Opus Fixed Income: Schroders NewFinance Capital (SNFC)

Shortlist: Best performing specialist fund of hedge funds over three years

The Opus Fixed Income Fund was set up in 2003 as an alternative for investors who wanted a fixed income exposure. The fund of hedge funds (FoHF) structure allows for diversification so that when yields go up performance does not necessarily suffer, as would be the case with a series of direct investments.

The fund targets Libor plus 3% to 7% over the cycle with low volatility. This is working well in the current low-yield environment, according to the management company, Schroders NewFinance Capital (SNFC).

However, the threat of rising interest rates could change this. To hedge this possibility the fund has a bucket of funds spread over credit and government debt, which should protect performance no matter what the interest environment in future.

Within the FoHF about two-thirds of the underlying managers are invested in global rates and foreign exchange with the remaining third invested in global credit strategies. Having this range acts as a diversifier so that performance is maintained in a risk on/risk off environment.

Like other funds, Opus Fixed Income found September 2011 a hard month, but the fund fell by only 13 basis points (bp) in sterling terms. This was mostly because of the solid credit positions taken.

The FoHF’s managers are defensive in this respect, and seek to maintain a broad appeal to insurance companies looking to diversify or private banks looking for a long-term fixed income allocation. The FoHF has proved popular with the wealth management community.

Allocation is top down and the FoHF looks to see what the environment is and then where the opportunities lie. The managers are conscious that the credit and interest rate environment in future is likely to be difficult, and are accordingly looking to hedge risk.

The FoHF offers managed accounts. Following the 2008 crisis, credit as a FoHF strategy was difficult to find. SNFC decided to hedge any credit risk by investing through funds that were in managed account format. This means no co-investor risk, no risk of managers taking too much leverage, and full transparency. In some cases the FoHF manager has had tangible input into investment decisions.

For example, in event-driven credit (21.4% of the overall portfolio), the fund with the largest portfolio holding (10.2%) is in a managed account format investing in emerging market credit. In structured credit (10% of the overall portfolio), the biggest holding, worth 8.5%, is also a managed account. Using managed accounts allows the FoHF more control as well as liquidity.

Another key advantage of using a managed account structure for riskier strategies is that the FoHF invests only in those managers with liquid strategies. The same manager, accounting for 13% of the portfolio, runs four of the managed accounts. The FoHF expects to add more managed accounts to the portfolio in future.

Fund facts
Name of fund: Opus Fixed Income
Management company: Schroders NewFinance Capital (SNFC)
Contact details: www.newfinancecapital.com
Assets under management: $230 million (SNFC, $4.5 billion)
Launched: March 2003
Net cumulative performance since inception: 56.6%
Annualised return: 5.36%
Annualised volatility: 4.17%
Sharpe ratio: 0.70
Strategies covered: fixed income relative value, fixed income relative value/directional, systematic trading, emerging markets debt and foreign exchange, credit trading, event driven credit special situations, structured credit, asset backed lending
Number of underlying managers: 25
Administrator: Credit Suisse Administration Services (Ireland)
Custodian: Credit Suisse International, Dublin Branch
Auditor: PricewaterhouseCoopers
Legal counsel: Dechert and Maples and Calder
Minimum investment $500,000 (class A)
Management fee: 1%
Performance fee: 10% over a Libor hurdle and high water mark
Redemption terms: quarterly with 60 days' prior notice