Oclaner responds to lack of bond liquidity
Investors are facing liquidity crunches increasingly frequently these days, with the bond market a well-documented example, with thin trading making it much harder to exit losing positions, say market participants.
Some market participants in Asia are responding by increasing their fixed income risk tolerance, relying less on stop-losses and boosting their trading currencies.
Singapore-based multi-family office Oclaner Asset Management is one such firm. “Liquidity is very thin and prices move very quickly and in steps,” said Sylvain Baude, chief investment officer. “Look at what happened with [Indonesian mining company] Berau Coal – the bond went from par to 55 [cents on the dollar] in four days.”
As result, whereas once Oclaner would have set tighter stop-losses on its bond positions, now it has widened its thresholds. This is because the current poor liquidity leads to frequent price ‘whipsaw’, where a bond quickly recovers previous losses, said Baude.
He said Asian telecoms firm Pacnet was a good example, with a $350 million bond it issued last year recently falling from 109 to 85 cents and then recovering to par over the course of a few days.
Using stop-losses in the current environment can be “a very painful strategy” in a range-bound market, Baude noted. “We saw that in October again, even in the most liquid market [when US Treasury yields suddenly crashed from 2.2% to 1.86% on October 15 and then rebounded in a matter of hours].”
In the Asian credit space, liquidity is very thin, he said, and it’s difficult and costly to exit even a relatively small position – such as $1 million – particularly in high yield.
So, instead of taking too many stop-losses, Oclaner has increased its fixed-income risk tolerance so that it can accept more volatility, said Baude, “to make sure we don’t get stuck at the bottom”.
In addition, it employs currencies much more now to reduce risk and volatility – for example, using Australian dollar to hedge commodity issuers and Singapore dollar as a proxy for the renminbi – noted Baude.
“You can short the currency a bit, you can do this and that,” he added, “but in terms of risk management for fund managers, [the loss of bond liquidity] is a tectonic shift, especially if you have an active book.”
Ernesto Prado, CIO at Ayaltis, a Swiss fund of hedge funds firm, agreed: “Your [currency] hedges are much more important right now – if they don’t work out in a market dislocation, you’re toast.”
It’s not only bond investors who are suffering from thin liquidity, noted Olivier Spoor, Singapore-based portfolio manager at Oclaner. Overall liquidity at the macro level is very thin, and that’s a big issue for the mark-to-market of asset managers offering daily liquidity, such as Oclaner, he said.
In the equity market even the most liquid stocks are now very prone to “liquidity destruction”. Volatility has been lower for the past six years in the US, said Spoor, and since last September the market has been getting nervous about valuation and rushing for the door quickly.
He cited the example of Apple seeing $50 billion shaved off its $700 billion market capitalisation in the space of an hour on December 4, and added that there have been many recent intraday moves of more than 10% on certain stocks.
Moreover, oil – by far the most liquidly traded commodity – has seen its price halve [to around $50/barrel] for no apparent reason this year, said Spoor. “No one saw this coming.”
“The oil market has been over-supplied for a long time, and the incremental and well-flagged US production rise cannot justify alone a 50% drop in the price,” he added. This is also the first time in decades that oil has fallen that much with no global economic recession, said Spoor.