Basis Capital reopens flagship fund

Sydney-based Asian arbitrage player looks to structured credit space for opportunities.

Sydney-based alternative investment boutique Basis Capital has reopened its flagship Pac-Rim Opportunity Fund to new investors. The multi-strategy Asian arbitrage fund currently stands at $260 million.

The fund has enjoyed an annualized return of 10% since its inception in August 2000. Basis CIO Steve Howell says the fund has an enlarged capacity of $500 million.

"We've reopened the fund because we're seeing better opportunities in the credit space to generate alpha," says Howell. "We're employing more long/short trading in the credit derivatives area to ITRAXX and CDX indices and single name credit default swaps."

Howell says he will increase allocation to credit trading strategies in his Pacific Rim portfolio as he expects volatility strategies to under-perform going forward. "This year volatility strategies were a drag on the performance of our portfolio and pulled our return down by about 4%," he says.

He expects the fund to return 5.0% for the year, with one negative monthly return during 2004. "There was a time when 40% of our portfolio was allocated to volatility strategies, but now it's just 16%," he says, arguing that falling global default rates, improving corporate balance sheets, an accommodating US Federal Reserve policy and a growing appetite for CDO products are all contributing to less equity volatility in the medium term.

The Basis team is also working on creating a 2x levered version of the Pac-Rim fund that will be available to existing investors in 2005.

Next year Basis is also planning to market its Yield Alpha Fund, which focuses on alpha opportunities across the global structured credit market as well as liquid high-yield investments. Launched in December 2003, the fund has returned 11.5% in its first year with no down months.

"Our in house securitization team, which consists of two dedicated members, gives us an advantage when researching opportunities for the fund," Howell comments. "The fund employs an active approach to portfolio and risk management and seeks to provide a consistent return in excess of 500bp over Libor. Importantly the fund has a low duration risk profile and provides returns, which are uncorrelated with traditional asset classes."

The Yield Alpha Fund currently stands at $50 million and the Basis team wants to grow this to $250 million. Howell reports strong investor interest, particularly from pension funds attracted to the steady return profile.

Basis Capital was established in 1999 by Steve Howell and Stuart Fowler. Howell has spent 20 years working in the Asian and Australian capital markets in roles at NatWest capital markets, Cargill Financial Services and American Express Bank.

Fowler previously worked at a range of institutions building capital markets businesses including Australian Bank, NatWest and Salomon Smith Barney. The Basis team currently consists of 15 members, five of which are focused on risk management.

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