Algometrics, a London-based hedge fund, is entering the credit default swaps market for its USD33 million proprietary equity fund, Algometrics Cayman. Stephen Smith, managing director, said Algometrics is also entering the market on behalf of its investors. The firm trades for approximately three outside funds. Growing liquidity in the credit-default swaps market is spurring Smith to use the over-the-counter credit instruments. Currently, the fund only uses exchange-traded equity derivatives and over-the-counter equity options. "If you're trading the stock, credit derivatives are the way into the next tier of equity risk," Smith said. Algometrics has done some experimental credit-default swaps trading and is building a system to use for trading.
Leverage in the Algometrics Cayman fund can reach up to 10 times, but typically is at about five-times, Smith said, adding the fund targets a 15-20% rate of return. Deutsche Bank is Algometrics' main counterparty, but the fund also works with large U.S. investment banks, he said, since it is a global fund. Algometrics has a minimum counterparty credit rating of AA minus.
