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AAA-rated star: why it’s crucial not to constantly hedge

AAA-rated star: why it’s crucial not to constantly hedge

The high cost of constantly hedging means bond managers adopting alternative strategies would be better served by being more active and tactical, according to Danske Bank’s Teemu Liikanen.

Speaking to Citywire Selector, Liikanen, who is among the top performers in the Alt Ucits - Bond Strategies sector, said it pays to be more offensively minded at present.

‘We are heavily positioned in high-risk investments (41.3%) and investment grade credit (50.5%). It’s partly because it has been difficult to find any alternatives.

'I would be more than happy to take the risk level down and we have done that, but it’s difficult to stay defensive for too long.'

Liikanen, who runs the Danske Invest Neutral fund, said low-risk investments have to pay to invest in low-risk instruments, making it painful for fund managers if the position goes wrong, as there are no corrections.

‘This is why it is crucial to not constantly hedge. We are managing this fund from Helsinki, therefore there is a local tilt and flavour as we hold around 38% of Finnish corporates in the fund, and many investors see that there is more liquidity on those bonds.

‘At the same time, there is maybe some value every now and then, because there are fewer investors involved. This means we can understand the bonds better than some international players and it gives us some pick up on the basic investments.’

For this reason, Liikanen said it’s key to really know and understand the market, because many of these instruments are so illiquid in some cases.

‘You really need to know when to sell them, just so you’re not stuck with them,’ he said.

High-risk credit

With a clear preference for high-risk credit, Liikanen said one of the most positive contributors to the fund has been these assets.

‘Especially hybrid bonds and bank Tier Ones. We have also been able to take the carry and draw down for basic credit bonds, while investing internationally. One of the good calls we did make this year was that we turned bearish early summer.

‘That was the right call, because we hedged all of our dollar bonds, and they were possibly even a little bit over hedged. It’s been difficult this year not to hedge too much.

‘That’s been a challenge for us, as the yields have not risen and the prices of credit bonds have been extremely positive – it’s been key not to take profit too fast,’ he added.

Over the three years to the end of October 2017, Liikanen returned 8.07% in euro terms in the Alternative Ucits bond strategies category. This compares with a 2.60% rise by the average manager over the same time period.

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