By Philip Haddon | 10:44:01 | 09 December 2008
Having returned 21% in the past year while markets have plummeted, SEB’s Hans-Olov Bornemann is now long on sovereign debt with his asset allocation fund, while he has slashed his equity underweight.
Bornemann runs the SEB Asset Selection fund, which he describes as a ‘hedge fund light’ aimed at aimed at institutional investors as well as retail clients. It is currently available in euro and Swedish krona share classes, but will launch sterling and US dollar share classes in January 2009.
It is the Nordic region’s largest Ucits III absolute return strategy and SEB’s fastest growing fund ever, with assets currently at €1.4 billion. Since its inception, it has produced some outstanding performance. In the past 25 months, in Swedish Krona terms, the fund has returned 39.1% compared to a 25.7% fall in the MSCI World index and a rise in the 1 month STIBOR of 8.9%.
Bornemann and his team invented the fund while on a 7 hour train journey to a ski resort. Bornemann says that to try and kill time they decided to try to come up with an idea for the ‘ultimate fund.’
‘What we came up with was a hybrid between a hedge fund and a long only fund,’ he says. The SEB team tried to eradicate some of the weaknesses of hedge funds by going for lower fees, daily liquidity, daily trading and a strict legal framework. The basis for the fund is that Bornemann believes that asset allocation is the most important factor for successful investing.
‘It doesn’t matter if you choose Deutsche Telekom or Vodafone- if the market goes down, both will go down. 90% of performance is down to asset allocation decisions, both strategic and tactical,’ he says. ‘What is most important is to decide how much to have in bonds, equities, commodities and currencies and how much long and how much short.’
The SEB Asset Selection fund targets a 5% return above the risk-free rate after fees. Such is Bornemann’s conviction about the product, he has invested €200,000 of his own money in it.
The fund uses a systematic quant model, which rebalances the portfolio on a daily basis. This results in an exceptionally high level of turnover, up to 20% a day. As a result, Bornemann likes to only ever be in liquid instruments.
‘We studied the best and worst hedge funds in the world. The worst were the ones taking concentrated bets, with too much leverage and which were too greedy. The biggest mistake an investor can make is to invest in illiquid assets. There can be no risk management if you are in illiquid assets. We’re not gonna make that mistake, we only invest in the most liquid instruments.’
In the past six months the fund has returned 19.8% in krona terms while the MSCI World has fallen 20% and the risk-free STIBOR 1 month index has risen just 2.4%. This suggests Bornemann’s system, which takes just a one to three month view, has been getting its allocation right. With this in mind, it may be significant that his system currently suggests the bottom of the market is close.
‘We are nearing the end of bear market, as we see it,’ Bornemann says. ‘The way to tell, is when you have bad news coming out and market doesn’t fall dramatically further. This is a sign of strength or troughing.’
He says he is ‘still slightly short equities, but not as short as before.’ He has long positions in sovereign bonds from the UK, US, Germany and Japan- taking his fund’s net bond exposure to 150%. He is not taking on any credit risk and also says that if he was ‘short volatility’ at the moment he would go bankrupt.
The SEB Asset Selection fund is registered for sale in Sweden, the UK, Germany and Luxembourg.