Stockholm (HedgeNordic) – SEB’s asset management arm has expanded its suite of hedge funds with the launch of SEB Eureka Fixed Income Relative Value (SEB Eureka), a vehicle seeking to capitalize on relative value opportunities in Scandinavian fixed-income markets. Reduced bank risk-taking as a result of tighter regulations has led to increased volatility, creating a perfect battleground for SEB Eureka’s strategy.
In an interview with HedgeNordic, Bo Michael Andersen, the fund’s senior portfolio manager and chief investment officer, and portfolio manager Tore Davidsen explain the fund’s strategy in great detail and discuss the investment process behind the strategy.
SEB Eureka’s Strategy in Great Detail
SEB Eureka employs several relative value strategies to exploit inefficiencies in the pricing of securities in Scandinavian fixed-income markets and the Danish market in particular. One of these strategies involves taking advantage of the yield pickup in Scandinavian covered bonds. The fund also aims to use a significant part of its risk budget to conduct other fixed-income relative value spread trades, including spread trades in over-the-counter (OTC) derivatives and government bonds.
“SEB Eureka aims to avoid exposure to market directionality in the pursuit of alpha,” says Bo Michael Andersen, and hedges interest rate risk using derivatives. The credit risk inherent in the portfolio is low since the fund can only invest in bonds with high credit ratings, mainly government and covered bonds. The main risk associated with the strategy, however, is drawdown risk in stressed scenarios, explains Andersen. “The fund has a strong focus on diversification, tail risks and capital preservation when entering into relative value trades,” he adds.
Discussing the characteristics distinguishing SEB Eureka from peers, Bo Michael Andersen says “we believe the fund differentiates itself from some peers by focusing on Scandinavia only, and by having a broader focus on fixed-income relative value and therefore being more well-diversified.” In addition to utilizing covered bond strategies, the fund also employs relative value strategies in government bond markets and OTC derivatives markets.
What, Why and How: Investment Process
The investment process behind SEB Eureka consists of three pillars: What, Why and How. “The three-step approach underlines the aim of the fund not only to identify relative value opportunities [What],” explains portfolio manager Tore Davidsen, “but also to understand the dynamics before considering to add a given position [Why] and, last but not least, identify risk/reward and determine how to capitalize on the idea [How].”
Discussing the first pillar of the investment process, Davidsen says that “market opportunities are typically identified by screening markets using proprietary quantitative tools developed by the fund’s portfolio management team and the SEB Group,” with proprietary risk models used continuously to monitor risk. While the first pillar in the investment process is more quantitative by nature, the second pillar involves more qualitative analysis in order to understand market dynamics.
Investment Team, Target Audience and Track Record
SEB Eureka’s portfolio management team is based in Copenhagen and consists of two portfolio managers, Bo Michael Andersen and Tore Davidsen. Quantitative resources within the SEB Group are being used by the team in building and developing quantitative models. Prior to managing SEB Eureka, Andersen worked 16 years as head of fixed income and head of markets at SEB Denmark.
The new launch was part of SEB Investment Management’s strategy of expanding its offering of alternative investment products, as investors are increasingly haunting for investment products uncorrelated to traditional asset classes. However, SEB Eureka can only be distributed to professional investors, with required minimum investment figures of DKK 10 million and 25 million depending on the share class. With the fund currently managing DKK 1.45 billion in assets and an estimated capacity between DKK 5 billion and 6 billion, there are still available seats at the table.
SEB Eureka aims to generate annual returns in the range of 4-8 percent with a volatility target in the same range. The fund returned 3.6 percent year-to-date through the end of August and posted seven consecutive months of positive returns since its inception in mid-January 2018.