KBC Alternative Investment Management, a hedge fund manager with USD2.5 billion in assets, is planning to launch a quantitative statistical-arbitrage credit hedge fund. This would be one of the first hedge funds to pursue this strategy in the credit markets, according to hedge fund sales professionals. Statistical arbitrage is popular in equities but until recently the instruments for shorting credit, such as default swaps, have not been available at tight enough bid/offer spreads to take advantage of the arbitrage opportunities, according to Andy Preston, cio in London.
The move is part an expansion of KBC AIM's trading strategies to include credit arbitrage. Preston said it is planning to get into the space because "the credit markets are inefficient and under-arbed. We perceive some mispricing and want to create a model that systematically capitalizes on those opportunities."
The arbitrage opportunities are also likely to be larger in the credit markets because there is more real money moving around and fewer arbitrageurs. "Flows in credit are very large and very fundamentally driven and demand and supply dictates that price moves are economically unjustified," explained Preston.
"The convertible bond arbitrage market is much fiercer than the credit markets," noted Preston. The credit arbitrage fund will also use other sub strategies, such as structured credit arbitrage and relative-value trades, noted Preston.
KBC AIM has five hedge strategies. It started off as a convertible bond arbitrage fund, and its convertible opportunities fund returned 14% last year. It set up its first credit arbitrage fund, a capital structure arbitrage fund, 12 months ago and it has returned 18% after fees.
