Aladdin Capital Management, a collateralized debt obligation manager with five transactions under its wings and $1.5 billion in assets under management, is planning to increase its participation in the structured credit market and is in the process of launching an open-ended credit fund. "It's going to be a long/short credit fund that will gain exposure to credit predominantly through the use of credit derivatives," said Jason Morris, director in structured products at Aladdin. He will be a co-manager for the new fund, which is slated to begin trading in September and has amassed $50 million of seed capital that will be levered. Morris declined to reveal the name of the new fund, citing securities laws.
The fund will take positions in vanilla instruments such as default swaps as well as more exotic instruments such as credit options and recovery rate swaps. The bulk of the fund will be in CDS but by using a wide array of instruments the fund will be able to "decompose risks into its Greeks," he said. For example, the fund can go long or short credit or volatility on a single name or a basket of names, instead of taking on a multitude of different risks by investing, say, in a corporate bond. As part of the effort, Aladdin recently hired Yi Zhao, a desk quantitative professional from BNP Paribas' credit trading team in New York, as another co-manager for the new fund.
Morris, who joined Aladdin in August of last year from Moody's Investors Service, said the fund will mark new ground for the firm, which has to date limited its exposure to synthetic instruments to 15-20% of its total in its traditional open-end credit funds. He said the maturation of the credit derivatives market has made Aladdin comfortable enough to make it an integral part of its plans.
"As we've used them more and more often, we've become more comfortable with [credit default-swaps] and are extremely comfortable with how the product holds up in times of stress," he said, adding, "it's a legitimate instrument now." And because the fixed-income manager prefers to take duration-neutral bets, "CDS offer a more economically efficient way of gaining credit exposure," he explained. The fund will take positions in credits from the U.S. and Europe, and though Morris noted the European market is more advanced than the U.S. one, he said Aladdin's investments will be centered on American credits because that is where its research work is focused.
Aladdin currently has $1.5 billion under management, through four traditional cash flow CDOs and one synthetic transaction. Of those cash deals, three are leveraged loan-backed transactions and one is an investment-grade corporate bond-backed vehicle.
The money manager, of Stamford, Conn., has not yet selected a prime broker for the fund.