Relative-value trades now make up as much as 50% of Deutsche Bank's flows. Marcus Schüler, managing director in integrated credit marketing at Deutsche Bank in London, said the plummeting bid/offer spreads have started to attract hedge funds and volumes have rocketed. Previously bid/offer spreads were too wide for hedge funds to profit from strategies. The iTraxx indices are now quoted with a 0.5 basis point bid/offer spread in the one, three, five, seven and 10 year maturities.
Sylvain Barrette, credit portfolio manager at DWS Investments in Frankfurt, said it was looking at relative-value trades as part of its strategy of diversifying revenue streams.
The most popular strategies are curve trades and forward trades. In an example curve trade, presented by Schüler, an investor would purchase USD17 million of five-year British American Tobacco protection at 69bps and sell $10 million of 10-year at 87bps. The only difference in a forward trade is the notional size of each leg is identical and this ensures the investor is neutral default risk. In the curve trade the investor has default risk, but does not have spread risk.
