Eriswell Capital has traded a novel debt against equity structure which has caught the eye of several market makers because it offers a natural hedge for their correlation books. In the trade, Eriswell Capital sold a first-to-default credit-default swap basket and bought an out-of-the-money worst-of equity put on the same names. Michael Weber, principal of the fund in London, said, "This particular trade is fantastic for everyone." He declined to name the counterparties.
The trade is appealing because it involves the hedge fund selling equity correlation exposure to the bank. Structuring desks have been scrambling to buy correlation, to balance the short positions they have built up through selling retail equity-linked notes (DW, 12/23). The deal also suits credit traders, who have mostly sold rather than bought first-to-default CDS baskets.
City derivatives analysts agreed the trade looked like a good match. One strategist noted hedge funds and prop desks have looked at trading out of the money puts against CDS baskets, but this appears to be the first example using a worst-of option. "It looks like a more effective way of playing debt and equity," he admitted.
