SAN FRANCISCO (MarketWatch) — Hedge funds that don’t have much experience in the field may be using credit derivatives “inappropriately,” industry advisory firm Hennessee Group LLC said on Monday.
Credit-default swaps, or CDS, are derivatives that provide insurance against a company going bankrupt. Investors pay an annual spread, or premium, in return for the promise of a payment in the event of bankruptcy or a similar credit event. As the creditworthiness of companies change, the cost of this insurance fluctuates.
CDS are a common investment and trading tool of credit hedge funds, which have used the derivatives effectively over the past five years, Hennessee, which tracks manager performance, said.
However, equity hedge funds have begun trading CDS more during the past year too, making Hennessee concerned that managers who are inexperienced in derivatives markets may be using them in inappropriate ways, the firm explained.
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