Senior corporate bond officials at Banc of America Securities are considering starting a proprietary hedge fund that would invest in the credit markets, according to an official at the firm. He declined further comment, and referred calls to Tara Burke, a firm spokeswoman, who declined comment. One fixed-income official familiar with the situation compares the proposed vehicle to UBS Principal Finance (see story, page 2) and to CLCM Credit Management, a new multi-billion-dollar operation just started by Credit Lyonnais (BW, 4/14), in that it would use the investment bank's capital, but be independent from the firm's secondary trading operations. The possibility of a B of A vehicle modeled after UBS Principal Finance and CLCM Credit Management is the latest sign that investment banks are increasingly investing their own capital in the credit markets.
A B of A official declined to give details about the proposed credit hedge fund, insisting that it is in its earliest planning stages and is at least a year away. If it truly follows the model of CLCM Credit Management, it will invest in high-grade, high-yield and distressed corporate bonds and asset swaps. It will also use credit derivatives to take synthetic short positions, according to a senior fixed-income official who recently met with John Botti, head of CLCM Credit Management. The official says CLCM Credit Management is not a hedge fund, however, because it does not use leverage. Neither CLCM Credit Management nor the proposed B of A vehicle plan to invest third-party money. Botti declined to comment. Requests for an interview with Peter Abramenko, managing director, UBS Principal Finance, were referred to Kris Kagel, spokesman for UBS Warburg, who denied the requests.
Peter Petas, head of global strategy at Creditsights, and a veteran emerging markets analyst, compares the funds to emerging markets proprietary trading desks he says were ubiquitous on the sell-side, but were shut down after the Russian default. He calls the reappearance of these desks an interesting trend that he believes firms are employing "to take advantage of dislocations in the credit markets." He believes volatility in sectors such as telecom and even autos, along with a record number of fallen angels, has created unusual opportunities for experienced investors who can operate more nimbly than a mutual fund by using tools such as swaps and derivatives in an attempt to hedge risk and maximize return.