According to Financial Times’ Brian Bollen, The implications of central clearing of over-the-counter derivatives for certain hedge fund trading strategies could be significant.
If Olivier Lebleu, London-based head of non-US distribution for Old Mutual Asset Management, is correct in his analysis, the imposition of higher levels of transparency will make life increasingly difficult for hedge fund traders pursuing relative value fixed income strategies.
To illustrate his thesis, he points to two of the most high-profile events of recent years in which one party identified vulnerability in another and constructed customised transactions specifically to position itself to exploit that vulnerability. Centralised clearing of OTC derivatives would diminish de facto and de jure the ability of Paulson & Co to trade against the subprime mortgage market as it controversially did in 2007, and the ability of hedge funds to stage a repeat of the “whale trade” attacks on JPMorgan in the spring of 2012.
“The primary pool of funds this process impacts are sophisticated credit strategies,” adds Peter Laurelli, a New York-based vice-president at eVestment, a provider of institutional investment data intelligence and analytic solutions.
“But it will impact other groups that trade in the OTC derivative markets on an opportunistic basis as well, including macro and multistrategy funds. I don’t think this process will eliminate the ability of hedge funds to exploit unique opportunities as the bilateral structure for OTC derivatives is not disappearing.”