Money managers have started using credit derivatives to hedge and boost returns for institutional clients and are expected to start using the instruments for retail portfolios this year. Schroder Investment Management is thought to be the first large asset manager to use credit derivatives for retail targeted portfolios, (DW, 12/1) but last year, U.S. asset management giants Western Asset (WAMCO), Fidelity Investments and JPMorgan Fleming Asset Management all staged their entrance into the credit derivatives arena, said credit derivatives sales professionals.
Jim Vore, executive director, credit derivatives at Morgan Stanley in New York, said the increased liquidity in the default-swap market has led more asset managers to start using the instruments. Over the past year, many money managers have been successful in gaining approval from their institutional investors to use the instruments, with investment guidelines being rewritten to allow the products. The increasingly standardized definitions of credit events being used by dealers has also aided their adoption, he added.
Several large money managers now have the framework in place to use credit derivatives and firms' sales staff are out pitching the benefits for retail portfolios. But, one credit professional in New York said the documentation is complex and is too complicated for retail investors.
Myles London, senior risk manager at Advest, a regional broker dealer in New York, cautions against using credit derivatives as a catch-all risk mitigation tool. The use of credit derivatives to mitigate portfolio risk has been actively sold to asset managers by banks over the past year and is viewed by many as something of a panacea, he noted. But, they can be expensive and managers really need to consider whether they are suitable, he stated.
