refinancing rate is currently deeply into minus territory.
‘We can buy AAA short-dated paper at zero or slightly minus, because we have refinanced ourselves at much deeper minus rates, which is unique in the Swiss market.’
The second substrategy of the fund, convergence, takes advantage of discrepancies in bond valuations.
Bischofberger said the Swiss franc market is structurally inefficient as there is a lot of demand from institutional clients who follow an index and have to buy everything from it.
'That leads to a situation where the credit spread difference of a CHF bond and its international peer of the same company can be more than 200 basis points in a five-year duration context.'
The fund takes advantage of this difference as it is able to sell a Swiss franc bond at 100 and buy the CDS of the same company with the same risk, capital structure and maturity at 90.
‘We do pair trades and are long the bond identical risk where it is more attractively valued and short where it is more expensive and in 95% cases it is in the Swiss franc market.’
Bischofberger said the trading books of investment banks have been significantly reduced since the financial crisis, which means in the case of forced selling in the market the banks’ trading departments won’t be able to provide sufficient liquidity.
The fund manager said within the substrategy called 'liquidity premium' the fund provides the market with liquidity for selected corporate bonds.
‘This allows us to monetise on bid-ask-spreads. Our fund can directly trade with more than 40 counterparties as well as provide liquidity on SIX.'