Reference no: EM132958238

You have been asked to analyze the performance of two absolute return bond funds, Fund A and Fund B.

• Fund A is an onshore regulated fund with a beta of 1.3 and Fund B is a hedge fund with a beta of 1.7. They can both invest in global bond markets, including investment grade and high yield bonds, and can use derivatives.
• There is data on the two Funds, the performance data is annualized based on the last three years. Data on duration and credit exposure reflects the current position of the funds. The risk-free rate of return over the last three years has averaged 0.5% per annum.

                                                   Fund A               Fund B

Total return (after fees) %           6.2                   4.5

Volatility %                               6.9                      4.1

Modified Duration                       3.4                       1.2

Average credit rating of bonds        AA                   BBB

held

Problem (a) Calculate the Treynor ratios.

Problem (b) If bond yields fall which Fund would be likely to generate better performance? Explain your answer.

Problem (c) Which of the Funds has taken the most credit risk and is the manager of this Fund expecting credit spreads between corporate bonds and Treasury bonds to widen or narrow? Explain your answer.

Problem (d) Calculate the Sharpe ratios of both funds and comment, based on the Sharpe ratios, which fund has generated the best performance.