Investors looking to add synthetic credit to their cross-asset class portfolios have emerged as the first players to show interest in total-return swaps on the iTraxx index, a play debuted by JPMorgan last month. The swaps allow them to buy or sell exposure to European credit through a vehicle that tracks returns on the iTraxx CDS index.
"For people who invest across various asset classes such as rates and equity, this is a natural plug into credit," said Paul Glasgow, credit trader at JPMorgan in London. "It allows investors to source credit returns in a simple format," he added.
In the swap, the buyer pays a notional to the seller upfront and at maturity receives the upside of the iTraxx Total Return Index, a theoretical level based on returns from funded investment in iTraxx. Glasgow said he expects the investor base to grow to include traditional cash-based credit investors as well as so-called portable alpha funds. Other credit houses are thought to be eyeing the launch of similar swaps.
