March 2021 | Issue 232
News
Captor builds CDS use-case as it launches smart beta strategy
Dan Alderson
Deputy editor
Stockholm-based Captor Fund Management is readying a fund that will aim to beat cash bond benchmarks by investing in CDS indices, adding to signs of broader appetite for the asset class.
The Aster Global Investment Grade fund, which chief investment officer Daniel Karlgren will oversee, is set to launch in March or April. Billed as a ‘smart beta’ strategy, it will take levered long positions split evenly between Europe and the US through investment grade indices iTraxx Europe and CDX IG.
With 125 companies referenced in each index, this will give the fund exposure to a portfolio of 250 credits.
Captor projects that, at current spread levels (Europe 49.25bp, IG 52.75bp at time of press), the Aster fund will have a one-year expected return of around 3.4%.
This compares to an expected return of just 2.6% net for a fund holding an average seven-year triple B bond in dollars, hedged to krona, after deducting the same fee as Aster (0.4% institutional class C).
Karlgren: overseeing the new fund, which will have exposure to a portfolio of 250 credits
As well as aiming to achieve higher returns than traditional IG credit funds, Captor believes the strategy will suffer much smaller draw-downs than those investing in equity or high yield credit markets.
The Aster simulated portfolio would have consistently outperformed global equities in Swedish krona and global aggregated credit hedged to the currency, including in 2020.
Captor will initially target Swedish institutional investors such as pension trusts and insurers looking to diversify their fixed income holdings. But the firm may open the Ucits fund to international investors over time.
Global investment grade credit exposure has typically been expensive for Swedish institutional investors, given the need to currency hedge to krona. Mismatches in interest rate regimes also often work against Swedish firms.
Karlgren says that centrally cleared CDS index investments mitigate the need to currency hedge, and bid/offers are a fraction of those on individual bonds.
The Aster strategy will focus on the most liquid five-year part of the CDS curve, but could look to any tenor, while minimising the FX constraints of global bond portfolios by investing cash holdings in krona-denominated triple A covered bonds and interest rate swaps.
As part of its long-term commitment to uphold ESG investing, Captor also aims to gear the fund to compliant products over time if sufficient liquidity builds in them. The firm notes the current investment grade CDS index universe is around 73% ESG compliant.
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Global credit funds & CLO's
March 2021
| Issue 232
Published in London & New York.
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