Intended for professional clients only
productSEPTEMBer flash 2009 Natixis Absolute Swap Arbitrage A year of absolute, liquid and genuinely decorrelated performance
Natixis Absolute Swap Arbitrage began operating just before the bankruptcy of Lehman Brothers (15 September 2008). One year on, it is delivering performances in line with its objectives, in an exceptional historical context. As the markets gradually return to normal, the liquidity of swaps(1) is set to rise further, thereby increasing the arbitrage opportunities for this liquid fund offering absolute and genuinely decorrelated performance.
Why launch this fund last year? The investment teams at Natixis Asset Management anticipated that liquidity would become a major issue for our clients in an already depressed market environment. They therefore decided to launch this new single-strategy absolute performance fund. Its distinctive feature is that it provides our clients’ portfolios with a source of performance that differs from fixed-income, credit and equities while offering a liquid and original strategy. Natixis Absolute Swap Arbitrage is decorrelated from the major classes of risky assets and thus provides genuine diversification. The investment philosophy of Natixis Absolute Swap Arbitrage flows from the simple observation that fixed-income markets are by their nature inefficient. The multiplicity of parties involved, each with divergent objectives and constraints, gives rise to differing expectations with regard to trends in yield curves. These differences lead to arbitrage possibilities within a single curve or between different yield curves, particularly between the money market (three months to two years) and the bond market (two to 30 years), two markets that are well arbitraged but highly segmented relative to each other. The investment team has developed innovative expertise in interest rate swaps and particularly the analysis of spot spreads(2) relative to forward spreads(3). This expertise is entirely unique. No competing fund distributed in France currently offers such an approach. Natixis Absolute Swap Arbitrage (I share) is aimed at investors seeking an annual performance in excess of Eonia +2% over a minimum recommended investment period of two years, with a target annualized volatility of 3% (weekly target VaR(4) of 0.70% with a probability of 95%). The investment team implements duration-neutral and exchange-risk-free arbitrage strategies on 10 yield curves of OECD countries (Eurozone, UK, Sweden, Norway, Switzerland, United States, Canada, Japan, Australia and New Zealand). The arbitrage positions are taken by means of interest rate swaps, which are standard and liquid off-balance-sheet derivative instruments. The fund’s assets, which exceed €50 million, are invested essentially in money-market instruments comprising only negotiable debt securities with A1/P1/F1(5) ratings and maturities of less than three months. The main risks are consequently the risk of capital loss, the risk associated with arbitrage strategies (investment team’s ability to anticipate future relative variations in different international interest rate swap markets) and discretionary management risk.
(1) Swaps: exchanges of fixed interest rates for variable interest rates. (2) Spread spot: swap rate differentials observed today. (3) Spread forward: future swap rate differentials anticipated by the market. (4) Value at Risk: maximum loss over one week with a probability of 95%. (5) Standard & Poor’s, Moody’s and Fitch ratings.
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One year on, the objectives have been met With a net performance of 3.96% (compared to 1.64% in the case of Eonia) from its inception up to 31 August 2009, NASA has exceeded its performance objective and shows an annualized weekly volatility of 1.45% and behavior that is genuinely decorrelated from the fixed-income and equity markets:
Correlations as at 31/08/09*
Eonia
Natixis Absolute Swap Arbitrage
- 0.07
Euro MTS 1-3 years
CAC 40
- 0.10
0.00
* calculated on a daily basis since the inception of the fund
The fund currently has a sensitivity of 0.10 and a global off-balance-sheet VaR of 0.22% in a context of a return to risktaking. That represents a good opportunity for investors to enter the market or add to existing investments. Seven new arbitrages have been effected since the end of August 2009, in particular one arbitrage between spot and forward spread of US vs Australian rates and one between spot and forward spreadof Norwegian vs Swedish swap rates by means of four- and three-year forwards respectively. Finally, it should be emphasized that NASA has maintained its liquidity over the period and has not been negatively impacted by the bankruptcy of Lehman Brothers, as the Risk Department rightly suspended relations with that counterparty three months earlier.
What lies behind the success? A discretionary approach based on powerful quantitative tools enabling in particular: n The daily proposal of several thousand possible arbitrages to increase the number of opportunities: transparent strategies
a large universe of possibilities
10 SWAPS curves
a large number of potential arbitrages
forward expiries
l Autralia l Canada l Switzerland l Euro zone l Japan l New Zealand l Great Britain l Sweden
x
All possible spot spread combinations are considered for maturities ranging from 3 months to
x
The process reviews all forward curves from 3 months to 5 years
=
Strategies on a large number of spread combinations
30 years
l United States
n Control of the risk in the portfolio in respect of each strategy
For each of the 19 arbitrages currently in the portfolio, two alert thresholds are set: Maximum loss: a “stop loss” order is preset for each transaction. When the level of loss is exceeded, the transaction is closed. That makes it possible to cut any losses. Dynamic profit-taking: a “take profit” order is preset for each transaction. In addition, to further refine our “take profit” system, we have implemented a “trailing stop” system (a stop order which follows the P&L trend and locks in the profit), allowing the gains to run for as long as the P&L trend remains upward. The aim is to capture the bulk of the rise without reducing the hoped-for gain:
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Dynamic take profit Gain on the strategy Final profit-taking when the P&L trend runs out of steam and touches the trailing stop
150 Additional gain due to trailing stop 70 Initial profit-taking
Activation of a trailing stop once the initial take profit has passed
Trend over time
Source: Natixis Asset Management
Natixis Asset Management Expertise The Quantitative and Arbitrage management team n Assets under management (31/08/2009): 675 Me
n Major portfolios under management: 4 open-ended funds
The Quant & Arbitrage management team head is Nathalie Pistre, PhD. The team comprises two portfolio managers, Dieudonné Djimi et M'hamed Fenniri, helped by the SAMS team (Structuration, Analysis, Modelisation and Solutions), with an average experience of 10 years of which 8 with Natixis Asset Management. Dieudonné DJIMI Quantitative and Arbitrage Portfolio Manager Dieudonné Djimi joined Natixis Asset Management in 1999 as a Portfolio Manager specialised on ABS. He began his career within our Group in 1997 when he joined CDC Investment Management (New York) as a Junior Portfolio Manager on Emerging Markets. In January 2006 he joined the Fixed Income management team as a portfolio manager specialising in the interest rate swap market. He is now part of the Quantitative and Arbitrage portfolio management team within Natixis Asset Management. Dieudonné Djimi holds a Postgraduate degree in Economics & Econometrics and a diploma of Advanced Studies in Finance. Dieudonné has an experience of 12 years and has been working for our company for 10 years. M’hamed FENNIRI Quantitative and Arbitrage Portfolio Manager M’hamed Fenniri joined Natixis Asset Management in 2001 as an intern in the Euro Long-Term Fixed Income Management department. He provided portfolio managers with performance analysis on their funds and assisted in the investment and reporting tasks. In 2002, he moved to the Insurance Management and CDO department as structured credit and CDO Analyst. Then he joined the SAMS team of Natixis Asset Management. He is now part of the Quantitative and Arbitrage portfolio management team within Natixis Asset Management. M’hamed Fenniri holds a degree in Corporate Finance from the Leonard de Vinci business school in Paris and holds a Master’s degree in Trading and International Financial Markets from the ESLSCA business school. M’hamed has an experience of 8 years and has been working for our company for 7 years. The Quant & Arbitrage team benefits from the expertise of the whole fixed income department i.e. 35 PMs, a dedicated strategist and 7 quant analysts from the SAMS team. SAMS include a team of quantitative engineers dedicated to the fixed income department. It participates to processes’ elaboration thanks to quantitative methods and technical analysis. It supports the managers by improving their processes and their management with innovation’s research. Written on 23/09/09
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Natixis Asset Management : a fixed-income expert Golden Trophy - Best range of international bonds funds- Trophées des meilleurs SICAV & Fonds - Le Revenu 2009 May 2009 Natixis Asset Management awarded for the performance of its bond range over 3 years in the category “International bonds funds”, “network banks"(1øøø)
Best Bond Group - Lipper Fund Awards 2009 (France) March 2009 Lipper gives Natixis Asset Management top ranking in the generalist category for the performance of its range of funds over 3 years(2)
1st prize Large Bond Group - La Tribune - Morningstar “Victoires des SICAV” Awards 2009 March 2009 France’s leading business and financial newspaper, La Tribune, gives Natixis Asset Management top ranking for the performance of its range of funds in the large bond group category over 5 years(3) (1) Category "Network banks" with European funds registered for sale in France and rated by EuroPerformance for at least three years as of 03/31/2009 (Source: Le Revenu). (2) Companies with funds registered for sale in France and rated by Lipper for at least three years as of 12/31/2008 (Source: Lipper Thomson Reuters). (3) Companies with more than 15 bond funds registered for sale in France and rated by Morningstar for at least five years as of 06/30/2008 (Source: Morningstar).
For further information
absolute return this document is intended for professional clients only (as defined by the mifid)
Natixis Absolute Swap Arbitrage
n Find the Fund Product Profile under “Our Products” on our website at www.am.natixis.com
Absolute performance through arbitrage strategies on interest rate swaps
Absolute performance through non-directional strategies over an investment period of 2 years, Natixis Absolute swap Arbitrage aims to attain an annual performance higher than eonia + 2%, after operating and management fees (I share), while remaining within predefined risk parameters (target volatility of 3%). The investment team implements three types of swap curve arbitrage strategies, all duration neutral with no currency risk. These arbitrage positions are reached through interest rate swaps, off balance sheet derivative instruments, which are standard and liquid. The fund’s cash is mostly invested in debt securities and money market instruments.
Benefit from opportunities on swap curves from selected countries Natixis Absolute swap Arbitrage’s investment philosophy is based on a simple observation: fixed income markets are inefficient by nature. The diversity of players, each with diverging objectives and constraints, creates different expectations with regards to the evolution of swap curves. These differences result in arbitrage opportunities within or between yield curves. The fund benefits from these opportunities through duration neutral arbitrage strategies on 10 swap curves from selected oeCD countries*. The investment team has developed an expertise on interest rate swaps, specifically on spot rate spreads (spread between 2 spot rates) and forward rate spreads (spread between 2 future rates anticipated by the market).
Spot swap yield curve
1 year forward swap yield curve
Yield
5-10 spot yield spread
Key poINTs n Innovative, complementary, and duration neutral arbitrage strategies with no currency risk n Interest rate swaps: standard and liquid instruments n A discretionary investment process based on quantitative tools facilitating the detection of a very large number of arbitrage opportunities
overvIew Target return Annual performance net of operating and management fees above eonia capitalized + 2% (I share)
Yield 5-10 forward yield spread
Yield spread between a 5 year spot swap and a 10 year spot swap
4,0%
2,0%
Yield spread between a 5 year forward swap and a 10 year forward swap
4,0%
2,0% Maturity (Years) 5
10
15
Maturity (Years)
20
5
10
15
20
Source : Natixis Asset Management, graphique à titre d’illustration
Diversified sources of performance The fund studies a wide universe in order to identify opportunities for alpha creation. Natixis Asset Management has developed in-house quantitative tools allowing the detection of investment opportunities on a very large number of rate spread combinations (10 swap curves, spreads ranging from very short to very long maturities, several forward expiries). After a quantitative screening, the investment team selects the best opportunities on a discretionary basis. The portfolio combines 3 types of strategies: short term anticipations on the convergence or the divergence between forward and spot rate spreads medium term trend following strategies, capitalizing on lags between spot and forward rate spreads long-term repulsion strategies, in situations where rate spreads reach their historical boundaries
Investment universe Interest rate swaps of selected oeCD countries*, and euro denominated debt securities and money market instruments Benchmark eonia capitalized Minimum recommended investment period 2 years Risk indicator Target annual volatility of 3%
* Australia, Canada, Switzerland, Euro zone, Japan, New-Zealand, United-Kingdom, Sweden, Norway, United States
Intended for professional clients only
Disclaimer
This document is intended for professional clients. It may not be used for any purpose other than that for which it was intended and may not be reproduced, disseminated or disclosed to third parties, whether in part on in whole without prior authorization in writing from Natixis Asset Management. No information contained in this document may be interpreted as being contractual in any way. This document is produced purely for information purposes. It is a presentation created and prepared by Natixis Asset Management based on sources considered to be reliable. Natixis Asset Management reserves the right to change the information in this document at any time without notice, and in particular anything relating to the description of the investment process, which under no circumstances constitutes a commitment from Natixis Asset Management. Natixis Asset Management will not be held liable for any decision taken or not taken on the basis of the information in this document, nor for any use that a third party might make of the information. The Fund is authorized for sale in France and possibly in other countries where the sale is not contrary to local legislation. Prior to any investment, investors must check that they are legally authorized to invest in a Fund. The risks and fees connected to investment in a Fund are described in the relevant prospectus. The prospectus and periodic documents are available from Natixis Asset Management upon request. The prospectus must be given to the investor prior to the subscription. Under Natixis Asset Management’s social responsibility policy, and in accordance with the treaties signed by the French government, the funds directly managed by Natixis Asset Management do not invest in any company that manufactures sells or stocks anti-personnel mines and cluster bombs. Find the Fund Product Profile under “Our Products” section on our website at www.am.natixis.com
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