Fixed-income powerhouse III Offshore Advisors is planning to launch a credit derivatives arbitrage fund next month. The firm is seeking to launch with $300 million with its principals kicking in $15-20 million, according to an investor document obtained by Alternative Investment News, a CIN sister publication. III has already been investing in credit derivatives in its other funds, but has approached the capital allocation limits. The III Relative Value Credit Strategies Fund is being kicked off to allow it to invest further and to pursue opportunities in the credit market outside its current mandate, the document says. Calls to Bill McCauley, principal, were not returned by press time.
III began investing in the credit derivatives market toward the end of last year, and the strategy now represents 15% of the III Relative Value/Macro Fund. Around that time it hired John Cieslowski from Bank One and Lester Croyle from Commerzbank to run the strategy. The new fund will make several types of arbitrage trades, including bonds versus credit default swaps, index versus index and correlation trading. The vast majority of trades will be in the U.S., European and Japanese credit markets. III plans to invest in the higher end of the capital structure and may also engage in strategies that have longer workout periods.
The fund will carry a 2% management fee and a 20% performance fee. There will be quarterly liquidity with a 3% redemption fee for withdrawals in the first three years, however, investments made before Jan. 1, 2006 will be exempt from this provision. There is also a 20% gate.