 |
||
|
Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks |
 |
|
China Investment Corporation, the smaller of the two funds used to deploy China’s vast foreign exchange reserves, is already one of the most aggressive sovereign wealth fund players in structured investments and trading, and is set to become an increasingly important revenue source for banks.
CIC could receive a boost of as much as $200 billion in assets in the coming months, which is likely to accelerate its move into trading markets. The fund’s public investments dominate outside attention – most notably the $5.6 billion purchase of Morgan Stanley stock that marked its first big deal in December 2007. But the wild P&L swings in the Morgan Stanley investment during the crisis did not deter CIC from making bold structured credit trades during late 2008 and 2009. As banks scrambled to unload some of the toxic structured credit trades on their books during the crisis some dealers convinced CIC to purchase credit-derivative-based deals with notional values in the multiple billions of dollars. These trades were conducted when credit spreads were extremely wide and there was dislocation in the basis between bonds and default swaps. CIC made a very healthy profit on those trades, which is likely to encourage the firm to make further forays into structured investments and to step up its own derivatives trading.
Libya’s sovereign wealth fund is also taking steps towards more active use of derivatives in an approach that involves trading via a specially created hedge fund. Libya has seeded the launch of FM Capital Partners, a fund created by Frederic Marino, a former head of fund-linked products at Merrill Lynch. Marino has already hired derivatives trading specialists, including equity index options trader Nael Tassabehji, who most recently worked at Nomura.
Libya is spreading its investments in derivatives across different venues, in a hybrid approach that is becoming increasingly popular. It has made a number of structured product investments via its main sovereign wealth fund, the Libyan Investment Authority, in recent years. The seeding of FM Capital Partners marks further diversification of its complex investments.
A similar approach is being taken by Occidental, the energy firm that bought Phibro from Citi, in a purchase that brought the services of Andrew Hall, a high-profile oil prop trader. Soon after picking up Phibro for a relatively low $250 million, Occidental contributed seed money for a new fund set up by Hall. Astenbeck Capital Management – which is named after the location of Hall’s Bavarian castle – is reported to have lost more than 10% in a key fund in May, when the oil price dipped. But Hall’s strong long-term track record had already made capital-raising for the fund straightforward and Occidental was presumably prepared for volatility in his results.
Citi chief executive Vikram Pandit received some criticism for his decision to offload Phibro at a bargain price in October 2009 in reaction to criticism of a compensation package for Hall that could have totalled $100 million. Pandit might have thought that trading opportunity cost was worthwhile this summer, however. If Hall had still been a Citi employee Pandit might have been forced to deal with reports of substantial oil prop trading losses just as an overhaul of financial services legislation was coming to a conclusion in the US. That would have been tough to explain away, given Pandit’s public commitment to building a simpler, more transparent Citi.
