Olga Chernova is founder and CIO of Sancus Capital Management, a credit manager with offices in New York and Los Angeles that she founded in 2009 after a distinguished trading career with JPM, Dillon Read and Goldman Sachs. The firm specialises in investing in complexity premiums through structured products, such as CLOs and synthetic tranches.
Sancus runs two hedge fund vehicles (multi-strategy credit and CLO equity). The multi-strategy credit fund combines various credit instruments to generate option-like payoffs with limited downside. The fund provides largely floating rate exposure, which produces low correlation with other classic long/short credit managers, mutual funds, and ETFs.
“Our approach to investing combines fundamental analysis, momentum trading and a relative value framework,” says Chernova (pictured). “Our investors appreciate our expertise in complex products and our ability to move quickly as the opportunity set in credit changes throughout the credit cycle. In addition, our interests and investor interests are strongly aligned with significant internal capital invested in the fund.”
Sancus has not only been creative with its trade ideas, it has also pioneered an important innovation in the CLO space, called the Applicable Margin Reset (AMR).
This feature uses an online auction mechanism to refinance CLO liabilities and skips the traditional underwriting process and costs associated with it. “The feature is highly valuable to CLO equity investors. Sancus offers access to a pool of CLO equity with this refinancing feature. This offering is currently unique in the market,” confirms Chernova.
The Fund uses a relative value framework to identify mispriced opportunities and then often implements directional trades. Sancus calls this approach to credit investing “directional RV”.
As Chernova explains: “Credit markets are often disjointed: similar risk profiles in different instruments are priced differently. For example, volatility in credit CDX options and short-dated high-yield bonds can be valued differently, since both have a different investor universe.
“Our relative value approach will highlight historical dislocation. However, often transaction costs and liquidity would be prohibitive to putting on both sides of the trade to lock in true relative value. We then pick a side that we think is cheap or mispriced and implement it as a directional trade to save on bid/offer.
“Directional trades might have more risk, but if we size them smaller we often come out ahead versus paying for true relative value.”
Chernova remarks that the CLO market this year has been dominated by three big themes: 1) repeal of the risk retention rule; 2) a huge refinancing wave; and 3) an increase in equity-friendly structural features.
“All three are somewhat interconnected, but with respect to the repeal of risk retention rule, this move generated a lot of supply in CLOs which ultimately drove widening in spreads of CLO liabilities. CLO collateral managers no longer have to post retention capital from their management companies or risk retention funds. This allows existing managers to issue more deals, and does encourage new entrants into the CLO management space.”
On winning this year’s award, Chernova comments: “We are honored to receive this award. Our team have put a lot of hard work into developing both creative trading strategies in the credit space and pioneering important innovations within the CLO market.” n
