Monday, December 24, 2012

Hewlett Packard's total return swaps

I have just been sent a list of the total return swaps in the Master Trust for the HP Pension Plan. These TRS (standing for Total Return Swaps) were interlaced with tens of pages of other assets and not in the pension plan form 5500 but in the (separate) Master Trust form 5500.

This is the list:

Security ID  Description 1                Description 2                     Cost  Current Value
99QABN497    TRS FL BARCLAYS 20+ INDEX    P USD-LIBOR-BBA 3M 2011 DEC 01    -     - 
99QABN5B1    TRS EL_BARCLAYS 20+ INDEX    P USD-LIBOR-BBA 3M 2011 DEC 01    -     18,592,748 
99QABNCM9    TRS FL BARCLAYS 20+TSY       P USD-LIBOR 3M 2011 OCT 31        -     - 
99QABNCN7    TRS EL BARCLAYS 20+TSY       P USD-LIBOR 3M 2011 OCT 31        -     52,221,457 
99QABQ219    TRS FL UL BARCLAYS 20+ TSY   P USD-LIBOR3M 2012 FEB 23         -     - 
99QABQ227    TRS EL UL BARCLAYS 20+ TSY   P USD-LIBOR3M 2012 FEB 23         -     6,586,388 
99QABSRK6    TRS EL UL BARCLAYS 20+TSY    P USD-LIBOR3M-22BP 2011 NOV 09    -     23,247,808 
99QABSTE8    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR3M-22BP 2011 NOV 09    -     - 
99QABT767    TRS FL UL BARCLAYS 20+INDX   P USD-LIBOR 3M 2012 JAN 04        -     - 
99QABT775    TRS EL UL BARCLAYS 20+INDX   P USD-LIBOR 3M 2012 JAN 04        -     (10,219,797)
99QABTJ98    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR 1M 2011 DEC 07        -     - 
99QABTKA3    TRS EL UL BARCLAYS 20+TSY    P USD-LIBOR 1M 2011 DEC 07        -     (7,136,997)
99QABTWR3    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2011 DEC 06        -     - 
99QABTWS1    TRS EL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2011 DEC 06        -     4,426,796 
99QABUZ63    TRS FL UL BARCLAYS 20+TSY    P USD-3M LIBOR 2012 JAN 09        -     - 
99QABUZ71    TRS EL UL BARCLAYS 20+TSY    P USD-3M LIBOR 2012 JAN 09        -     (4,403,910)
99QABXAB3    TRS FL UL BARCLAYS 20+       P US0003M -25BPS 2012 MAR 07      -     - 
99QABXAC1    TRS-EL UL BARCLAYS 20+       P US0003M -25BPS 2012 MAR 07      -     5,022,105 
99QABYJD8    TRS EL UL BARCLAYS 20+ TS    P USD-LIBOR3M 2012 MAR 28         -     (5,357,109)
99QABYJE6    TRS FL UL BARCLAYS 20+ TS    P-USD-LIBOR3M 2012 MAR 28         -     - 
99QABZA02    TRS FL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2012 APR 26        -     530,370 
99QABZA10    TRS-EL UL BARCLAYS 20+TSY    P USD-LIBOR 3M 2012 APR 26        -     -


They are all returns for the very long bond (entirely Barclays 20 plus year index).

The current value of these bears no resemblance to how profitable the position appears to have been in aggregate or how profitable it would have been over 12 months.

The 20+ Barclays index returned high teens percent during the year until October 2011 - which is consistent with the results achieved.

The 2011 results are thus mostly explained by a huge derivative position on the long bond as several of the commentators guessed.

Strangely the fund also carried interest rate swaps (separately disclosed) on which they lost money.

That said, the HP Pension Fund got almost entirely out of equities in 2007 and almost entirely into long bonds (via swaps) just as the yields collapsed.

The former was disclosed contemporaneously. The latter was not disclosed.

The result is impressive: at minimum a very well timed form of liability driven investing.


John

4 comments:

Jake said...

As someone who "guessed" exactly right, I want to take any credibility I earned to make one last point in response to the following:

"That said, the HP Pension Fund got almost entirely out of equities in 2007 and almost entirely into long bonds (via swaps) just as the yields collapsed."

This had nothing to do with HP being good market timers, but rather the Pension Protection Act being enacted which forced plan's to better hedge their liabilities (change in funded status now impacted financial statements - http://en.wikipedia.org/wiki/Pension_Protection_Act_of_2006).

MOST plans (not just HP) chose to reduce equities and move to bonds (if they hadn't already done so by 2008).

Finally.... why TR swaps on Treasuries vs. Interest Rate Swaps? Swaps began to trade through Treasuries following the 2008 crisis. The other option was Treasury futures, but you needed to constantly make margin payments on those.

TLDR; HP did nothing out of the ordinary

Jake said...

One last point....

It appears in 2008 that they didn't rebalance tactically, but rather the market rebalanced the plan for them. If they had been 40% equity / 60% hedge before the Lehman collapse, the nominal gain in the hedge (a 25%+ gain that year) would have offset the 25%+ loss in equities. Instead, they had a $782 million loss on investments (see their 2008 10-K). This pushed equities down and the hedge up as a percent of total assets, which they then appear to have maintained.

The timing wasn't so good after all.

Anonymous said...

Lucky timing on the LDI as suspsected. No blame should be given nor credit gained. They listened to some sharp consultant.

Vy said...

On hindsight, one notes that the yield curve inverted in 2007 and usually it is a good time to go into long bonds when this happens ... but it has been well executed nevertheless.

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