SG Corporate & Investment Banking is offering derivative investment products linked to a fully managed credit derivative fund. While derivatives of managed collateralized debt obligation index or bespoke tranches have become popular in the last year, SG officials say the firm is the first to link investment products to an actively long/short credit or correlation fund, which requires more sophisticated risk management. The firm has teamed up with a European asset manager for the venture, but officials declined to name the manager.
SG is able to write investment products on the fund because it has come up with a way of managing the risk of the fund gapping, or declining suddenly in value. It does this by calculating the gap value-at-risk of the portfolio on a daily basis. If the VAR level of capital-at-risk for the portfolio strategies exceeds a designated cushion, the asset manager will look to hedge part of the exposure to bring the level of risk back to acceptable levels--rather than unwind trades.
"Funds with GapVAR have a competitive edge as they can trade correlation efficiently and diversify their risk exposure at a cheaper cost," said Edouard Huntziger, director in structured derivatives at SG in Hong Kong. "These are more diversified in terms of default risk, spread risk and correlation risk."
Fund-linked products have traditionally been the turf of equity derivatives businesses, but SG sees this as a natural development for credit derivatives. "Asset management involvement in credit has initially been through managed collateralized debt obligations--now they can provide sophisticated returns that are close to hedge fund products," said Huntzinger. "Alternative investment in credit has become a reality."
