The evolution of the credit derivative market and structured credit innovations is changing the way fixed income managers, such as pension funds, manage their liabilities. Peter Knez, cio at Barclays Global Investors, said the evolution of synthetic structures--including collateralized debt obligations--has brought new opportunities to generate alpha at the same time as pension funds are scrambling to boost yields in a low interest rate environment.
Credit derivative-based strategies have produced new sources of return, overcoming the limitations of traditional long-only positions, while also allowing managers to hedge out their beta, he said. The ability to separate alpha from beta is a significant development, he noted. Credit derivatives and structured deals comprising credit-default swaps, have also created relative value opportunities between bonds and swaps. These developments in the context of the current interest rate environment have led to a structural shift in the way fixed income managers think, he stated.
