This hedge fund has “the model” that foresaw last year's bond rout.
Obeying their computers, the five-person global “quant team” at SEB AB in Stockholm anticipated last year's bond sell-off and went to “short” from “long” in U.S. bonds even before Donald Trump's election to U.S. president accelerated a surge in yields.
“Our bond models reacted rather strongly to the election of Trump,” Hans-Olov Bornemann, head of the global quant team at SEB Investment Management, said in a phone interview Monday. “The re-positioning accelerated when the election results were published.”
Mr. Trump's victory stunned global debt markets and sent the Bloomberg Barclays Global Aggregate Total Return Index down 4% in November, the deepest slump since the gauge's inception in 1990. The yield on the 10-year benchmark U.S. Treasury has jumped about 100 basis points in the past six months, in part driven by speculation that Mr. Trump will unleash fiscal stimulus and cut taxes.
Mr. Bornemann, who manages €1.7 billion ($1.8 billion) in the SEB Asset Selection hedge funds, is still short bonds. SEB Asset Selection had an annualized return of 5.4% since the start in 2006.
The fund's purpose is to increase the risk-adjusted return of customers as the “ultimate complement” to a portfolio. The quant team, which includes a former nuclear engineer, relies completely on a model by adopting a trend-following strategy.
“We just call it 'the model,'” Mr. Bornemann said. “We don't want to deal with subjective things. Human beings -- including ourselves -- shouldn't be making qualitative and emotional investment decisions.”
The model calculates daily the probability for equities, bonds and currencies to rise or fall on average on a three-month horizon. The calculation for each asset is based on technical, fundamental and behavioral variables such as price, volume, valuation, growth and investor positions. The optimal portfolio is then composed and implemented.