Free content

Montreal-based fixed-income manager Addenda Capital has hired Graeme Thom from Toronto-basedRoyal Bank of Canada Dominion Securities, the brokerage arm of RBC, to develop and manage what the firm believes is an innovative multi-strategy bond vehicle that will invest between 20-30% in over-the-counter and exchange-traded bond and currency derivatives.

The View From Fifty Thousand Feet

Banco Guipuzcoano has purchased a three-year basket call option quantoed into euros on the Nikkei 225 and the Dow Jones EURO STOXX to structure a deposit account for Spanish retail investors. The options return the increase of each of the indices above their levels when the option was purchased. Alfredo Urrutia, head of derivatives in San Sebastian, said the deposit account puts half the investor's money into a three-year guaranteed deposit which gives 50% participation in each of the indices and offers a 100% capital guarantee. The other half of the investor's capital is put in a deposit account for one year, which pays 6% interest, 140 basis points more than one-year Euribor when the trade was put on earlier this month. After a year the investor gets this half back. The bank loses money on the cash placed into the deposit account but makes it back, along with a profit, from the margin on the guaranteed portion of the deposit account.

This chart, provided by Citibank/Salomon Smith Barney Inc., tracks bid-ask prices for par credit facilities that trade in the secondary market. It also tracks facility amounts, ratings, pricing and maturities.

BB&T Asset Management has nearly completed a major shift out of long Treasury bonds, slashing its duration by 10-15% in the first two weeks of this month. The manager believes recent yield rallies don't offer enough reward for staying long-duration. However, the firm won't completely abandon long bonds, says Keith Karlawish, who manages $190 million in taxable fixed income, because inflation remains relatively contained and there are continuing Treasury buybacks.

Merganser Capital Management in Boston, which has historically been overweight the broker-dealer sector, has cut its holdings from 15-20% of the portfolio to 5%, selling $350 million worth of the bonds, which it views as too rich. The Morgan Stanley Dean Witter two-year medium term notes issued two weeks ago came at 80 basis points off the curve, compared with comparable finance sector or bank paper that is generally priced about 100-120 basis points off, notes Bob LeLacheur, who manages over $2.8 billion for the firm. He adds that five years ago MSDW paper would have traded 50-100 basis points cheaper to any bank. As the equity market began penalizing broker dealers with poor P/E ratios, they got rid of risk, and following recent mergers become market favorites.

Pitcairn Trust is in the process of executing a swap out of ABS and agencies and into investment-grade corporates on a credit-by-credit basis, to capture additional spread. Patrick Kennedy, portfolio manager for $200 million in taxable fixed-income, expects another strong year out of ABS and agencies, but believes he can pick up extra spread by swapping into corporates whose spreads he expects to tighten.

Chart coming soon.

Lion Capital Group plans to launch a long/short equity hedge fund that will use over-the-counter derivatives. Markus Jordi-da Costa, managing partner in Zurich, said the fund will use calls, puts and basket options when it launches in February. It will typically use derivatives to short a stock or a basket of stocks. For example, if it thinks the share price of a sector of stocks is going to fall it will buy a put on a basket of stocks in that sector.

Altgate Capital is launching its first five hedge funds and plans to have another five out by the end of the first quarter. The firm opened its doors last year (DW, 10/30). The funds will employ strategies including long/short, merger arbitrage, event-driven, distressed debt and emerging market styles, said James Baker, chairman and a 25-year Goldman Sachs veteran. The funds, will be offered through third-party distribution channels including private banks and financial advisors and will carry standard fees of 1% management/20% performance. Total costs after factoring in those of the distributor will be around 2% management and 25% incentive, Baker said. Private client minimums will be $1 million for investment. The funds will be targeted toward small and medium-sized institutions and high-net-worth individuals. Altgate is presently looking for distribution channels. "We already have five hedge funds lined up for clients....Five will probably not be enough. By the end of the first quarter we will be offering at least 10," Baker said.

A bank in Tokyo bought some USD1 billion in three-month euro calls against the Japanese yen Wednesday, struck at JPY115, according to traders there. Three-month implied volatility on the pair jumped from 15.4%/15.9% Wednesday, to 16.2%/16.7% Friday, a trader said. On Friday the spot stood at JPY112.80, compared with around JPY109 Wednesday, he added. A number of smaller lottery-ticket style positions also traded through the week in U.S. dollar/Japanese yen options, with traders buying deep out-of-the-money dollar calls/yen puts. Traders bought one-year yen puts struck at JPY150, and three-month yen puts struck at JPY125. Such puts are attractive because while they are cheap, if they move into the money they bring potentially massive earnings, one trader said. The dollar traded at about JPY118 Friday.