Kumar Palghat, until last month the co-head of Pimco Australia, aims to launch a no-benchmark domestic fixed interest fund early next year, and is eyeing the burgeoning Asian bond market.

Palghat, who spent ten years at Pimco and oversaw both the Australian business and its portfolio management between 2003 and April 2006, is currently in discussions with a local institution that provides infrastructure to boutiques. Once licensed, Palghat’s firm – he’s unsure of the name, only that it will begin with a ‘K’ – will launch an alternative Australian fixed interest fund that “sits between traditional bonds and hedge funds on the risk/return chart”. The process will separate beta and alpha, with the beta intended to provide a running yield of cash plus 1-2 per cent, and the alpha generated from relative value, long/short trades. “You need the flexibility to be able to go to zero duration,” Palghat said, pointing to the pain suffered by Australian bond managers in the last two years as their median returned 2-3 per cent, while cash did 6 per cent. That single product aside, the firm will also look to tailor portfolios for institutions, with Palghat particularly excited about developing locally-denominated debt markets in Asia. “There’s $1.5 trillion of reserves in Asia-Pacific central banks but the debt markets are nowhere near as big…as countries begin to raise debt in their own currency, and the credit and mortgage markets continue to emerge, you’ll start to see arbitrage opportunities,” he said. A new Asia-related debt market may even emerge as the likes of China and India begin tapping markets like Australia, rather than just the World Bank or the US, for infrastructure funding. “The attraction for those countries is that the loans won’t have all those World Bank conditions on them…if someone like the Asian Development Bank stood behind it, you could have locally issued India or China bonds as a capital guaranteed type alternative.” Palghat will initially employ about four people in his firm, including a former US colleague as a portfolio manager, and his wife, an economist with World Bank and US Treasury experience, to foster links with the global academic community.