Best Credit/Distressed Hedge Fund: Shortlisted

The Cheyne Long/Short Credit Fund aims to generate net returns of 12%-14% regardless of economic and market conditions such as credit spread moves and the general direction of interest rates.

As a directional fund the two managers, John Weiss and David Peacock, position the corporate credit, both long and short, based on thorough fundamental analysis and on the market view of the team.

The fund invests primarily in synthetic portfolio tranches and single name credit default swaps (CDS). It is divided into two distinct strategies: relative value credit trading, which accounts for around 75% of portfolio activity, and actively managed synthetic collateralised debt obligation (CSO) equity tranches, taking the remaining 25%.

The relative value book is high conviction alpha and takes the top long/short picks, while the carry book positions term-financed portfolios to create a long default, long carry position.

Describing the investment process, the managers say through the relative value book they make position conviction trades on a non-directional basis with the aim to realise profits in a 3-6 month time horizon with the trades driven from the long side, the short side or as pair trades.

Typically the fund holds around 10-15 long against 10-15 short positions, representing the best trade ideas from both the portfolio management and analyst teams. The book can assume gross leverage of up to five times.

With current trading volume at $20-$60 billion a year, the company believes it is possibly the largest hedge fund user of credit default swaps and one of the largest asset managers of synthetic corporate credit risk.

While taking long and short views on credit through CDS, the managers say they will only use CDS to express short views on credit "as this is the most efficient way to do so". They add they will use bonds to express a long view on credit as opposed to CDS if the bond is trading at a large negative basis, for example, higher spread, to the CDS.

The carry book positions term-financed portfolios (with a fixed margin) to create a long default, long carry position. The managers actively manage the portfolios with an average turnover of between 30%-40%.

The robustness of this structure has been proven in the last 18 months as spreads widened 10 times although these structures remained intact, according to the managers. They say this ensures transparent pricing of the portfolio and liquidity from a number of market makers.

Cheyne says its primary strength is the quality of its fundamental credit analysis. The credit team currently manages approximately $73 billion of synthetic corporate credit risk. The quality of the analysis, it says, has delivered a default track record of 0.33% over 7.5 years versus the Moodys Default Notional of 2.56% over seven years.

In addition and as a unique selling point, the company points to its access to a large number of dealers and sell-side trading desks which gives it valuable information on capital flows and results in superior access to liquidity.

This is important in times of market stress and pricing power which leads to reduced bid-offer costs. All this can have a direct impact on investor's returns, say the managers.

Cheyne Capital was a founding member of the Hedge Fund Working Group and its funds comply with the  best practice standards of the organisation.

Fund facts: Cheyne Long/Short Credit Fund

Full name of fund: Cheyne Long/Short Credit Fund
Name of managers: John Weiss and David Peacock
Management/investment company: Cheyne Capital Management (UK)
Contact: Natalie Withers (+44 (0)20 7968 7348; Natalie.Withers@cheynecapital.com)
Launch date: 2004
Portfolio size: approximately $100 million
Average annualised return: 6.53% (at March 31, 2010)
Average annualised volatility: 10.04% (at March 31, 2010)
Share classes: US dollar and euro
Administrator: Citi Hedge Fund Services Dublin
Auditor: Ernst & Young (Cayman)
Custodian/prime broker: Morgan Stanley
Management fee: 2%
Performance fee: 20% with high water mark
Minimum investment: $100,000
Lock-in/up: none
Redemption period: monthly with 30 days notice; 3% if redeemed within the first 12 months of investment