Henderson Global Investors is planning on becoming a more active buyer of synthetic securities following the implementation of an in-house derivatives model that will allow it to compare values in the cash and synthetic markets. Daniel Beharall, head of the quantitative portfolio management team in London, said when the proprietary system is implemented, "we will really be cranking up what we're doing." Henderson manages roughly GBP11 billion (USD15.7 billion) in credit and he said, roughly speaking, the firm could have up to 10% of that in synthetic assets once the system is implemented, assuming market conditions are right. Currently Henderson has only a handful of single-name default positions.
Derivatives professionals said it makes sense, given the buyside can gain exposure in default swaps to names whose outstanding bonds are relatively small or in varied maturities. As for Henderson, it is looking at using derivatives now because of the decrease in liquidity of the cash market. "As government bonds become less liquid and we're looking for yield, we don't want to be pitching to clients with a limited armory," said Beharall. The asset manager is taking a close look at credit derivatives because of arbitrage opportunities that exist between the cash and synthetic markets. "It is another means of getting exposure and at any one time, either a bond or a default swap may have better value," he noted, adding the relative newness of default swaps means there is a basis to play on.
