Hedge fund manager Boaz Weinstein bets market is wrong on Credit Suisse

By Nell Mackenzie

LONDON (Reuters) - Hedge fund manager Boaz Weinstein doesn't believe Credit Suisse will default on its debt but if it does, the derivatives trade he has on the bank may win big, highlighting just how hedge funds use volatile markets to try and 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 confidence crisis deepened by unsubstantiated social media reports on the bank's financial health.

Hedge funds and other speculators borrowed just over a fifth of Credit Suisse's stock in order to short it as of Oct. 31, the highest level since at least 2006, according to S&P Global Market Intelligence.

Weinstein told Reuters that he holds a dual long and short position on 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 long 2-year and short 10-year protection on the bank.

"The curve trade in Credit Suisse reflects my view that one way or the other, in the next two years the drama around Credit Suisse will resolve for better or for worse. I believe it will be for better and that they recover," said Weinstein, offering a glimpse of his trading strategy.

Weinstein led a proprietary trading fund at Deutsche Bank which was spun out to start Saba Capital Management in 2009. Famously, the fund bet against JP Morgan's "London Whale" trading position in CDS indices in 2012.

Demand for a company's CDS can also attract investors seeking protection against the firm or betting on its demise. Credit Suisse's CDS surged in price through late November after the bank's $2.4 billion rights issue and the stock of the company fell to the lowest level in its 166-year history.

While bearish bets against Credit Suisse mounted in late 2022, Weinstein says he watched Credit Suisse's CDS price curve make less and less sense: the 2-year protection on the bank cost about the same as the 10-year.

"I think Credit Suisse’s CDS and bond curves are mis-priced because they imply that the bank will be seen as similarly risky many years down the road as it is today," said Weinstein.

So, he bought the 2-year CDS and sold the 10-year CDS, what market traders sometimes call, a spread or straddle.

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

Investors have increasingly turned to CDS derivatives trades either to protect themselves or express a bearish view. CDS indices such as the iTraxx and CDX saw over $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)