Stockholm (HedgeNordic) – Under the guidance of Michael Petry, Danske Bank Asset Management has developed a solid trio of relative-value fixed-income hedge funds, overseeing a total of €2.2 billion in assets under management. After experiencing high single-digit or low-teen losses in 2022 due to several factors, mostly stemming from the unexpectedly aggressive interest-rate hiking cycle, all three funds swiftly recovered from last year’s drawdowns, achieving gains close to or exceeding 20 percent in the first 11 months of 2023.
While each fund within the trio has its own distinctive features, they share a common core philosophy. “All three funds aim to deliver a positive, absolute return, regardless of the direction of the financial markets, relying on strategies that seek to capitalize on interesting patterns and discrepancies in fixed income and bond market pricing,” explains Petry. The oldest and largest among them, Danske Invest Hedge Fixed Income Strategies, focuses on exploiting relative and absolute mis-valuations in the fixed income markets in Scandinavia, the US and Euroland, with a predominant emphasis on Scandinavia. “If we are looking back in time, 90 percent of the risk has historically been allocated to the Scandinavian markets,” points out Petry.
Danske Invest Fixed Income Relative Value, on the other hand, represents a carve-out of the flagship strategy, tailored specifically for Swedish investors. Managed by the same team, this fund entails certain adjustments to get marketing approval from the Swedish FSA. “We needed to adjust and exclude a few things that we can do in the other fund,” explains Petry. “It’s the same approach, the same team, with a very high correlation between the two funds.” The younger sibling, Danske Invest Fixed Income Global Value, takes a more global-focused approach under the management of Anders Møller Lumholtz. Collectively, these funds oversee €2.2 billion in assets under management, with Danske Invest Hedge Fixed Income Strategies leading the way at just over €1 billion and the more globally-focused fund managing €763 million.
Michael Petry and his eight-member team employ an approach focused on identifying attractive relative value strategies in fixed-income markets, such as the narrowing spread between five-year Swedish mortgage bonds and government bonds. This involves scrutinizing historical data, looking for what Petry terms a “relative value signal” that points to a relationship that deviates significantly from its historical average. “This historical perspective is crucial for us,” he emphasizes. “If something seems interesting, we then assess the macro story. Is there a macro story behind this trade, or is it purely flow-driven?”
“If something seems interesting, we then assess the macro story. Is there a macro story behind this trade, or is it purely flow-driven?”
If no correlation with the macro environment is identified, the focus shifts to historical flows. Another aspect involves examining the carry, whether there is a positive or negative carry role in a given position. The team tends to favor positions with a positive carry role and a macro link, ensuring alignment with their macro view. “It’s essential that our macro view aligns with the position,” says Petry. “Nonetheless, we can have trades where we agree with the macro and can also have trades where we don’t see any macro link.”
Reflecting on 2022 and Its Aftermath
Central banks’ aggressive measures to combat inflation reverberated through financial markets in 2022, resulting in large falls across stock markets, substantial interest rate increases, and spread widening, and, on the whole, nervous and very volatile markets. Heading into 2022, Petry and his team had, among many different positions, positioned themselves for rates to rise, but only to a certain degree. The team sold out-of-the-money options on the expectation that rates would not rise beyond a certain level.
“As many others, we were caught wrong in some positions for higher rates,” Petry admits. Quick to recognize the mistake, the team stopped themselves out of those positions in March and April of last year. “I am pleased we did it that early, and in hindsight, we did it much earlier than the central banks realized that interest rates could go much further,” explains Petry. “Despite the early action, losses were incurred and then later on other things in our portfolio went wrong,” he elaborates. “Mortgage bonds performed very poorly during the summer and the beginning of the autumn.” However, a strong turnaround began in September, contributing to a robust performance ever since.
“We took stop losses on the right things, that’s the main reason for our comeback.”
After incurring a loss of close to 22 percent in the first nine months of 2022, Danske Invest Hedge Fixed Income Strategies has advanced 38.5 percent from the end of September last year through November this year. In a similar fashion, Danske Invest Fixed Income Global Value has gained 42.6 percent since September of last year after incurring a loss of 25 percent in the first nine months of 2022. The strong recovery reflects the implementation of “an early stop loss on the right things and the appropriate time on the positioning we were wrong on,” according to Petry. “Everything else that we kept in the book has come back very nicely and many opportunities came along with volatile markets,” he emphasizes. “We took stop losses on the right things, that’s the main reason for our comeback.”
Looking ahead, Petry expresses enthusiasm for the current market environment, stating, There are so many opportunities out there.” Despite the impressive comeback and already being in more than 20 percent for two funds and close to 20 percent for the third fund, Petry remains optimistic about 2024. Anticipating double-digit returns, he underscores the transformative shift in the market environment.
“After years of relative quietness and near-zero interest rates, we are in a completely different environment, where a lot of opportunities pop up more or less every day.”
“After years of relative quietness and near-zero interest rates, we are in a completely different environment, where a lot of opportunities pop up more or less every day,” says Petry. “It is a very good environment and we are very pleased to be active in this market after weathering the drawdowns.”