Chenavari Investment Managers, the London-based credit-focused hedge fund, is building “agile and opportunistic” positions for yet further dislocation in global markets, going long in synthetic instruments – such as synthetic bonds and credit default swaps – and shorting cash assets, predominantly cash bonds.
In a letter to investors on Monday morning, Chenavari observed how value is reconstituting following last week’s market turmoil, with credit spreads in the iTraxx Crossover 5 year CDS index having gapped out some 300 basis points since the start of the year.
Meanwhile, technicals will be “king” in the short-term, the manager said.
“After the brutal sell off, we would expect some of the most exposed funds to start facing redemptions. Depending on the magnitude of those redemptions, and the level of leverage of the funds, we believe that some ‘half liquid’ instruments could be hit by forced selling. This could trigger further dislocation on certain cash instruments, paving the way for very attractive entry points on certain corporate bonds and AT1s.”
The noted added: “This thesis of “better value, dangerous technicals” has driven us to build a profile with a slight skew towards synthetic instruments on the long side, in addition to bonds, whilst the shorts are mostly expressed via cash bonds.”
The Lyxor/Chenavari UCITS Credit Fund’s bond shorts have helped protect performance from the sharp correction in high yield instruments, which saw some bonds slide more than 20 points and the iBoxx High Yield index down 11 per cent as liquidity tightened. The fund has continued to offload its bond positions since late February, and is up some 1.26 per cent year to date.
“It is also important to note that the fund has built a comfortable cash buffer, giving us the ability to buy back some bonds should the potential technical dislocation mentioned above create attractive opportunities,” Chenavari added. “This also means that the fund’s positioning remains very opportunistic and could evolve extremely quickly as the co-PMs see fit. More than ever, the current market conditions call for being agile and opportunistic; the positioning represented above is only a picture at a point in time and could change fast.”
Established in 2008 by French-born credit market veteran Loïc Fery, the strong-performing Chenavari runs a range of products focused on a mix of credit, real estate and asset-backed securities products.
