Former Hedgie Eyes Shadow Banking Sector

Oct 19 2012 | 11:28am ET

Daniel Zwirn, who closed his $6 billion hedge fund DB Zwirn in 2008, is looking to the shadow banking sector.

Zwirn, who closed his fund after an internal review revealed problems with fund transfers and expense accounting, is in talks with strategic backers, according to the Hedge Funds Review.

His new venture is based on his belief that private investors need to take the place of banks in providing credit to middle-market companies. Zwirn argues the illiquidity premium to be earned on such loans has risen dramatically:

"We're talking about one- to three-year middle market or small loans secured against corporate, real estate, consumer or structured finance assets," Zwirn told HFR. "The natural buyers of this risk are banks, or in certain cases insurance companies, but they have been forced to exit this business. As a result, the illiquidity premium is enormous."

Zwirn is considering a variety of illiquid credit strategies including special situations corporate lending, real estate lending, unsecured consumer lending and legal and insurance finance. His fund may also buy distressed debt and non-performing loans.

Moreover, he intends to structure funds to reflect the duration of underlying loans and assets, offering investors a choice of structures, from private equity to hedge funds to hybrid vehicles.

Zwirn told HFR the most attractive opportunities could be "in the space between hedge funds and private equity.”

"Investors willing to take positions that are 18–30 months in duration could do very well," he said.


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