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00:00:00 – 00:46:15
The video features Bob True, founder, and CEO of Barnegate Fund Management, discussing the fund's effective relative value fixed income strategy. Over 23 years, Barnegate Fund Management achieved a notable 1,647% total return (13.3% compounded annually) with minimal correlation to traditional asset classes. The fund capitalizes on market mispricings often arising from non-economic decisions, such as central bank interventions and panic-induced market behaviors.
Key to their strategy is holding positions long-term, sometimes for years, to exploit the normalization of distorted yield curves and mispriced assets. For example, during the 2008 financial crisis, they profited from the yield disparities caused by the Bank of England’s quantitative easing and the sell-off of Treasury Inflation-Protected Securities (TIPS). Despite enduring significant short-term losses, Barnegate’s robust risk management and ample collateral reserves allowed them to weather market volatility and eventually reap profits.
Bob underscores the necessity of patience, risk management, and maintaining liquidity to manage periods of financial stress. The fund also prioritizes long-term collateral management to handle potential margin calls. Their consistent strategy, focusing on detailed research and understanding global economic policies, has helped them navigate various market conditions. Despite challenges such as initial capital acquisition and competition with better-known firms, Barnegate has leveraged global economic trends to identify and exploit investment opportunities, contributing to their sustained success.
In summary, their disciplined approach, rooted in exploiting financial market inefficiencies, alongside prudent risk management and a deep understanding of global economic movements, has cemented their reputation and yielded impressive returns.
00:00:00
In this segment, the speaker introduces Bob True, the founder and CEO of Barate Fund Management, a leading relative value fixed income hedge fund. Bob’s fund has achieved an impressive total return of 1,647% over 23 years, translating to a compounded annual rate of 13.3% net to investors. Notably, the fund’s performance has shown almost zero correlation to traditional asset classes, positioning it as number one out of over 30,000 funds on Bloomberg. Bob, aged 52, runs the fund with a small, dedicated team focusing on discovering unique investment opportunities. He prioritizes investing and deep research over marketing and has a reputation for consistently returning capital to investors. Bob starts his presentation by highlighting the fund’s 23-year performance, its low correlation to major investment groups, and their strategy of making money from the non-economic decisions of others. Barate Fund Management engages in long-term trades, often holding positions for 1-2 years or longer, partly enabled by their stable and long-term-focused investor base.
00:05:00
In this part of the video, the speaker explains the structure of the Barnegate fund, focusing on relative value trades that incur no initial cost and a global cash and bond mutual fund segment. The fund uses $500 million to purchase various assets as collateral for trades. The returns combine yields from unleveraged assets and relative value trades. The speaker also discusses how Barnegate profits from non-economic decisions of others, using quantitative easing by central banks aiming for 2% inflation as an example. Specifically, the UK’s bond buying spree in 2008-2009 significantly distorted the bond market, providing lucrative opportunities for Barnegate.
00:10:00
In this part of the video, the speaker discusses the financial strategy employed by Barnegate during the intervention of the Bank of England (BoE) in response to the global financial crisis. The UK government issued bonds across different maturities, while the BoE bought bonds in specific areas, distorting the yield curve. Barnegate’s trade involves paying in the five-year area and receiving yields in the three-year and longer-term areas. Initially, this strategy worked well as they received higher yields than they paid. However, as the BoE increased its intervention, the distortion grew, causing Barnegate to lose money.
The speaker highlights that despite these losses, Barnegate continued to hold and even expand their position, confident that the curve would eventually normalize. When the BoE finally achieved its inflation target and ceased its interventions, the yield curve normalized, and Barnegate profited significantly. The video emphasizes the importance of holding trades for extended periods and having enough collateral to withstand market distortions in fixed income relative value trading.
00:15:00
In this part of the video, the speaker discusses the market dynamics during the 2008 financial crisis, particularly focusing on the behavior of Treasury Inflation-Protected Securities (TIPS) and traditional treasuries. They explain how Lehman Brothers’ collapse caused a panic, leading to the selling of TIPS, while investors flocked to the safety of traditional treasuries. This resulted in a significant yield disparity between TIPS and treasuries, which represented a trading opportunity. The speaker outlines their strategy of arbitraging this mispricing by buying TIPS and shorting treasuries, emphasizing the importance of having enough collateral to withstand margin calls despite short-term losses. They highlight that the trade’s success hinges on the ability to maintain margin requirements amidst market volatility.
00:20:00
In this part of the video, the speaker discusses the importance of risk management and patience in investment strategies, particularly when dealing with mispriced trades. They emphasize that it can take years for mispricings to correct, as illustrated by a three-year period for US government bonds to stabilize. They explain the necessity of holding onto trades through volatile periods, using excess collateral to meet margin calls. The speaker highlights a tough period in 2008 where their fund lost 37%, but due to substantial collateral reserves, they managed to endure and eventually profit from the same trades. The key takeaway is the critical role of maintaining liquidity and managing volatility to survive periods of financial stress.
00:25:00
In this part of the video, the speaker reflects on the firm’s experiences with volatility and returns over the years. They highlight the recovery from a past difficult period within five months, which they attribute to their approach to fixed income relative value. In 2023, they experienced a high return of 22% with lower-than-expected volatility due to negative correlations between trades. This contrasted with the high volatility and losses in 2008. The speaker emphasizes the importance of surviving through challenging times and notes that their strategy has remained fundamentally the same, although market conditions and specific trades change. They manage around 15 to 20 trades in major markets, looking for mispricings. Additionally, the speaker admits to not enjoying or excelling at delegation and people management, focusing instead on trade analysis and research.
00:30:00
In this segment, the speaker explains the approach to managing the volatility of a fund’s share price, aiming for a long-term volatility target of 8 to 10%. They discuss using daily and yearly volatility measures, comparing it to how Microsoft’s share price volatility is evaluated. The strategy includes maintaining a significant portion (50%) of the fund as collateral to withstand deviations and adjusting position sizing based on individual trade volatility and correlations. Historical performance shows that the target was successfully met in 22 out of 23 years, with notable exceptions like 2008. The speaker also addresses how opportunity-rich periods lead to higher volatility due to increased trading. They underscore the importance of ‘carry’ in trades, which involves profiting from the difference between incomes received and payouts made, exemplified by a trade scenario involving yields.
00:35:00
In this part of the video, the speaker discusses their fund’s trading performance, specifically highlighting that in 2008 they achieved approximately a 20% carry, whereas currently, they experience about 9-10%. The speaker emphasizes the value of trades that remain mispriced over a long period, allowing them to continuously collect coupons with minimal cost, likening it to the “promised land” due to low volatility. They reflect on their success in 2023, attributing it to capitalizing on these mispricings rather than any particularly exciting or high-risk strategies. The speaker then shares a personal story about the challenges of obtaining initial investment after the collapse of Long-Term Capital Management, describing how they invested their own money, lived frugally, and utilized public resources like the New York Public Library to keep costs down until the strategy eventually proved successful.
00:40:00
In this segment of the video, the speaker discusses their initial struggles in attracting investors, despite having profitable opportunities. They highlight one instance where an investor, who initially passed on investing at a low share price, eventually bought in when the price was significantly higher. The importance of marketing is emphasized, as potential investors generally prefer established names. The speaker also describes their process for generating investment ideas, which involves staying informed by reading various financial publications and monitoring global economic events. They provide an example concerning Switzerland’s monetary policies, explaining how they identified an investment opportunity due to the country’s unique approach to controlling its currency appreciation and negative interest rates. This thorough analysis of global economic trends helps them spot market mispricings.
00:45:00
In this part of the video, the speaker clarifies that while government interventions, such as those in Switzerland or the Bank of England’s quantitative easing, are significant and provide good trade opportunities, not all significant market actions are government-driven. Some, like the panic-induced selling of TIPS and buying of Treasuries, occur independently of government interventions. The segment ends with a note of thanks to the speaker, Bob, and the audience for their participation.