Alternatives Global Liquidity Relative Value

Investment Objective

PGIM Fixed Income’s Global Liquidity Relative Value Strategy is a market-neutral strategy investing in liquid sectors of developed country fixed income markets and select emerging markets. The Strategy seeks to maximize total return on a risk-adjusted basis, utilizing a 1,000 bps risk budget, by investing in a diversified portfolio of leveraged long/short opportunities implemented using government, sovereign and agency securities and derivatives.1

1 There is no guarantee that these objectives will be met.

Investment Philosophy

The Global Liquidity Relative Value Strategy’s Relative Value platform is predicated on the belief that there are both persistent structural inefficiencies as well as near term dislocations in the liquid and securitized sectors of the global fixed income market. In our experience, different markets are characterized by different structural inefficiencies, some for long periods of time. The proprietary quantitative models we use in the Strategy are expressly designed to identify and capitalize on such inefficiencies. The Senior Portfolio Managers expect that the Strategy will, in the aggregate, exhibit little correlation to the broad equity or fixed income indices.

Investment Process

The Strategy utilizes proprietary relative value models in six different trading sub-strategies (described below), and seeks to constrain systematic risk (i.e. interest rate, curve, currency, spread) to foster more stable returns. The Senior Portfolio Manager dynamically allocates to the Sub-Strategies based on his assessment of the opportunities available at any one time.

 
Sub-Strategy Pro-Forma Strategy Allocations Decscriptions
Government Optimal U.S.: 10%     Non-U.S.:10%     Total: 20% Seeks to maximize fundamental value in government bonds using proprietary quantitative models
Government Relative Value U.S.: 10%     Non-U.S.:10%     Total: 20% Seeks relative value along the government yield curves using proprietary quantitative models, along with portfolio manager input
MBS Relative Value U.S.: 5%       Non-U.S.:0%       Total: 5% Seeks relative value in U.S. mortgages using proprietary quantitative models, along with portfolio manager input
Swap Relative Value U.S.: 5%       Non-U.S.:5%       Total: 10% Seeks relative value in interest rate swaps and interbank futures markets using proprietary quantitative models
Futures Relative Value U.S.: 20%     Non-U.S.:10%     Total: 30% Seeks arbitrage opportunities between futures and their respective government bonds
Spread Trading U.S.: 5%       Non-U.S.:10%     Total: 15% Seeks relative value spread opportunities between governments, agencies, mortgage-backed securities, and interest rate swaps

With these target weights as a guide, the Senior Portfolio managers continually seek to construct a diversified mix of these strategies to maximize the ex-ante information ratio of an overall portfolio while managing systemic risks. They continually evaluate the opportunity set within each Sub-Strategy and adjust weights accordingly.

The Senior Portfolio Managers, as well as the sector managers who work with them, seek to identify relative value opportunities using PGIM Fixed Income’s proprietary quantitative analytics, as well as their seasoned qualitative judgment and trading expertise.

Each opportunity is evaluated by the Senior Portfolio Managers based on its expected unit of return per unit of volatility, net of transactions costs. If the expected return from convergence is greater than the expected volatility, the Portfolio Manager will implement the trade. Specifically, the Portfolio Manager will establish a long position in the “cheap” security and short the “rich” security, while simultaneously taking opposite positions in the financing markets. PGIM Fixed Income incorporates a variety of these types of trades within each Sub-Strategy, seeking at all times to maximize the overall expected information ratio of the overall portfolio while remaining within the constraints established by the risk budget used by PGIM Fixed Income in connection with the management of the Strategy.

The risk budget is the starting point for portfolio construction. Each sector manager then assesses prevailing relative value opportunities in his sector, mindful of the amount of risk he is able to “spend” in the sector or strategy. Each sector manager then raises his best relative value ideas to the Senior Portfolio Managers, who collectively assess all of the ideas from all sectors together. In making their assessment, the Senior Portfolio Managers consider existing positions in a portfolio, existing risk exposures, the risk budget and how it is currently filled, and market, trading, and liquidity considerations.

Senior Portfolio Managers

 

Erik Schiller

CFA, Managing Director and Head of Liquidity