Xaia Investment recorded over €1.2 billion in fund volumes by the end of the month. Of this, more than €900 million was in basis (CDS versus cash credit) funds and €261 million in a capital structure arbitrage strategy. These all made positive returns, as did its Credit Curve Carry fund. “The number of market anomalies means directional strategies have not been necessary, as this has created some of the best opportunities to source negative basis and capital structure positions in the past decade,” says Jochen Felsenheimer, managing director at Xaia. “We reopened funds in these areas we had soft-closed since 2011, and found the opportunity to collect money from old and new investors.” Xaia Credit Basis and Credit Basis II each target a 3-3.5% return over three-month Euribor, net of fees. They profit from discrepancies in the basis between cash instruments and CDS.

“Basis has flipped during the crisis,” says Munich-based Felsenheimer. “People were afraid of US dollar liquidity so started selling bonds to raise money. Beyond the first weeks of the crisis, CDS remained relatively stable and it’s the most liquid part of the credit universe. This picture will develop according to which names are on central bank buying lists, but those that don’t make it will continue to have negative basis.” Xaia’s Credit Debt Capital, a capital structure arbitrage fund, also performed well. According to Felsenheimer, it makes sense in a crisis to buy into credit risk at wide spreads and use equity (stock) puts as a hedge, which is similar to a basis position. “Implied equity volatility spiked early on,” he says, “meaning these trades were not easy to set up, but since then a window of opportunity has opened.” Across its funds, Xaia aims for low leverage and sharpe ratios. Correlation trades rounded off a good month. “Being long equity tranches delta hedged has worked well,” Felsenheimer says. “Default risk rises overall, so expected loss correlation rises and this tends to favour equity versus mezzanine.”