By Nell Mackenzie
LONDON (Reuters) – Hedge fund manager Boaz Weinstein doesn’t believe Credit Suisse will pay off its debt, but if it does, the derivatives trading he has in the bank could win big, highlighting how hedge funds use volatile markets to try to make money to generate. juicy returns.
Speculators raised bearish bets on the Swiss bank last year amid concerns about how much capital it would need to bolster its balance sheet amid a crisis of confidence exacerbated by unsubstantiated social media reports about the bank’s financial health.
Hedge funds and other speculators borrowed just over a fifth of Credit Suisse’s stock to short it as of Oct. 31, the highest level since at least 2006, according to S&P Global Market Intelligence.
Weinstein told Reuters he holds a dual long and short position on Credit Suisse’s credit default swaps (CDS), derivative contracts that provide insurance protection and pay out when a company defaults on its debts. He is long 2 years and short 10 years protection on the bench.
“Credit Suisse curve trading reflects my view that the drama surrounding Credit Suisse will be resolved one way or another for better or worse over the next two years. I believe it will be for the better and they will recover” said Weinstein. , which offers a glimpse into its trading strategy.
Weinstein ran a proprietary trading fund at Deutsche Bank, which was formed in 2009 to start Saba Capital Management. It is known that in 2012 the fund bet against JP Morgan’s “London Whale” trading position in CDS indices.
Demand for a company’s CDS can also attract investors seeking protection from the company or betting on its demise. Credit Suisse’s CDS rose in price through the end of November following the bank’s $2.4 billion rights offering and the company’s shares fell to the lowest level in its 166-year history.
As bearish bets against Credit Suisse increased in late 2022, Weinstein says he saw Credit Suisse’s CDS price curve make less and less sense: The 2-year protection in the bank cost about the same as the 10-year.
“I think Credit Suisse’s CDS and bond curves are mispriced because they imply that many years from now the bank will be as risky as it is now,” Weinstein said.
So he bought the 2-year CDS and sold the 10-year CDS, which is what market traders sometimes call a spread or straddle.
Weinstein’s $4.8 billion hedge fund does best when markets are volatile. Amid 54 major rate hikes by the central bank, its main fund returned more than 28% in 2022, according to industry research. In 2020, the same fund returned 73% after losses in 2021 and 2019, the study found.
Investors are increasingly turning to CDS derivatives trading to protect themselves or to express a bearish view. CDS indices such as the iTraxx and CDX traded more than $30 trillion in 2022, the most since the COVID-19 pandemic in 2020, according to research from S&P Global Market Intelligence.
Credit Suisse declined to comment.
(Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and Susan Fenton)