By Jim Robinson
Last year was one of the most brutal in history, according to Ralph Gasser, fixed income product specialist at Julius Baer.
It should come as no surprise, then, that Julius Baer's €2.4bn (£2.2bn) Absolute Return Bond fund should have suffered.
Although the fund has largely succeeded in beating three-month Euribor by 2-3 per cent a year since it was launched in April 2004, it missed that target last year.
"Last year was tough for relative-value trades because there was such a big dislocation in the pricing of cash securities relative to derivatives, specifically post-Lehmans default," Mr Gasser says.
"It's normalising somewhat now, but in 2008, with liquidity drying up, cash bonds - which are at least two-thirds of the portfolio at any given time - significantly underperformed synthetic or derivative products, through which we are allowed to run shorts.
"On our long/short allocations, the shorts were more liquid synthetics, while the longs were on the cash side - the longs underperformed the shorts."
Consequently, the fund fell by approximately 2 per cent. And while that would have been a top-quartile performance against long-only peers, Mr Gasser concedes the return will be cold comfort for some investors.
Another factor, he says, has been the "generally negative tone" toward absolute-return funds. In 2008, investors began to "question the very rationale" behind the strategy, pulling money out - over the period, the fund's assets more than halved to €2.3bn.
Nonetheless, Mr Gasser remains optimistic for the year to come. "We are still on track to move back toward the defined-return target", he says. "It will take a bit of time, but we are confident we will get there."
The Absolute Return Bond fund, a Luxembourg-domiciled Sicav, employs similar techniques to Julius Baer's fixed income hedge funds, with the exception that the fund, being a Ucits III vehicle, cannot short cash securities or take on leverage.
The fund is managed by fixed income boutique Augustus Asset Managers, with all 16 portfolio managers contributing ideas to the portfolio.
"That approach is very much reflected in the fact that, since launch, we have consistently made money across cycles in all our sub-strategies, including interest rates, currencies, credit and equity-linked," Mr Gasser says.
That, combined with the managers' ability to be "very alert to sharp swings in market sentiment", should stand the fund in good stead.
"There will probably be more short-term moves in portfolio characteristics because the ability to react quickly to short-term changes in markets is what is going to dictate success to a large extent this year. Market technicals are likely to move very fast in 2009."
That trend, where markets are driven mainly not by fundamentals but by technicals or sentiment - such as the repatriation of money back into US dollars - is likely to prevail in 2009, Mr Gasser adds.
"A lot of these themes - probably in the other direction - will play out again, so being able to react quickly to short-term changes in market conditions will be extremely important. It's going to be a relatively volatile year, but then, that typically plays into our hands."