YTM CAPITAL AND LONG/SHORT CREDIT
We have devised our long/short credit strategy to reduce volatility and to prioritize capital preservation.
Only in exceptional circumstances will we take interest rate risk.
The majority of our corporate bonds are investment grade.
These structural pillars are the foundation of the way we manage long/short credit and are reinforced by our risk discipline.
Risk Management is Paramount
Our multi-decade success as credit market makers and portfolio managers was born out of our deep understanding of risk, and our consistent application of disciplined risk management.
The major risks are credit – both issuer-specific and market-wide risk – and liquidity risk – the ability to sell corporate bonds quickly at fair prices when the market is shifting. We monitor these risks every minute the market is open, and employ quantitative and qualitative techniques to measure and forecast risk in order to insulate our funds.
Risk management is the bedrock of our three investment strategies.
1. SHORT MATURITY BONDS
Short term bonds are significantly less volatile than long term bonds. Short-term bonds have less credit risk and less volatility because it is more certain that bonds with a short time to maturity will be repaid. They also have less volatility because the math used to value a bond is non-linear. That means market events that create small changes to short-term bond values create changes to long-term bond values that are magnified many times.
In addition, short-term bonds increase in value much more quickly as they approach maturity than long-term bonds. And short-term bonds are significantly more liquid, allowing us to take advantage of new opportunities or to reduce risk more quickly.
2. NEW ISSUES
Roughly one new investment grade bond issue is brought to market each business day in Canada. New issuances are often priced at a discount to similar bonds that trade in the secondary market, not unlike equity initial public offerings. Our portfolio managers priced thousands of new issues while working for bank dealers. They have the skills to determine when pricing is attractive and participate accordingly.
3. RELATIVE VALUE
The values of two bonds often have a strong relationship. Where the current value difference has strayed materially from the expected difference, our portfolio managers assess whether the value gap will revert to the old relationship. Where a reversion is expected, they will enter into positions to take advantage of the anticipated price movement.
Our portfolio managers have been managing long/short credit for decades.
At YTM they have consistently earned awards for both return and risk.