Symphony Asset Management has launched two senior bank loan funds that enable the manager to short bank debt, according to LMW sister publication Alternative Investment News. Symphony is able to make negative bets on bank debt through total return swaps, said Michael Henman, director of business development. Henman declined to reveal details on how these synthetic short sales are executed, citing the proprietary nature of the firm's methods. Gunther Stein, director of fixed income strategies, did not return calls.
The funds are considered highly unusual because shorting bank is considered near impossible on a large-scale basis. Last year, Goldman Sachs put together a detailed proposal for shorting bank debt, but pulled the idea (LMW, 6/23). The Goldman proposal called for the firm to borrow the loans from a bank or collateralized loan obligation, pay an administration fee and the coupon on the loan, and lend the security out to a client. Goldman was said to be unable to obtain the required repo agreements because banks were unwilling to lend out the loans for the required period of time. Illiquidity in the bank loan market and inefficient settlement are also barriers.
Rival fund managers and even some sell-side officials were largely in the dark as to how the total return swap would be structured. One portfolio manager said Morgan Stanley has been shorting bank debt for some time, but only selective names and in small amounts. Similarly, Deutsche Bank is said to be providing a tailored service to hedge fund clients. But Symphony is targeting a larger fund--rumored to be up to $500 million--and is stating that it is unaware of any other firm that has devised a method for shorting senior loans systematically in order to construct hedged portfolios. Bankers and spokespeople at Deutsche Bank and Morgan Stanley declined comment.
The two hedge funds, called Melody Fund and Harmony Fund, will invest in triple-C to triple-B loans. Symphony assumed responsibility for the Nuveen Investments bank loan fund after the departure of Jeffrey Maillet.