With the traditional hedge fund model flipped upside down, more and more money managers are looking to previously unseen methods in hopes of unlocking returns. While a growing number of funds have looked toward technology for the next step in investing, focusing attention on artificial intelligence models, computer learning, and advanced quantitative analytics, others are looking in corners of the investing world which may have already existed. Asgard Fixed Income Fund is in the latter category. In the past 12 months, Asgard has brought in returns of 19%, stellar at any time but especially noteworthy given the recent tendency for hedge funds to trail the S&P 500. And Asgard's excellent performance is thanks to an investment in some of the least risky bonds available.

AAA Rated Debt, No Credit Risk

Asgard has focused its investments on mostly AAA rated debt, ensuring that it takes on no credit risk in the process. In order to be able to do that, Asgard relies on excellent leverage, now totaling about 11 times but having been as high as 25 times in the past. In a spotlight report by Bloomberg, Asgard's chief investment adviser through Moma Advisors A/S indicated that "the best risk-adjusted returns are actually the low vol trades." Mathiesen tends to forget about the direction that interest rates are headed, which removes a great deal of the tension associated with investing in bonds: negative interest rates abound in Europe and the European Central Bank is moving toward drawing back stimulus.

Thanks to this unorthodox approach, Asgard has managed to bring in returns of 14% per year since inception in 2003, well beyond most bond indexes. By comparison, Bloomberg's government bond index has brought in returns of just 5% per year in the past decade.

Biased Toward Nordics

Asgard tends to be biased toward the Nordics, says Mathiesen. "We're long risk premiums in fixed income. We invest in anything that has a risk premium that doesn't involve credit risk." Thanks to Asgard's proprietary forecasting model, the managers are able to find the best risk premiums within short-term and high-quality bond markets. The fund, which operates with approximately $670 million in assets, makes most of its bets on yield spreads, money market spreads, and country spreads within European fixed income markets. Its largest bet is on Scandinavian covered bonds, and the fund tends to hedge its bond bets with derivatives.

So far, the model seems to be working exceptionally well. Mathiesen indicated that they have been "successful in providing alpha. We've produced a higher risk-adjusted return than what the carry should justify in the positions we hold." Will other hedge funds attempt to follow suit and earn big rewards by playing it safe?

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