Hedge fund manager Maystone Partners plans to buy credit default swaps once its Maystone Continuum Fund, a convertible-bond arbitrage fund launched last month, doubles its assets under management to USD100 million. Henry Pizzutello, managing partner in Greenwich, Conn., explained that because the typical notional size of over-the-counter credit default swaps is USD5 million, the fund wants to increase its assets under management for diversification purposes before plunging into this market.
Credit default swaps are an attractive investment because the credit derivatives market is becoming increasingly standardized and diversified, said Pizzutello. The fund plans to buy credit protection on corporate and high-yield names in order to mitigate interest rate and credit spread risk on the fund's convertible arbitrage book. In addition, it will buy swaps where it sees potential to profit from general spread tightening, which has been occurring since October. Even where spreads have begun to widen, there is often still a lot of room left for further movement, making the purchase of swaps attractive, he noted. It may also purchase swaps on distressed securities if Maystone wants to take a position on the probability of these companies filing for bankruptcy.
Pizzutello has not yet decided which default swap counterparties it will use, however, he noted that Maystone will likely only employ two firms, which will be selected according to criteria including credit rating and price. Goldman Sachs is the fund's prime broker.
