By Nell MacKenzie

LONDON (Reuters) – Hedge fund manager Boaz Weinstein doesn’t think Credit Suisse will default on its debt, but if it does, the derivatives trade he has at the bank could gain big, highlighting how hedge funds use volatile markets to try to generate juicy returns.

Speculators increased bearish bets on the Swiss bank last year on concern about how much capital it would need to bolster its balance sheet in a crisis of confidence deepened by unsubstantiated reports on social media about the bank’s financial health.

Hedge funds and other speculators borrowed just over a fifth of Credit Suisse shares to sell as of Oct. 31, the highest level since at least 2006, according to S&P Global Market Intelligence.

Weinstein told Reuters he is dually long and short in Credit Suisse’s credit default swaps (CDS), derivative contracts that offer insurance protection and pay out when a company defaults on its debt. He is a long protection of 2 years and short of 10 years in the bank.

“The trading curve at Credit Suisse reflects my view that, one way or another, over the next couple of years the drama around Credit Suisse will be resolved for better or worse. I think it will be for the better and they bounce back.” Weinstein said. , offering a glimpse of his trading strategy.

Weinstein led a proprietary trade fund at Deutsche Bank that was spun off to start Saba Capital Management in 2009. The fund bet against JP Morgan’s “London Whale” trading position on CDS indices in 2012.

Demand for a company’s CDS may also attract investors seeking protection against the company or betting on its demise. The price of Credit Suisse’s CDS rose through the end of November after the bank’s $2.4 billion rights issue and the company’s shares fell to the lowest level in its 166-year history.

While bearish bets against Credit Suisse increased by the end of 2022, Weinstein says he saw Credit Suisse’s CDS pricing curve make less and less sense: 2-year protection at the bank costs about the same as 2-year protection at the bank. 10 years.

“I think Credit Suisse’s bond and CDS curves are mispriced because they imply that the bank will be seen as just as risky many years into the future as it is today,” Weinstein said.

So, you bought the 2-year CDS and sold the 10-year CDS, which market traders sometimes call the spread or straddle.

Weinstein’s $4.8 billion hedge fund works best when markets are volatile. Amid 54 major central bank rate hikes, its main fund returned more than 28% in 2022, according to industry research. In 2020, the same fund returned 73% after losses in 2021 and 2019, the research showed.

Investors are increasingly turning to CDS derivative trades to hedge or express a pessimistic view. CDS indices such as iTraxx and CDX saw more than $30 trillion traded in 2022, the most since during the COVID-19 pandemic in 2020, according to research by S&P Global Market Intelligence.

Credit Suisse declined to comment.

(Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and Susan Fenton)