Bob Treue has maintained his composure despite losing 4.3% in May, his first down month in a year and a half. The month that did much worse damage to a variety of strategies was, he believes, just a bump. “It’s a sign that people are still very scared,” he said. “I don’t see anything dramatically changing.”
Treue’s firm, $432 million Barnegat Fund Management, hasn’t altered its focus as a result of May’s mayhem, which lowered the return of its flagship fixed income arbitrage vehicle, Barnegat Fund, to 7.1% for the year. “Generally, when people panic, we lose money in the short term,” he said. But the firm makes up for it over time, as it did by dropping 37.62% in 2008 and rocketing back with a 132.68% in 2009 (see Building up Barnegat).
“People pulled their cash in May,” he said, adding that it reminded him of October 2008. “There was a lot of stress and fear in the market.” But while May left many securities priced significantly from fair value, he believes, it wasn’t enough of a dislocation to encourage him to snap up bargains, since he’d long ago already entered his trades—which Barnegat typically holds for years—at better prices.
Barnegat, which Treue founded in 1999, focuses on how bonds are priced relative to one another and researches the mispricings in the fixed-income arbitrage markets. The fund’s biggest loser in May was its municipal bond/LIBOR trade, for which Treue captured the difference between municipal bond yields to LIBOR yields using swaps. He describes it as searching for “anomalies in the spread between bond and LIBOR curves.”
“In May, the yields of municipal swaps went up while the yields of LIBOR went down,” he said. “That hurt us.” Barnegat has earned profits in that trade from the wide spread between the yields of 30-year municipal bond swaps yielding roughly 101% of LIBOR, profiting as the spread decreased. An investor selloff of municipal bonds in May pushed the yields on those swaps from 83% to 90% of LIBOR, decreasing the spread. Treue could have bought more swaps betting on a reversion, but he’d already loaded up in 2008 when spreads increased to 85.6% in October, 104.4% in November, and 107% in December, so he found the new mispricing less attractive.
Not all of Barnegat’s positions in May hurt performance. In 2009, the Bank of England began purchasing its own sovereign debt at higher prices (and lower yields) than the bonds would have fetched in the open market, Treue believed, so Barnegat went short. This trade has continued to make money for Barnegat in May as the Bank of England has left the market and no longer supports these bonds.
Unlike other fixed-income arb shops, the Barnegat fund only holds 10 to 20 trades at a time and takes on a very long-term investment approach.
Before founding Barnegat in Hoboken, NJ, Treue was head trader at the Watermark Group in Princeton, NJ, a market-neutral fixed-income shop, and at Paloma Funds in London.
—Suzy Kenly