New York Firm Preps ABS Hedge Fund

Jul 20 2009 | 9:29am ET

There’s a new asset-backed securities hedge fund taking aim at that battered asset class. New York-based DS Credit Strategies is readying its maiden hedge fund for launch in September with between $75 million and $100 million.

The DS Credit Strategies Fund will employ a fundamental, research-driven, bottom-up investment process to take advantage of market dislocations in the ABS market, according to a source familiar with the firm’s offering.

“The tremendous advantages to this fund over its peers are [its managers] have traded the assets successfully in all market conditions for many years, and more importantly they ‘created’ what they are now buying, having originated over $1 trillion in the ABS sectors they invest in,” said the source.

Its portfolio will consist of residential mortgage-, auto loan-, student loan-, equipment loan- and consumer asset-backed securities. The fund may employ leverage of up to two-times its assets under management, depending on market conditions.

“The ABS markets offer incredible opportunities for unlevered returns,” the source notes. “A year ago, there were ABS traders showing 50% returns right after the markets seized up.  While the sector has become somewhat less volatile the edges are still there and it has nowhere near recovered.  This weakness in the sector is expected to continue as long as consumer credit remains constrained and economic data affecting the consumer ABS markets is negative.”

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