QIC has teamed with UBS Investment Bank to get a leveraged return, via a fixed income note, on the emerging market alpha of BlueBay Asset Management, making it the first investment of its kind in emerging markets fixed interest.

The $US390 million mandate to BlueBay Asset Management, with UBS acting as a conduit vehicle, is the first alpha-only mandate QIC has awarded for fixed interest. QIC head of fixed interest external managers, David Field, said the more common ways of stripping beta from emerging markets funds were expensive, and coming up with a cost effective structure was a challenge. He estimated that this mandate would cost QIC about half of those structures that hedged using a total return swap. QIC will pay UBS an annual upfront fee and then BlueBay’s management and performance fees will be deducted from the note return. The leverage will be three times that of the underlying BlueBay fund. Field said the mandate was a culmination of months of research and the concept of sourcing emerging markets alpha without the beta exposure. “We looked at absolute return and long/short as well as the possibility of hedging beta but cost effectiveness was the challenge,” he said. “So we looked at a replication portfolio.” UBS provides QIC with a note which gives a leveraged return on the underlying fund, then the beta is shorted from the strategy by selling bonds and covering those shorts, with performance gained from the replication portfolio relative to the index. “;I’ve talked to a lot of people and as far as I can tell this is the first of this type of structure done anywhere in the world for emerging markets,”; Field said. “;We hope it will be a meaningful contributor to performance at the fund level.”;

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