U.K. bond managers are waking up to the potential of the credit-default swap market and several, including AXA Investment Managers, Credit Suisse Asset Management and Standard Life Investments, are gearing up to trade the instruments this year, according to DW sister publication Global Money Management. Kerrigan Procter, director of rate structuring at Royal Bank of Scotland in London, said most fund management firms he talks to have recently hired derivatives experts or have made internal appointments in preparation to use CDS. Pension funds increasingly want to use credit derivatives to match liabilities and to enhance returns. "Any fund manager that doesn't do that will be left behind the pack," he noted. U.K. managers, with their traditional focus on equity, lag behind their European peers in CDS experience.
AXA in London will start trading CDS in the next couple of weeks.Alliance Capital Management in London started to use CDS earlier this year for one institutional segregated bond mandate and Deutsche Asset Management's sterling bond team in London started trading CDS three months ago because it is cheaper to gain exposure to certain issuers in the financial sector through the CDS market than the cash market. CSAM intends to start using credit derivatives before year-end in external mandates and Standard Life Investments will start using CDS for its internal life funds this year.
Once Standard Life has built up a track record, the manager will offer its CDS capabilities to external clients. It recently hired Roger Sadewsky, v.p. at JPMorgan Securities, to spearhead the drive. Aegon Asset Management plans to develop the capability to trade CDS next year.
Standard Life Investments wants to use CDS to exploit pricing discrepancies between the cash and derivatives markets, said Andrew Sutherland, head of credit. Trading CDS will dramatically widen AXA's opportunity set, said Jamie Grant, investment manager. There are 830 bond issues in the Merrill Lynch Sterling Broad Index, from 325 issuers, whereas there are CDS on some 2,000 issues.
But Will Managers Pull The Trigger?
CDS might be the talk of the Square Mile, but the jury is still out on how widespread fund managers' use will be. One potential sticking point is that clients have to include permission to use derivatives in investment manager agreements and, since many of these agreements pre-date the CDS market, trustees must revise these agreements before managers can use CDS for such segregated mandates. Indeed, AXA's Craig Hurt, fixed-income product specialist, is busy knocking on trustees' doors in an attempt to persuade them to revise their manager agreements. Clients have been receptive, he noted. The majority of pension funds, however, are "just trying to get up to speed with plain vanilla swaps," said Aegon's Anton Eser, head of structured products in Edinburgh. CDS, he cautions, "could be a bridge too far for a lot of clients."
