Global Liquidity: ICBC Funds Treasury Arbitrage Fund

Bloomberg: Using Chinese Money, a Hedge-Fund Startup Bets Big in Treasuries
The outfit goes by the somewhat unwieldy name of CCSZF Management. The firm is backed by a Citic Group unit, which supplied the seed money, while Industrial & Commercial Bank of China Ltd. was brought in to provide financing in return for a cut of the profits. The key man behind it all is Stephen Siu, who spent two decades helping to pioneer arbitrage strategies for Treasuries on the proprietary trading desk at Greenwich Capital Markets, which later became part of Royal Bank of Scotland Group Plc. Former colleagues describe Siu as one of the savviest traders around, with a keen eye for exploiting minuscule price gaps between the bond and futures markets.

...CCSZF’s business model underscores two particular changes, which have created greater arbitrage opportunities in Treasuries, while at the same time limiting the number of traders who can pursue them. The first is the rise of futures trading as bouts of bond-market illiquidity increase. The second has to do with access to financing and the fact that fewer banks are providing it.

...But because the price discrepancies traders seek to arbitrage are so small, perhaps only 1/10th of a percentage point, firms like CCSZF typically try to juice returns by borrowing money through repurchase agreements -- with sums reaching $60 for each dollar of invested capital in some cases. For CCSZF, that type of leverage would boost its assets under management to $3 billion.

If you can get financing, it’s easier to “step in and pick up some of these coins you find on the sidewalk,” said Stuart Sparks, an interest-rate strategist at Deutsche Bank AG.

...“Everybody uses” ICBC for repo financing now, said Will Heins, an independent consultant and former interest-rate derivatives broker at Javelin Capital Markets. “They’re cheaper than everybody else.”
This sounds like a recipe for reflexivity trouble.

No comments:

Post a Comment