Blockbuster bond manager Bill Eigen has started to cut into his sizeable cash holdings to capitalise on the volatility-induced re-pricing of the market.
Speaking to Citywire Global, Eigen, who runs the $9.4 billion JP Morgan Income Opportunity fund, said he expects to see more opportunities emerge in the short-term.
‘We put some money to work as we finally saw some opportunities induced by the recent volatility. Now, our level of cash in the portfolio is less than the previous 64%,’ he said.
Eigen, who has built his cash weighting steadily to a height of 65% in May, also said he reduced some selected short positions and added some selected long positions in the last couple of months.
‘We invested especially in the synthetic space. We have also covered some of the short positions that have worked pretty well, including some CDS in the US dollar-denominated emerging markets debt,’ he said.
Another trade Eigen is implementing is short euro versus US dollar, as he believes it reflects the situation of the two regions' economies.
Dangerous central banking
From a macroeconomic side, Eigen believes central banks have completely broken the fixed income markets as he said they are no longer reflective of economic fundamentals and inflation data.
‘They are just reflective of what central banks are doing. Moreover, people have been too accustomed to monetary policy makers being incredibly dovish,’ he said. In his opinion, QE helps people mentally but its effects on the real economy are hard to decipher.
‘I don't understand the whole transmission mechanism between QE and zero rates. It seems that economic data don't matter anymore. What matters is just what the FED says,’ he added.
Cash as a volatility hedge
Eigen has held this high level of cash just three times in his career: in the second half of 2008, in the second half of 2011, and now. This is because he said that, in the current situation, he is keen to invest only when there are some very interesting opportunities.
‘For an absolute return manager like me, to deploy capital in German bunds now is almost imprudent,’ he said. ‘Fixed income investing is primarily about capital preservation. The more rates get close to zero, the more difficult it becomes to meet our mandate.’
Elsewhere in the fund, Eigen still owns several financial bonds as he said the sector was very cheap when he started to invest in it.
‘Also, banks have re-capitalised and cleaned up their balance sheets, providing safe and attractive opportunities for investors,’ he said.
Over the past three years, the JPM Income Opportunity fund returned 3.83%, eight percentage points more than the EONIA benchmark.