Northern Trust Global Investment will step into the credit derivatives arena next year when it launches a new fund dedicated to trading credit-default swaps. The fund manager, which has USD500 billion under management, is currently testing the credit fund with ghost trades of CDS referenced to investment grade corporates and a small number of crossover names.
An official familiar with the fund said the six-month trial was launched in response to client interest and to take advantage of increased liquidity in the credit derivative market. "There is now more transparency in the market and regulation in what will happen if there is a credit event," the official said, adding, "It's a logical step for traditional managers, like Northern Trust, to use the best bits of the derivative market." Wayne Bowers, director of global fixed income at Northern Trust, declined comment.
Officials said the aim of the trial period was to pick out corporate single names with spreads that can be successfully hedged and show investors potential returns. This is why the fund will focus on single-name CDS rather than credit derivative index trading. Officials are confident the fund will be launched in real terms in February or March next year, even if hit by an unexpected credit event.
Northern Trust's derivative trading up to now has been limited to currency swaps to hedge exposure to non-U.S. government bonds in its global government bond fund. The move into the credit market is viewed by market officials as a big step forward for the company. The fund manager's clients are institutional investors; predominantly pension funds, which will likely use the fund as an absolute return overlay for their investments in cash fixed income portfolios. Managed by the company's global fixed income business, the credit fund will be marketed globally.