Bond Giant With $736 Billion Builds Defenses Against Credit Rout
(Bloomberg) -- When Luke Hickmore doubled down on credit-default swaps to guard against an onset of volatility, even he didn’t anticipate the violent storm that would hit the market.
This week, as credit finally succumbed to a downdraft in riskier assets, Hickmore has bolstered his defenses, through single-name CDS that are more liquid and easy to exit in times of stress.
“It’s difficult to call the direction for risk in the short term with a lot of political noise over the next few weeks,” said Hickmore, a senior investment manager at Aberdeen Standard Investments, which runs $736 billion of assets from Edinburgh as the U.K.’s largest active manager. Bigger hedges will help guard against any impending volatility sparked by Italy’s budget impasse with the European Union and Britain’s messy Brexit divorce, he said.
His credit funds remain tilted toward “risk-on,” meaning a long-term bet that credit will recover and prices will resume their climb. But he expects the days of ultra-low volatility are likely over, as the European Central Bank taper means it’s no longer in the background stifling market swings. That can be seen in the convergence of bonds with CDS.
“We have used this as a point to add some protection for funds against more volatility,” he said.
One trade this week: selling out of Heathrow Funding’s notes due 2031 in favor of the airport operator’s 10-year credit-default swaps. “CDS moved quicker than the physical bonds during the selloff at the end of last week,” Hickmore noted.
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