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The CQS ABS Fund is a global asset-backed securities (ABS) fund that invests in long and short and relative value positions in ABS, residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and related instruments.

Paul Heyrman, product specialist for the CQS ABS Fund, believes his team negotiated the credit cycle starting in October 2006 successfully. In 2007 and 2008 the fund provided significant net returns to investors – an impressive positive 45% and 73% respectively.

The fund has now experienced two years without a drawdown and its Sharpe ratio is 2.14.

The strategy uses relative value and analytical models to identify attractive cashflows on the long side of ABS and then strategically hedges on the short side using primarily non-ABS instruments. This strategy is what has enabled the fund’s managers to deliver such consistent return patterns, according to Heyrman.

The fund’s team comprises 11 professionals all focusing on ABS. They employ statistically based models to analyse the collateral of securities “going down to a loan-level basis as some of these securitisations literally have thousands of loans,” Heyrman explains.

On top of quantitative analysis, the team carries out important qualitative and judgement-based analysis. Five of the team members have been in the market for over 15 years and this “wealth and breadth of experience is important when you’re looking at model-based types of analysis,” Heyrman adds.
 
“You need to know what your models capture and what they don’t because none of these models work as a black box. It is very important to look around the corner and figure out what changes will happen in the regulatory environment that potentially our models don’t capture and what trades we need to put on to capture that,” he says.

Regulation and market intervention particularly in the US encourage Heyrman and his team to make the most of their combined experience. The second bout of quantitative easing (QE2) and programmes such as troubled asset relief programme (TARP), home affordability modification programme (HAMP) and the public private investment partnership (PPIP) are all influencing the ABS market. Heyrman is keeping a sharp eye on them.

HAMP in particular has influenced the cashflow of securities as it has led to the modification of individual loans, Heyrman points out.

“To understand how these programmes are working – or how they might not be working – and how they might evolve going forward is crucial for understanding the landscape. This is in terms of the technicals of the market, what the supply and demand equation is in light of the various stimulus programmes that added net demand and leverage into the market at a crucial point in time which was a tailwind for prices,” he notes.

“From the fundamental side we see initiatives like HAMP, which modifies the contractual terms of the actual loans, that will have ramifications for cashflows and the individual securities we buy. It has become a crucial part of our analysis to understand these programmes and how they might evolve,” explains Heyrman.

Within the CQS ABS team specific analysts are allocated particular programmes and act as the primary contact person for that given area of market intervention or programme. Heyrman underlines the unified spirit of the team when considering upcoming uncertainties, commenting that “the whole team provides input.”

For the rest of 2011 Heyrman believes there will be ample opportunities in US non-agency (not issued by a US government agency such as the Federal National Mortgage Association FNMA) RMBS which currently represent the core of the CQS ABS portfolio. From a more opportunistic point of view Heyrman is also eying the European CMBS bond market as well as strategies related to the monoline insurance market.

Fund facts
Full name of fund: CQS ABS Fund
Name of portfolio manager: Alistair Lumsden
Name of investment/management company: CQS
Contact information: Michael Rummel, CQS, 5th Floor, 33 Chester Street, London SW1X 7BL (+44 (0)20 7201 2491; Michael.Rummel@cqsm.com; www.cqs.ch)
Launch date: September 2006
Assets under management: $1.271 billion (at March 31, 2011)
Net cumulative performance since inception: 303.19% (at March 31, 2011)
Annualised return: 36.31% (at March 31, 2011)
Annualised volatility: 14.05% (at March 31, 2011)
Sharpe ratio: 2.14 (at March 31, 2011)
Strategy: long/short relative value asset backed securities
Share classes: US dollar, euro, sterling, Swiss franc
Administrator: Citco Fund Services (Ireland)
Auditor: Ernst & Young
Prime brokers: Barclays Capital Securities, Credit Suisse Securities (Europe), Morgan Stanley & Co International
Legal counsel: Allen & Overy (US and English law); Seward & Kissel (US); Maples & Calder (Cayman)
Domicile: Cayman Islands
Management fee: 2%
Performance fee: 20%
Minimum investment: $1 million
Lock-in: none
Redemption/liquidity terms: quarterly, with 90 days’ notice