Nomura Global Alpha LLC’s Capital Fund was up 1.02% (compared to a 0.7% gain for the S&P 500 and 0.4% for the Euro Stoxx Index) in March for a year-to-date gain of 3.13%, mostly because of the fund’s ability to capitalize on yield flattening in the US, down from 2.33% gains last month but a year-on-year improvement over March 2013’s 0.59% gains. Monetizing the yield curve flattening was also the main reason for the fund’s 30% monthly increase in risk, reaching 248bp value at risk (VaR).
NGA monetized 65% of curve flattening trade
“NGA benefitted from our term-premium trade (short 5s, long 30s) through the end of March. In fact, the trade was the single largest P&L contributor for the month of March,” says the NGA Capital Fund’s March report. “The move from March 19th through March 24th (4 trading days) was a 3-standard deviation move in our favor. As a result of this move, we have monetized 65% of the curve flattening trade.”
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With such a strong swing in one direction, NGA doesn’t think it’s likely that the yield curve will be able to flatten any more in the near term, so it will take advantage of the likely re-steepening. NGA also plans to short 2-year Treasury bonds to take advantage of the eventual Fed rate hike mentioned by Federal Reserve Chairperson Janet Yellen during a press conference last month. Among macro strategies, the Fed yield curve trade was responsible for 0.47% returns last month, followed by commercial mortgage back securities (0.35%), corporate bonds (0.30%), and non-dollar yield curve trade (0.10%).
Cross- and intra-sector strategies were more of a mixed bag last month, with gains from mortgage-backed securities and implied volatility being mostly offset by losses from swap spread trades.
NGA long CMBS, Euro credit, inflation premiums
While NGA will alter its yield curve strategy to take advantage of a probably re-steepening, it will keep three other major macro positions in place, staying long on US CMBS, European credit, and TIPS. “We think consumer-price inflation will be a huge degree of focus in 2014, as even a small change to the upside will have meaningful impact on the Fed’s speed of liquidity withdrawal and the response from risky assets,” says the March report.