BGHL aims to deliver a net return (after all fees) of 400 to 600 bps above the “risk free rate” over the course of a business cycle, irrespective of the market performance.
The “risk free rate” is defined for performance purposes as capitalised EONIA. EONIA (Euro Overnight Index Average) is a weighted average of all overnight unsecured lending transactions in the interbank market within the EU and EFTA. Capitalised EONIA compounds returns by assuming a full reinvestment of interest.
BGHL achieves its investment objective by investing substantially all of its assets into the BG Master Fund, an opportunistic Europe focussed multi strategy hedge fund. The BG Master Fund pursues a variety of strategies which seek to exploit price arbitrage opportunities. Such opportunities are identified by research that is undertaken by an investment team possessing extensive multi-asset arbitrage and derivative expertise. Typically, investment ideas are catalyst driven with a focus on special situations and events.
Downside risk is mitigated by hedging the positions which are taken. The cost of hedging is factored into return projections and decision making around which positions to take. The Manager seeks to maintain a broadly market neutral position and to deliver returns that have a very low correlation with equity market indices. This profile means that BGHL can act as a valuable source of diversification in a portfolio.
Capital is dynamically allocated to the best ideas categorized into four main types of strategy.
- Volatility strategies
- Equity strategies
- Credit strategies
- Trading strategies
Convertible bond arbitrage
Convertible bond arbitrage involves purchasing a convertible bond, which is a security issued by a company that may be converted from debt to equity at various prices and points in time. There are many types of convertible bond, including mandatory convertible bonds which have predetermined and fixed conversion or redemption features. The hybrid nature of convertibles, combining both fixed income and equity characteristics, can be exploited through an arbitrage when the price of the convertible bond differs from the sum of the value of each of its components. Investors can purchase (or sell) the convertible bond at a discount (or premium) to its fair value and hedge one or more of its components. In general, arbitrage opportunities arise when the equity option embedded in the convertible bond is, for a variety of reasons, priced differently to those of equivalent pure options that may exist in the market. Hence, the equity component is often hedged by selling short the underlying common stock.
Volatility arbitrage is an investment approach that seeks to exploit volatility pricing discrepancies across related instruments. For example, it is quite common for arbitrage opportunities to exist between warrants issued by a company to its shareholders and the corresponding equivalent options available in the market. This is capitalised upon by buying the warrant and selling the corresponding equivalent option. This particular strategy is referred to as corporate warrant arbitrage. Generally, managers focusing on volatility arbitrage tend to maintain market neutral portfolios that can profit from the tendency of volatility to oscillate around a mean.
Gamma trading is an investment approach that seeks, through the trading of options and other derivative instruments, to take advantage of anticipated or unanticipated dislocations in financial markets, such as market crashes. To determine a gamma trading opportunity, the managers will compare the implied volatility embedded in an option with recent realised volatility in order to find an implied volatility discount. Fundamental analysis is used to try and determine the cause of the discount and potential catalysts for a significant change in volatility.
A merger arbitrage strategy is a special situations strategy centred on announced merger and takeover transactions. Trades will generally involve taking a long position in the target company’s stock and, in some instances depending on whether the transaction is a cash or share offer, a corresponding short position in the acquirer’s stock. Investors assess the probability of various scenarios and the time-frame for completion and seek to capture the ‘‘merger spread’’, being any value that will be realised upon successful completion of the merger.
A special situations strategy involves trading the securities of a company involved in a significant anticipated capital market event or ‘‘special situation’’. Examples include spin-offs, divestitures, re-organisations, liquidations, restructurings, and share buybacks. Through scenario analyses, investors assess the expected value of the securities upon completion of the transaction, the time likely to be involved before completion and the possibility that the transaction will not be completed at all. The uncertainty around these special situations creates investment opportunities for those who attempt to anticipate correctly their outcomes. Profits can be generated by purchasing the securities at a discount to the value at which they will be realised upon completion of the transaction.
Catalyst driven equity long/short strategies
An equity long/short strategy involves the construction of a portfolio of long and short equity positions, sometimes supplemented with derivatives. Investors attempt to add value primarily through stock selection and the determination of corporate events that can act as catalysts for changes in valuation. Stock selection is based primarily on fundamental analysis of companies. Stocks perceived to be undervalued are bought and stocks perceived to be overvalued are sold short. Managers will also sometimes seek to take activist roles on corporate governance and management in an attempt to trigger catalysts.
Value investment is an approach that involves buying shares in companies that are perceived to be significantly undervalued versus their intrinsic fair value. When applying this approach, investors are often unable to determine an immediate catalyst that may trigger the convergence of the stock price to its fair value. However, fundamental analysis suggesting a significant undervaluation present longer-term profit opportunities. Value investors often identify companies operating in mature sectors with strong cash flow generation or small cap companies.
Capital structure arbitrage
A capital structure arbitrage strategy is based on pricing inefficiencies across different components within the capital structure of the same company or a related company. Such pricing inefficiencies present relative value opportunities either within the debt structure or across equity and debt securities of the company. Investors applying this strategy seek to take advantage of valuation discrepancies within a company’s capital structure by taking a long position in the under-priced security and a short position in the overpriced security.
Credit long/short strategies
Credit long/short strategies involve identifying relative value opportunities between corporate securities of companies in similar industries or sectors. Opportunities are not driven by the consummation of an event and do not involve the securities of companies that are or likely to be in distress. These relative value opportunities are identified via extensive fundamental credit research whereby investors seek to capture either the divergence or convergence of credit spreads between corporate securities of companies in similar industries.
Restructuring or distressed securities strategies involve buying securities, often debt instruments, of companies that are (or are likely to be) in distress and therefore trade at a significant discount to their redemption or fair value. Investors will determine, on the basis of fundamental research, a scenario and risk analysis, a clear understanding of the legal framework surrounding the specific company’s distress and whether the securities’ price fails to reflect the company’s intrinsic value.
Restructurings will often be very lengthy processes and involve a proactive involvement in the financial and operational running of the company. They may also involve significant legal proceedings to enhance and crystallise the underlying value.
Equity quantitative trading
This strategy analyses short and long term stock momentum to capture various momentum biases. It combines these with systematic methods, which model trading intuition, to anticipate stock reversals or identify new portfolio candidates early on. The strategy harvests a supplementary risk premium as well as providing a useful risk management component.
Systematic trend following
This strategy aims to deliver absolute returns over a medium to long term horizon using an algorithmic trading system to identify trends in different markets. The strategy combines a long term investment view with geographical and technical diversification. It is implemented through multiple models with different time horizons across all asset classes and from a universe of 2000+ liquid single stock equities. This strategy is mainly used as a risk management tool within the BG Master Fund.
Index Rebalancing Arbitrage
This strategy focuses on temporary price inefficiencies created by significant forced flows. For instance, when a stock is added to a leading index, there is often higher than usual demand due to index trackers (passive investors) having to buy the share in their portfolios. This temporarily impacts the share price. By predicting this type of event, quantifying their impact and identifying patterns, the strategy aims to capture these inefficiencies and to take advantage of liquidity opportunities.
Trading using Artificial Intelligence
This strategy runs a pattern recognition program based on a diversified long - short portfolio of liquid futures on all asset classes. The trading horizon is short term but not high frequency and the patterns are identified using machine learning protocols applied on 1200 features derived from 250 financial environment variables. A portfolio is then built using mathematical aggregation theory.