BlueBay Asset Management
, the $57.8 billion London-based credit and alternatives specialist, which was acquired by RBC Global Asset Management
four years ago, has been rolling out mutual fund versions of its hedge funds and plans to continue to do so.
Its latest move is a plan to offer a Total Return Multi-Credit Fund
, a mutual fund that will invest across the credit spectrum in global high yield, global convertible bonds, emerging market debt, loans and other fixed-income securities, later this year. Jon Schlafman
, BlueBay's co-head of alternatives for the Americas, said the mutual fund version of the strategy would invest in higher quality, more investment grade credit than the hedge funds to accommodate the liquidity, valuation and risk controls of a mutual fund.
The firm also intends to register a Delaware-domiciled LP version of its BlueBay Credit Alpha Fund
, so U.S. retail investors can get access to it. The firm already launched a Luxembourg domiciled UCITS version of this fund last fall and plans to roll out the Delaware LP later this year.
BlueBay's original Credit Alpha hedge fund was launched in 2009 and is coming up on its five-year anniversary. It had 20 percent annualized returns per year in that time and a Sharpe Ratio north of 3 percent.
Schlafman admitted that returns in the more liquid strategies won't be as high, but they should still serve as a source of diversification and offer better bond returns than traditional fixed-income. Forecasts for bond returns going forward have been low given the rising interest rate environment, but Schlafman still expects the strategy to succeed.
" All the performance is driven by alpha, or spread expansion and compression. And what really determines the forward-looking prospects for performance is the dispersion of returns in the asset class. If you look at roughly the past ten years, the dispersion between top decile and bottom decile names has averaged about 30 percent. There is somewhat of a belief among investors that investment grade credit is kind of boring, but I don't think that's true. It's about the opportunity to pick the winners and avoid the losers."
The firm already began managing its RBC BlueBay Absolute Return Fund
over a year ago as a mutual fund and has been enjoying some positive performance and asset growth in it so far. The objective of the strategy is to go long and short liquid, relative value global credit, with a focus on investment grade and cross-over bonds, Schlafman explained. That fund has $475 million in U.S. assets and about $4 billion globally. It was launched in December, 2012, and returned 6.24 percent in the past year, ending March 20, according to Morningstar
The same investment teams that manage the hedge funds would be running the mutual fund and UCITS versions of the strategies, Schlafman said. "Much of what we've been doing has been a natural extension of the Cayman Island-domiciled hedge fund structures. From a very early point in the firm's history, the founders recognized the benefit in running slightly more constrained, liquid expressions of the same expertise," Schlafman explained. "Back then, that meant that they would evolve through things like UCITS and Luxembourg-domiciled funds. The next evolution is into the 40 Act space," he added. "We haven't had to recreate anything to do do the retail push." The firm plans to continue to roll out more liquid versions of its existing hedge funds.
RBC, for its part, has been beefing up its retail sales force
in the U.S., an effort that Matthew Appelstein
, who came over from Old Mutual Asset Management
in the fall of 2011, has been overseeing. He has been leading business development on the BlueBay strategies. Many financial advisors, RIAs and warehouses will often require a three-year track record in a specific fund before investing, but Appelstein said the firm's history in managing these strategies in hedge fund form, and being well-regarded by institutions and investment consultants, will often suffice.
The mutual fund versions of these funds will be much cheaper than BlueBay's hedge funds, but Schlafman said the firm is not concerned with diluting its fees. Instead, he thinks diversifying the firm's client base should be a positive move for RBC and BlueBay. "There are pretty obvious benefits in diversifying BlueBay's asset base in terms of investor type, geography and strategy," he said, adding that the partnership between the two firms should help them accomplish this goal. "BlueBay has historically been heavy on investment capabilities and low on distribution, while RBC always had an established footprint in distribution," Schlafman said.
The liquid versions of the credit funds also have a much larger investment capacity than the hedge funds. Appelstein and Schlafman said they could rake in as much as $8 to $10 billion, while the existing Credit Alpha fund manages about $200 million and could only grow to $700-$1 billion or so.
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