We use a micro, bottom-up approach to identify and exploit bond-specific arbitrage opportunities in G10 government bond markets. Anomalies caused by auctions, contract rolls, and deal flow from leveraged, real-money, and central bank accounts are exploited on both a spot and a forward basis, with the repo markets being an important source of opportunity.
The risks to which our strategy is exposed are largely idiosyncratic factors such as liquidity premia and repo squeezes. We take little in the way of yield curve risk, and if curve, swap spread, convexity, or event risk exposure emerges at the portfolio level, we will hedge this risk via the option markets or some other synthetic structure. The strategy is traded primarily from the long side of liquidity premia risk; this combined with our cash management methodology, positions us favourably in the event of a flight-to-quality or financial crisis such as 1998.
There are three aspects to our competitive edge. First, a capacity constraint (circa $500m) gives us an edge over the majority of FI RV funds, which have aum significantly in excess of this and are forced to drift into more macro RV (rather than bond-specific RV) to achieve the required return on capital. Second, the idiosyncratic nature of the risks our strategy runs means that the Sanctum Fund has delivered returns with very little correlation to our peers and fixed income market indices. Furthermore, in an environment where many fixed income funds struggle to generate returns, our strategy stands to benefit from the current flat yield curve environment given the greater level of repo squeeze risk inherent in a higher short-rate environment. Finally, the long-liquidity premia bias means that an implicit option on event-risk is contained in the risk return profile of the Sanctum Fund.