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Credit hedge fund switches from CDS to bond shorts, reports Bloomberg
Monday, December 19, 2011
Bloomberg reports that Greenlight Capital Re, an insurance entity that is managed in a similar way to Greenlight Capital’s hedge funds, reduced its short credit positions using sovereign credit default swaps in the third quarter of this year. It appears to have replaced these positions with cash shorts, suggesting that the manager is concerned about the regulatory risk involved in buying sovereign credit default swap protection. The article quotes a source as saying that other hedge funds have followed a similar strategy recently.
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Trading
Structured
CFlux secondary
CLO index levels:
| Index | 14 May |
|
| CFlux USD AAA | ↑ | 96.0 |
| CFlux USD AA | ↑ |
87.7 |
| CFlux USD A | ↑ | 85.1 |
| CFlux USD BBB | ↓ | 77.2 |
| CFlux USD BB | ↑ |
75.9 |
| CFlux USD EQ | ↓ | 76.7 |
counterparty risk management
But if his CDS goes out worthless, doesnt he realize his bond shorts accrete to par and are thus worthless shorts too? CDS cant be worthless unless reference debt is paid off at par. And if debt isnt, then there a credit event and that's a hard coded ISDA rule. Einhorn cant be forced into the "voluntary pool" so what is he afraid of ? I'd be more afraid the EU governments finagle with ability to short cash bonds by manipulating the repo markets in some way. With CDS, you're in a private contract far across the pond. Again, nobody can force anybody to join the voluntary group unless youre an EU bank.