11/06/2013

Treesdale Jumps on Rising-Rates Bandwagon

Count Treesdale Partners among a growing number of fund operators that are marketing vehicles designed to profit from rising interest rates.

The New York firm has been running the strategy for a separate account that gained 12.8% on a gross basis from April to the end of September. More than half of that return — or 7.4 percentage points — was earned in June, after the Federal Reserve signaled it would soon begin winding down its bond-buying program. Although the Fed has since made it clear that it is in no rush to begin tightening, bond investors increasingly are resigned to the fact that rates will begin rising sooner rather than later.

The planned fund is designed to outperform when rates are rising, but still deliver a positive return even if rates remain low. How? By investing in interest-only strips of mortgage-backed securities, which have the “unique characteristics of positive carry combined with negative duration,” according to marketing materials for the fund.

Treesdale is poised to launch the vehicle in the coming months, though the exact timing is uncertain. Meanwhile, the firm is acting as a sub-advisor for a planned exchange traded-fund to be called AdvisorShares Treesdale Rising Rates ETF. The vehicle’s sponsor, AdvisorShares, is a Bethesda, Md., firm specializing in actively managed ETFs.

“There is definitely a sentiment out there that the credit cycle has bottomed and that rates will be rising from here,” said Neal Berger, president of New York fund-of-funds shop Eagle’s View Capital. “As such, managers are trying to take advantage of this sentiment by creating products that will resonate with investors.”

Overseeing Treesdale’s rates strategy is portfolio manager Zachary Cooper, who joined the firm in March following a stint as a mortgage-bond trader at broker-dealer PrinceRidge. Prior to that, he was a senior portfolio manager focused on structured products at now-defunct hedge fund shop Highland Financial.

Other debt-fund operators with rising-rate products in the market include Metacapital Management, whose Metacapital Rising Rate Fund gained 12% from its May 1 inception through Sept. 30. Like Treesdale, Metacapital is seeking to differentiate its approach from a straight-forward bearish bet on bonds.

“Most rising-rates strategies entail negative carry, as they are either short the bond market explicitly or implicitly through the purchase of put options,” Metacapital founder Deepak Narula said in an Oct. 25 letter to investors. “We construct a portfolio that has modest positive carry if rates are unchanged but significant upside potential if rates were to rise. To construct such a portfolio, we combine high-yielding mortgage-backed securities with out-of-the-money options on interest rates.”

The Metacapital vehicle manages about $250 million, mostly for wealthy families and funds of funds. “Based on initial indications, we expect good investor interest,” Narula said. Metacapital runs about $1.6 billion overall, mainly in its Metacapital Mortgage Opportunities Fund.

Emerging Sovereign Group has been offering a rising-rates fund since 2009, though negative performance has kept a lid on the vehicle’s assets. That may change, however, as the ESG Treasury Opportunities Master Portfolio was running a 26.3% year-to-date gain as of Sept. 30. The fund lost 21.9% last year, 51.9% in 2011 and 13% in 2010 — for a cumulative loss of 58.6% through September.

The vehicle has $89 million under management, including leverage. Overall, the New York firm had $7.2 billion of regulatory assets as of June 30.

Treesdale was managing a total of $109 million as of June 30, down from about $350 million in 2011. The dip partly reflects the liquidation of its 9W Credit Opportunities Fund last year. The 10-year-old firm is led by Dennis Rhee and Yung Lim.

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