WEBVTT - Credit Hedge Fund on How Low Spreads Can Go 0:00:02.080 --> 0:00:06.920 US trade policy changes and tariffs in particular have dominated 0:00:06.960 --> 0:00:10.600 the minds of investors and businesses. They're a major driver 0:00:10.720 --> 0:00:15.080 of uncertainty and the increasingly shaky economic outlook globally. 0:00:16.040 --> 0:00:20.760 Executives have flagged this uncertainty across earnings calls all year, 0:00:21.360 --> 0:00:25.200 and higher tariffs could hit corporate earnings for money. But 0:00:25.760 --> 0:00:28.640 just like the game seen in equity markets, the credit 0:00:28.680 --> 0:00:32.800 market doesn't appear to reflect this concern. Corporate credit spreads 0:00:32.840 --> 0:00:37.199 have remained tight, and easing central bank policy rates should 0:00:37.320 --> 0:00:39.519 technically continue to benefit the space. 0:00:42.320 --> 0:00:45.960 You're listening to Asia Centric from Bloomberg Intelligence. I'm John 0:00:46.040 --> 0:00:46.920 Lee in Hong Kong. 0:00:47.040 --> 0:00:48.640 I'm Katamitriva, also in Hong. 0:00:48.640 --> 0:00:51.479 Kong, and this week we're looking at credit markets in 0:00:51.560 --> 0:00:54.920 light of growing global risks and investor appetite for debt. 0:00:55.200 --> 0:00:58.240 This week we're chatting with Monica Shao. She is chief 0:00:58.280 --> 0:01:01.800 investment officer and founder of Treotic Capital. It's a hedge 0:01:01.800 --> 0:01:03.840 fund a base in Hong Kong, and she joins us 0:01:03.880 --> 0:01:04.600 here in our studio. 0:01:04.680 --> 0:01:06.760 Welcome, thank you, thanks for having me. 0:01:07.560 --> 0:01:10.160 So I wanted to start with something that's on a 0:01:10.200 --> 0:01:12.959 lot of investor minds, and you talked about this on 0:01:13.000 --> 0:01:16.800 Bloomberg TV last week as well. We've had incredibly tight 0:01:16.840 --> 0:01:20.200 spread since November of last year. And that's despite the 0:01:20.240 --> 0:01:24.399 sort of growing macro risks, growing risks to corporate So 0:01:25.319 --> 0:01:28.200 what is happening there and how much tighter can we go? 0:01:29.280 --> 0:01:32.760 Well, so, just to define for the audience, corporate spread 0:01:33.080 --> 0:01:36.080 is you take the corporate all in yield of a 0:01:36.200 --> 0:01:40.920 bond and you subtract the treasury rate, which is presumed 0:01:40.920 --> 0:01:43.080 to be the risk free rate, and so we take 0:01:43.120 --> 0:01:45.440 the US Treasury and that's the corporate spread. 0:01:45.640 --> 0:01:46.640 So the corporate. 0:01:46.319 --> 0:01:49.960 Spread has indeed come quite tight in Asia in particular. 0:01:50.240 --> 0:01:53.440 We have been able to explain it for all year 0:01:53.520 --> 0:01:56.400 and all last year by the tight supply that we 0:01:56.520 --> 0:02:00.160 have with the redemptions coming through last year and this 0:02:00.240 --> 0:02:03.440 year we're still you know, net supply is not really 0:02:03.480 --> 0:02:07.200 additive by that much relatively speaking. So that's the reason 0:02:07.240 --> 0:02:10.320 why corporate spreads here are tight. And then in the 0:02:10.400 --> 0:02:14.560 developed markets in US Europe that's also quite tight as well. 0:02:14.880 --> 0:02:18.080 But then then the US dollar denominated debt market, we 0:02:18.200 --> 0:02:22.320 see that the cash to debt ratio is relatively high 0:02:22.440 --> 0:02:25.840 because the corporates in general have been able to refund 0:02:25.960 --> 0:02:30.239 at relatively good rates, so you know, they have been 0:02:30.360 --> 0:02:33.680 in a pretty good spot in terms of their liquidity 0:02:34.160 --> 0:02:34.680 and monica. 0:02:34.760 --> 0:02:36.440 You mentioned that the corporates have got a lot of 0:02:36.480 --> 0:02:39.880 cash on their balance sheets. But are you surprised by 0:02:40.000 --> 0:02:44.760 the actions in the credit markets considering you know, the tariffs, 0:02:44.800 --> 0:02:46.839 the economic consurgency that we've had this year? 0:02:47.720 --> 0:02:50.080 For sure, I mean, I think that all of us 0:02:50.240 --> 0:02:53.960 would have hoped for more volativity and the credits spread, 0:02:54.160 --> 0:02:57.160 especially for hedge funds like ours. But that said, it's 0:02:57.200 --> 0:03:00.800 also been a really goldie locks environment for carry trade 0:03:01.120 --> 0:03:04.120 in terms of all in yield. You know, I would 0:03:04.160 --> 0:03:07.800 say that we all expect that in Q three there 0:03:07.840 --> 0:03:11.520 should be some more volatility around earning season. But you know, 0:03:11.680 --> 0:03:13.839 keep in mind that for as much as we keep 0:03:13.880 --> 0:03:16.640 talking about tariffs, you know, the other part of the 0:03:16.720 --> 0:03:22.040 equation is that the market is expecting to see deregulation ahead. 0:03:22.280 --> 0:03:25.200 We have tax cuts also in the bill, So it 0:03:25.280 --> 0:03:27.960 is a balance of all those factors. And you know, 0:03:28.040 --> 0:03:31.640 to the extent that we might have softening earnings ahead 0:03:31.720 --> 0:03:36.360 because of tariffs, to some extent, people have psychologically been 0:03:36.480 --> 0:03:40.640 prepped for that and the growth of embedded in equities 0:03:40.760 --> 0:03:43.920 valuation I think should be more hurt than credit credit. 0:03:44.160 --> 0:03:47.480 We really are just focused on debt servicing ability. 0:03:48.600 --> 0:03:52.080 And where are you focused? I mean, is it regionally? 0:03:52.400 --> 0:03:56.640 I know you've recently expanded globally, so not just in Asia, 0:03:56.760 --> 0:03:59.640 but are there certain regions you like or industries you 0:03:59.720 --> 0:04:00.000 like right now? 0:04:01.280 --> 0:04:03.600 Well, So just to back up a little bit, we 0:04:03.680 --> 0:04:08.600 launched in twenty fifteen as the Asia Credit Fund, which 0:04:08.680 --> 0:04:11.440 was focused on Pan Asia including Middle East as a 0:04:11.480 --> 0:04:15.120 non core region, and then we went through a route 0:04:15.120 --> 0:04:19.400 with China high yield debacle and post that period we 0:04:19.480 --> 0:04:22.880 came out of it globalizing the fund and pushing more 0:04:22.960 --> 0:04:26.080 towards DM markets as well. So today we are looking 0:04:26.120 --> 0:04:30.000 at global markets and you know, being a fund that 0:04:30.240 --> 0:04:34.240 is still more i would say em centric, with an 0:04:34.240 --> 0:04:38.040 add on of develop markets as well. We are looking 0:04:38.200 --> 0:04:41.279 at how do we focus our time in spots and 0:04:41.400 --> 0:04:45.360 basically we go after pockets where there's you know, sell 0:04:45.360 --> 0:04:48.760 off or ability for us to be contrarian. So in 0:04:48.839 --> 0:04:50.960 the last couple of years, for example, we were very 0:04:51.040 --> 0:04:54.960 happy to kind of go into European bank financials and 0:04:55.080 --> 0:04:56.360 they still are you know. 0:04:56.320 --> 0:04:57.400 Relatively good yield. 0:04:57.520 --> 0:05:00.520 But we had a real event play with SVB with 0:05:00.560 --> 0:05:04.880 the UPSCS stories and each time we would look at 0:05:04.920 --> 0:05:07.600 the bank tier one, tier two and see there was 0:05:07.640 --> 0:05:09.200 a lot of value, so we would pick up in 0:05:09.279 --> 0:05:13.039 areas like that. We still like some regions that are recovering, 0:05:13.040 --> 0:05:15.720 for example Sri Lanka. We were in those as an 0:05:15.720 --> 0:05:18.720 event trade with a turnaround and under the IMF they 0:05:18.720 --> 0:05:22.480 have really beaten the expectations in terms of growth of GDP. 0:05:22.640 --> 0:05:25.760 Of course, you know they also will potentially face headwinds 0:05:25.800 --> 0:05:28.520 from tariffs unless they come to an agreement really quickly, 0:05:29.160 --> 0:05:32.919 but those are still areas that have added value. We 0:05:33.040 --> 0:05:37.560 still like Mongolia on a relative value basis, and I 0:05:37.600 --> 0:05:40.880 think in terms of looking across at regions that are 0:05:40.920 --> 0:05:44.680 relatively tight, like India high Yield, there are particular names 0:05:44.800 --> 0:05:46.799 we like and we just really have to be going 0:05:46.839 --> 0:05:49.400 down into the grass to kind of like look at 0:05:49.400 --> 0:05:51.960 the micro stories. So to be honest, in credit land 0:05:52.040 --> 0:05:54.479 right now, there's so much to look at because the 0:05:54.560 --> 0:05:57.000 new issues that are coming as well are starting to 0:05:57.000 --> 0:06:01.520 pay more premium. So even if GOLDI the spreads are 0:06:01.560 --> 0:06:05.440 relatively tight to the extent that everybody's rushing in with supply, 0:06:05.600 --> 0:06:08.880 especially in July, we are able to kind of bargain 0:06:08.920 --> 0:06:10.719 for more new issue premium. 0:06:10.960 --> 0:06:14.640 Within Sri Lanka and Mongolia, are there certain industries or 0:06:14.680 --> 0:06:17.159 corporates you like without giving away your book obviously, but 0:06:17.600 --> 0:06:20.080 are there certain industries that you're looking at as well. 0:06:20.200 --> 0:06:23.120 Yeah, Sri Lanka is pretty simple because it's just sovereign. 0:06:23.320 --> 0:06:25.520 It's a sovereign play that you know, a lot of 0:06:25.600 --> 0:06:29.520 real money guys have jumped into as well. And Mongolia 0:06:29.640 --> 0:06:33.080 they have quasisofts, they have financials as well. But you know, 0:06:33.200 --> 0:06:36.880 I think overall Mongolia to the extent that people were 0:06:37.160 --> 0:06:41.000 concerned about commodities earlier in the year and the pricing there, 0:06:41.360 --> 0:06:43.039 you know, there was a chance to get in in 0:06:43.080 --> 0:06:45.040 some volatility and Monica. 0:06:45.120 --> 0:06:48.440 You mentioned Sri Lanka and Mongolia, now I should know 0:06:48.480 --> 0:06:50.839 these but apologies are they frontier markets. 0:06:50.960 --> 0:06:52.320 They are frontier markets. 0:06:52.440 --> 0:06:55.480 And actually I forgot to mention with Mongolia because there 0:06:55.520 --> 0:06:58.280 was a change in the prime minister, so there was 0:06:58.360 --> 0:07:01.159 some volatility around that as well. But you know, I 0:07:01.160 --> 0:07:04.400 think what we try to do is in our fund 0:07:04.640 --> 0:07:06.719 we would be looking at ourselves as sort of a 0:07:06.800 --> 0:07:11.320 multi strat credit fund, so we have event plays that 0:07:11.960 --> 0:07:14.760 you know, are really around turnaround stories, contrarian stories, and 0:07:14.800 --> 0:07:17.400 then we have relative value, which you know I was 0:07:17.440 --> 0:07:20.320 mentioning to you. So particularly in investment grade where it's tight, 0:07:20.600 --> 0:07:24.000 you still can find some relative value across regions that 0:07:24.040 --> 0:07:27.000 we will look at comparisons on. And then we have 0:07:27.360 --> 0:07:30.280 also within relative value within the same capital structure. We 0:07:30.360 --> 0:07:32.960 might look at for example, and financials Tier one versus 0:07:33.080 --> 0:07:35.640 Lty two or the senior bonds, and we look across 0:07:35.680 --> 0:07:38.800 each tranch to look at that relative value. So and 0:07:38.840 --> 0:07:42.040 then we have a base which is more like value investments, 0:07:42.200 --> 0:07:47.680 and we look at allocating opportunistically in the bonds that 0:07:48.000 --> 0:07:50.640 we might stay for a longer term for yield, but 0:07:50.720 --> 0:07:53.560 then we use the coupons to pay for some hedges 0:07:53.760 --> 0:07:58.000 like macro hedges and longer term meaning meaning well we've 0:07:58.120 --> 0:08:00.720 actually had bonds that we hold even to maturity in 0:08:00.760 --> 0:08:04.000 some cases and then maybe something like two to three. 0:08:03.920 --> 0:08:06.640 Years, okay, and short term short. 0:08:06.480 --> 0:08:11.800 Term can be a day or an hour, yeah these days. Well, 0:08:11.880 --> 0:08:14.200 so I mean that is the reason for us to 0:08:14.240 --> 0:08:16.240 be I think is that as a hedge fund, the 0:08:16.280 --> 0:08:19.880 idea is we can deploy all kinds of strategies and 0:08:20.000 --> 0:08:23.880 be faster to kind of think about some relative value 0:08:23.920 --> 0:08:26.480 on the curve and capture those. But you know, I 0:08:26.480 --> 0:08:30.559 wouldn't characterize ourselves as the fastest momentum type. We tend 0:08:30.560 --> 0:08:33.640 to kind of be watching to wait for a time 0:08:33.640 --> 0:08:35.800 where we can swoop in, and then we tend to 0:08:35.800 --> 0:08:38.560 be more fundamental than most guys out in Asia, where 0:08:38.640 --> 0:08:42.040 we do take a real view on the actual credit 0:08:42.080 --> 0:08:44.439 story rather than just momentum. 0:08:45.200 --> 0:08:48.520 Asia Centric is produced by Bloomberg Intelligence. We're more than 0:08:48.559 --> 0:08:52.400 five hundred experienced analysts and strategists work around the clock 0:08:52.480 --> 0:08:55.960 to bring you timely, world class research. Our coverage spans 0:08:56.000 --> 0:09:00.320 two hundred market industries, currencies, commodities, and industries, as well 0:09:00.320 --> 0:09:03.360 as over two thousand equities and credits. To learn more 0:09:03.360 --> 0:09:07.560 about Bloomberg Intelligence, visit BI go on the Bloomberg terminal. 0:09:08.120 --> 0:09:10.600 If you like what you're here, don't forget to subscribe 0:09:10.640 --> 0:09:14.600 and share. So, Monica, I just wanted to clarify. So 0:09:14.640 --> 0:09:17.680 you're a long short hedge fund, so you would hit 0:09:17.800 --> 0:09:19.520 yourself across the capital structure. 0:09:20.080 --> 0:09:23.160 So what we are when we say we're long shot 0:09:23.280 --> 0:09:26.640 is purely opportunistic. I can be all long and I 0:09:26.679 --> 0:09:28.880 can be all short, and we've had periods where we 0:09:28.960 --> 0:09:31.680 had three times notional short for every one million long 0:09:31.840 --> 0:09:34.560 that has happened as well. So the idea is just 0:09:34.640 --> 0:09:37.840 that we can do anything and be anything along the 0:09:37.840 --> 0:09:41.880 way depending on the markets. In terms of the short's, 0:09:42.040 --> 0:09:47.000 generally speaking, we keep some ratio of macro hedges, right, 0:09:47.160 --> 0:09:50.840 So in Asia, so I came from London before, where 0:09:51.559 --> 0:09:53.680 it was a different type of market when I traded 0:09:53.720 --> 0:09:56.040 more DM. So I used to trade war US and 0:09:56.440 --> 0:09:59.880 European markets before I came out to Asia, and in 0:10:00.080 --> 0:10:03.240 those markets with all that depth, we have a very 0:10:03.320 --> 0:10:06.840 grown up, sophisticated market of single name CDs that we 0:10:06.880 --> 0:10:10.320 don't here in Asia. So we don't do a lot 0:10:10.320 --> 0:10:12.480 of the plays that we used to do there in 0:10:12.559 --> 0:10:15.880 terms of event plays around orphaning, succession events around CDs, 0:10:15.920 --> 0:10:19.480 for example, Here it's very different because you don't really 0:10:20.000 --> 0:10:24.200 hedge out with single name CDs for the most part, right, 0:10:24.240 --> 0:10:26.800 because they're not so liquid, and so we tend to 0:10:26.880 --> 0:10:29.400 look at indices as macro hedges. 0:10:29.640 --> 0:10:32.680 Okay, but would you be country neutral or can you 0:10:32.720 --> 0:10:34.080 go We don't have to be You don't have to 0:10:34.080 --> 0:10:36.559 be okay, So you talked about your Sri Lanka and 0:10:36.640 --> 0:10:39.360 your Mongolia positions, but you don't have to hedge those 0:10:39.480 --> 0:10:40.959 risks in the same country. 0:10:41.120 --> 0:10:44.120 No, we don't. Actually we take a view on those. 0:10:44.559 --> 0:10:47.120 You know, I think when I look back at what 0:10:47.200 --> 0:10:50.160 we went through in China, for example, I don't think 0:10:50.240 --> 0:10:53.800 that any amount of China CDs really would have helped you. 0:10:54.120 --> 0:10:57.200 So sometimes you have to look at if you were 0:10:57.240 --> 0:10:59.959 to really want to hedge something like a high yield, 0:11:00.400 --> 0:11:02.560 you would probably have to just take it off go 0:11:02.600 --> 0:11:06.400 to cash. We see cash as a hedge or another bond. 0:11:06.520 --> 0:11:10.760 Are you referring to the property crisis in China where 0:11:10.920 --> 0:11:12.920 like that's been gone for a couple of years. 0:11:13.000 --> 0:11:15.960 Yes, So in that case, it's like sort of the 0:11:16.040 --> 0:11:18.560 lesson that you learned through coming out of Asia is 0:11:19.000 --> 0:11:21.280 you know, not only do you have an issue of 0:11:21.559 --> 0:11:25.800 illiquidity of trading, but also because you don't have single 0:11:25.880 --> 0:11:28.480 name CDs as much unless you do some bespoke, which 0:11:28.520 --> 0:11:31.200 would have costed you a lot, then you really should 0:11:31.360 --> 0:11:34.319 just think about cash. You would have to have drawn 0:11:34.360 --> 0:11:34.840 a line. 0:11:35.520 --> 0:11:40.800 Yeah, you're talking about hedging, and you hedge using cash, 0:11:40.840 --> 0:11:42.360 As you said, I mean, could you talk a bit 0:11:42.360 --> 0:11:44.079 more about how you hedge? 0:11:44.720 --> 0:11:46.680 So when I say go to cash, I mean you 0:11:46.720 --> 0:11:49.559 literally just have to sell out and so that is 0:11:49.600 --> 0:11:53.199 something that you almost have to actively think about because 0:11:53.480 --> 0:11:55.400 you know, a lot of funds feel sort of pressure 0:11:55.520 --> 0:11:57.400 to have to use the cash and everything. But sometimes 0:11:57.440 --> 0:11:59.679 there are times you need to just get out because 0:11:59.679 --> 0:12:02.480 if you were to put a bond against another bond, 0:12:02.520 --> 0:12:05.160 so you short a bond against another bond, it may 0:12:05.200 --> 0:12:07.800 be so usyncratic that they don't match up. You may 0:12:07.840 --> 0:12:10.360 have periods of time where they kind of are going 0:12:10.400 --> 0:12:14.320 to hedge in a crisis regionally, but you know you 0:12:14.360 --> 0:12:17.800 will have slipperridge. And then in terms of other sort 0:12:17.840 --> 0:12:21.760 of hedging, it's really about rates or beta. So if 0:12:21.800 --> 0:12:25.760 you hedge like a you know, investment grade against investment grade, 0:12:26.000 --> 0:12:29.440 say you do like Korean financials versus India financials, the 0:12:29.600 --> 0:12:32.199 assumption is that if like for like, you'll hedge out 0:12:32.200 --> 0:12:34.360 at least rates, and then you're left with some kind 0:12:34.400 --> 0:12:38.560 of regional bias. But the way I see it is 0:12:38.640 --> 0:12:42.120 that whatever you show as DVO one flat and paper 0:12:42.200 --> 0:12:45.400 in terms of your risks is not real. You actually 0:12:45.440 --> 0:12:47.920 really need to look at line by line and you're 0:12:47.960 --> 0:12:49.280 never totally neutral. 0:12:49.520 --> 0:12:52.040 Could you give an example of that, just how you 0:12:52.200 --> 0:12:55.520 actually practically hedge, like you know, there's funds where people 0:12:55.600 --> 0:12:57.360 use gold as a hedge, for example, it's like the 0:12:57.360 --> 0:12:59.640 classic one, But like, how do you actually hedge? 0:12:59.679 --> 0:13:01.920 Again, it really depends on what you were talking about. 0:13:01.920 --> 0:13:03.840 So in that case what I was talking about the financials, 0:13:03.880 --> 0:13:06.160 you literally just sell the bond. So you buy the 0:13:06.200 --> 0:13:09.960 bond that is, let's say a Korean financialism that example, 0:13:10.040 --> 0:13:13.840 and then you sell the Indian bond that you decide 0:13:13.840 --> 0:13:16.240 that you think it's relatively expensive, for example, and then 0:13:16.559 --> 0:13:18.839 you can just make it like for like in terms 0:13:18.880 --> 0:13:21.200 of five year, both are five year, or both our 0:13:21.280 --> 0:13:23.679 ten year, or you may take a view on the 0:13:23.720 --> 0:13:27.240 curve and you may deliberately want to short a ten 0:13:27.320 --> 0:13:28.959 year versus a five year because you have. 0:13:28.920 --> 0:13:29.480 A curve view. 0:13:29.800 --> 0:13:32.680 And credit is complex that way. It's not quite like 0:13:32.800 --> 0:13:36.959 equity because you do have the embedded optionality, say of 0:13:37.000 --> 0:13:40.280 a call or a put. You have rates, you have 0:13:40.440 --> 0:13:44.680 potentially FX cross effcts if you're a US denominated fund, 0:13:44.800 --> 0:13:47.600 and then trading Aussie dollar. So you can take a 0:13:47.720 --> 0:13:52.240 view that way by very simple instruments, but complex view underlying. 0:13:52.840 --> 0:13:56.560 You mentioned liquidity or the lack of liquidity at certain times, 0:13:56.559 --> 0:14:00.559 and I think you prefaced China bonds, Is that an 0:14:00.640 --> 0:14:02.320 issue in executing your. 0:14:02.200 --> 0:14:04.000 Strategy, Sure it is. 0:14:04.520 --> 0:14:07.720 Trading liquidity is always something that we care more about 0:14:07.720 --> 0:14:10.679 in credit markets, I would think than equity, although I mean, 0:14:10.760 --> 0:14:13.959 I'm told in equity and EM markets, trading liquidity is 0:14:13.960 --> 0:14:18.040 also an issue. But basically in credit markets, we all 0:14:18.120 --> 0:14:20.960 know that anything that is trading very liquid and meaning 0:14:20.960 --> 0:14:24.640 that bidask is very tight, can easily become illiquid. As 0:14:24.640 --> 0:14:27.400 we went through the global financial crisis, as I've gone 0:14:27.400 --> 0:14:30.360 through twenty eleven, the EM crisis, and as we've gone 0:14:30.360 --> 0:14:33.280 through China and you know, March twenty twenty, all of 0:14:33.280 --> 0:14:36.040 these right, all of these routes we've had, I've lived 0:14:36.080 --> 0:14:39.440 through where you suddenly have something that was super liquid 0:14:39.480 --> 0:14:42.560 become illiquid to the point of not only your bid 0:14:42.600 --> 0:14:45.480 ass going out as much as ten bond points, but 0:14:45.800 --> 0:14:48.920 also you simply just can't find people to show up 0:14:48.960 --> 0:14:51.320 to trade, so suddenly all the traders are in the 0:14:51.320 --> 0:14:55.680 toilet or whatever. And you know, I think, first you 0:14:55.760 --> 0:14:58.360 have to live with the marks, which means like if 0:14:58.400 --> 0:15:00.760 you are a ten point bid ask, we always mark 0:15:00.840 --> 0:15:03.560 to mid. Then you suffer by that, and that is 0:15:03.600 --> 0:15:06.080 not real. It's not a real loss for your clients, 0:15:06.320 --> 0:15:09.160 but you have to mark to that daily. And this 0:15:09.320 --> 0:15:11.960 is something that we all know, and this is the 0:15:12.000 --> 0:15:15.880 reason why for credit funds, it actually really works better 0:15:16.040 --> 0:15:18.440 when you have a lock up and you have time 0:15:18.600 --> 0:15:21.480 to actually take a view on credit because more or 0:15:21.560 --> 0:15:24.840 less that illiquidity will resolve at some point and you 0:15:25.000 --> 0:15:28.040 need to have a real conviction around what you're doing 0:15:28.280 --> 0:15:30.320 in order to get in and get out of that trade. 0:15:30.720 --> 0:15:34.360 But the illiquidity can work for you as well because 0:15:34.360 --> 0:15:36.920 sometimes you can pick up really great things on a 0:15:36.920 --> 0:15:39.280 bargain because nobody else wants it and you have a 0:15:39.320 --> 0:15:41.440 real view talked. 0:15:41.200 --> 0:15:44.760 About some of the longs, you know, opportunities in Sri 0:15:44.880 --> 0:15:48.000 Lanka for example, what are some areas of risk or 0:15:48.040 --> 0:15:51.360 places that you're potentially on the short side right now? 0:15:52.320 --> 0:15:55.360 So on the short side right now, right now, right now, 0:15:55.480 --> 0:15:58.880 we have a view that it's relatively goldilocks period. So 0:15:59.320 --> 0:16:02.840 I don't have particular single name shorts that I really 0:16:02.920 --> 0:16:04.840 want to put on. I would rather put it on 0:16:04.920 --> 0:16:09.520 which I have through credit indices where we have macro hedges. 0:16:09.960 --> 0:16:12.480 But the way I see it right now is that 0:16:12.680 --> 0:16:17.840 we're in a relatively okay period for yield carry which 0:16:17.920 --> 0:16:21.560 means I'm not really expecting a ton right now of 0:16:21.880 --> 0:16:25.240 you know, capital gain, but in terms of yield, we're 0:16:25.440 --> 0:16:28.160 able to pick up some pretty good bonds in the 0:16:28.200 --> 0:16:32.640 recent one month that is averaging between eight to eleven 0:16:32.680 --> 0:16:36.160 percent yield, which is pretty good for five years or under. 0:16:36.600 --> 0:16:39.800 And this is in part thanks to all in yield, 0:16:39.880 --> 0:16:43.160 because we have you know, various times where you had 0:16:43.200 --> 0:16:46.560 rates of volatility, and also because we did go out 0:16:46.640 --> 0:16:49.680 and take a view that oil would not be totally crashing, 0:16:49.720 --> 0:16:52.160 and so some of the commodity bonds that were a 0:16:52.200 --> 0:16:54.480 bit sold off too much, you know, we stepped in 0:16:54.480 --> 0:16:55.520 in some of those as well. 0:16:56.480 --> 0:16:59.240 That's after the Middle East Iran Israel. 0:16:59.160 --> 0:17:02.160 Situation where well, I mean that actually helped oil, but 0:17:02.360 --> 0:17:05.879 more earlier when oil was kind of on a downward trend, 0:17:06.040 --> 0:17:10.719 especially after OPEC supply increase and people were worried about 0:17:11.240 --> 0:17:15.320 tariffs causing economics slow down. Then eventually probably they'll come 0:17:15.359 --> 0:17:18.119 back again. But my personal view is that oil doesn't 0:17:18.119 --> 0:17:21.119 really go much below sort of the high fifties or 0:17:21.160 --> 0:17:24.000 stay there. So in that case we can pick up 0:17:24.480 --> 0:17:28.040 some bonds where their break even is quite low per barrel. 0:17:28.440 --> 0:17:30.199 So we'll look at things like that, and then we 0:17:30.280 --> 0:17:33.840 have some event plays on particular you know, corporate turnarounds 0:17:33.880 --> 0:17:37.280 that we can't name, but you know, usually those are 0:17:37.359 --> 0:17:39.879 ones where there's a lot of fear and we do 0:17:39.960 --> 0:17:43.239 some analysis on the base case of either they do 0:17:43.280 --> 0:17:46.800 a liability management exercise what what that be? Or recovery 0:17:46.840 --> 0:17:49.720 or so forth, and you take a view. But typically 0:17:50.040 --> 0:17:53.760 we will look at things that tend to be more 0:17:54.040 --> 0:17:57.560 sold off or you know, we take a view that 0:17:57.680 --> 0:18:01.119 some bonds that we've known and liked, you know, we 0:18:01.200 --> 0:18:03.640 will always, even if we trade around a portion, will 0:18:03.680 --> 0:18:06.880 always keep something like thirty percent and take the ball 0:18:07.119 --> 0:18:08.520 on the price movement. 0:18:09.640 --> 0:18:13.639 Are you seeing any issues regarding default rates across Asia? 0:18:14.200 --> 0:18:17.080 Not across Asia, just because we only have a handful 0:18:17.200 --> 0:18:20.080 left that are even surviving out of China high yield, 0:18:20.160 --> 0:18:24.879 So the areas that were more sensitive tended to be that. 0:18:25.000 --> 0:18:27.959 And we literally have just a handful of names. So 0:18:28.480 --> 0:18:32.240 when people talk about Asia high yield returns coming back, 0:18:32.440 --> 0:18:35.280 I mean it's a little bit misleading because you're coming 0:18:35.320 --> 0:18:37.439 from a very low base and very few names, so 0:18:37.480 --> 0:18:39.840 the data points you know, are a few, right. But 0:18:40.080 --> 0:18:44.000 that being said, I think the default rate on DM 0:18:44.040 --> 0:18:47.879 markets like US is ticking up, and you know, you 0:18:47.960 --> 0:18:51.639 do see some underlying weakness in sort of the consumer 0:18:51.800 --> 0:18:55.240 household balance sheet, So when that will come out to 0:18:55.320 --> 0:18:59.400 roost is another story. But in the meantime, we are 0:18:59.680 --> 0:19:03.200 really having to look at the technicals of bond flows. 0:19:03.359 --> 0:19:05.440 And you know, last week, you know, week on week 0:19:05.440 --> 0:19:09.320 you're still looking at twenty billion dollars of inflow into 0:19:09.359 --> 0:19:14.200 credit markets across DM and EM. So despite supply coming, 0:19:14.280 --> 0:19:17.439 it's being very easily absorbed. We're seeing all the books 0:19:17.480 --> 0:19:21.199 over subscribed. So even if we want to focus on 0:19:21.480 --> 0:19:24.760 the fundamentals, I think the technicals are very important right now. 0:19:25.440 --> 0:19:28.439 Monica, I love to talk about your performance. How have 0:19:28.480 --> 0:19:31.360 you fared this year? But it's been really chopping financial markets. 0:19:31.720 --> 0:19:35.600 So we've actually done okay in that we started the 0:19:35.760 --> 0:19:40.199 year fairly positive. We had a wobble in between with 0:19:40.320 --> 0:19:43.240 the Liberation Day month, and then we kind of came 0:19:43.280 --> 0:19:46.120 back and so sequentially the last three months we've been up. 0:19:46.400 --> 0:19:48.600 So you know, so far a year to date, we're 0:19:48.600 --> 0:19:53.080 in the single digits up and in terms of our 0:19:53.160 --> 0:19:57.360 target we still are targeting high single to double digits. 0:19:57.880 --> 0:20:03.800 Historically before so the China route, we actually were pretty 0:20:03.880 --> 0:20:09.240 much annualizing at mid teens net returns. And then after 0:20:09.560 --> 0:20:13.440 we went more global and after we tweaked the risk 0:20:13.480 --> 0:20:16.400 framework after what we learned from the China debacle, we 0:20:16.560 --> 0:20:20.600 target sort of quote nquote safer returns. So we are 0:20:20.720 --> 0:20:24.119 more targeting kind of eight to twelve percent, whereas in 0:20:24.160 --> 0:20:27.960 the past we would target fifteen plus percent, and we 0:20:28.080 --> 0:20:30.600 had years where we were up almost thirty percent, you know, 0:20:30.640 --> 0:20:35.280 So you know, you can imagine that I tried to 0:20:35.960 --> 0:20:40.160 mirror the risk framework and my return target to what 0:20:40.320 --> 0:20:43.720 I would expect in terms of the environment in the 0:20:43.760 --> 0:20:47.199 market that we're in. And I think given that we 0:20:47.280 --> 0:20:50.840 have gone more global and also looking at DM, this 0:20:50.880 --> 0:20:53.760 is the reason why we've dialed back our risk framework 0:20:53.840 --> 0:20:56.600 and so we forced now a lot more diversification. I mean, 0:20:56.600 --> 0:21:00.439 to your point earlier about do you actually neutralize country 0:21:00.520 --> 0:21:04.720 risk personally, I've found that having traded through many prop 0:21:04.800 --> 0:21:08.439 desks in London in large hedge funds and then starting 0:21:08.480 --> 0:21:11.000 my own, I can tell you that if you are 0:21:11.160 --> 0:21:15.120 intellectually honest, you can't really do that on paper properly 0:21:15.359 --> 0:21:18.480 to neutralize P and L. Neutralizing risk on paper is 0:21:18.480 --> 0:21:20.879 one thing, but you know what you end up doing 0:21:20.960 --> 0:21:23.840 is people are being the system by putting on a 0:21:23.840 --> 0:21:27.000 bunch of like CDs that may not go anywhere, because ultimately, 0:21:27.040 --> 0:21:30.439 what we've learned with all these instruments is that whatever 0:21:30.520 --> 0:21:35.159 you think is theoretically the risk, really the technicals of 0:21:35.200 --> 0:21:38.680 that particular instrument is what matters. For example, in the 0:21:38.680 --> 0:21:42.240 global financial crisis, we learned the huge difference between funded 0:21:42.240 --> 0:21:45.440 and unfunded products. The people who thought they had neutral 0:21:45.480 --> 0:21:49.720 basis trades, for example, CDs versus bond like for like, 0:21:49.800 --> 0:21:53.919