Investment Process
The Chief Investment Officer and the Investment Committee seek to identify a limited number of investment themes that have established themselves in the market and appear likely to persist. The team evaluates fundamental factors, market developments, technical patterns and trends, and the input from a broad based information network consisting of strategists, fund managers, investors, business leaders, consultants, market makers and their economists.
Once a theme has been approved by the Investment Committee, traders may begin to populate them using different instruments. A formal trade sheet write-up requires the portfolio manager to justify a trade rational, the support for the theme they are expressing, the expected outcome of the trade, the reassessment triggers for the trade, and importantly the take profit or stop loss limits established for the trade.
During the life of the trade, The CIO leads the investment team in reviewing closed positions to ensure that a consistent and rigorous approach has been applied throughout the life of the trade. The process promotes transparency and accountability, drives self reflection and team improvement.
Trade Example: 1Y10Y Interest Rates
Investment Theme: Lower for Longer
US and European interest rates will stay exceptionally low for an extended period. A shift in expectations from persistently rising inflation toward greater moderation will lead to lower long-term global interest rates.
Trade Rationale
At the time of trade evaluation, the U.S. bond market had become sellers of medium term U.S. fixed income (large funds publicly selling medium dated Treasury bonds) in expectation of the Fed falling behind the curve of inflation (due to Fed’s easy monetary policies). Such actions lead to higher interest rates in the U.S. in the medium-to-longer duration parts of curve. At the time, we disagreed with this market assessment and believed the data on inflation fears would turn negative, and expect yields to move lower at the end of QE2. 
As a comparison, as QE1 came to an end, inflationary pressures quickly dwindled and the deflationary reality set in. While we did not expect this reassessment to be quite as extreme at the end of QE2, we did expect a modest rally in the back end of the curve. In addition, the attractive “carry” in this trade allow us to breakeven on a call option, for only a modest rally in the spot rate position and to create positive return from the carry (due to the 20 basis point spread between the spot and forward).
(1) Attractive Trade Entry: We purchased a call spread on the TYU1 (1 year futures contract on the 10 year treasury bond ), buying the 121.0 calls vs. shorting the 124.0 call. We risked approximately 30 basis points of our investor’s capital for the call spread.
(2) Profit Objective: After a rapid decline in yields in U.S. ten year notes we closed the call spread on May 20, 2011, just 3 weeks after it opened after realizing our objective.