“Home builder credit spreads were tight because they had good balance sheets, and people just didn’t think the risk was there,” Kobayashi said, adding the fund had resumed long positions in the builder CDSs about three months ago. The travails of the long-only CDS investors have probably not helped the Credit Market Neutral Funds’ assets under management, which sat around US$78 million at presstime. JANA’s head of investment outcomes, Ken Marshman, said the consultancy had taken insufficient interest in CDS to contribute to this article. However, Kobayashi said the Fund’s track record of performance, and never having imposed a gate or lock-up, was creating goodwill among institutional investors seeking alpha opportunities in credit.
She added that unlike many investors, the Mellon CM Fund did not make investment decisions based on ratings from credit agencies, because they were often slow to incorporate changing company fundamentals. “We look at model valuation versus market spreads and risk as measured by the price behaviour of actual credit defaults swaps…Our goal is to react quickly to changes in company fundamentals and the rapidly changing market prices of related pieces of the capital structure such as equity and volatility, allowing us to identify trading opportunities.” Kobayashi said the recent volatility and confusion in credit markets had increased those opportunities, as market participants reacted in a kneejerk fashion to managing their credit beta exposure by trading credit indices, bolstering the tendency for mispricings between individual corporate issuers.
