Jochen Felsenheimer, co-head of credit at Assenagon, answers SCI's questions

Jochen Felsenheimer

Q: When did your company become involved in structured credit?
A: Assenagon just started to set up its credit business activities in January 2009 to provide institutional clients with asset and risk management solutions in the widespread area of credit, with the focus being clearly on credit derivatives and structured credit. The goal is to provide clients with a state-of-the-art risk management architecture based on systems and tools which are standard in investment banks rather than asset management companies. This architecture allows us to transform almost every risk and return profile of complex credit derivatives and structured credit instruments into a fund solution suitable for asset managers and insurance companies, as well as banks.

In addition, we serve our clients with transparent reporting on a daily basis. Our goal is to provide a broad range of clients with a framework which allows them to benefit from extremely attractive valuation levels embedded especially in complex credit instruments.

In its capacity as an asset management company Assenagon acts under Luxembourg supervisory and offers a high flexibility with respect to the legal set-up of the funds. The range of possible legal structures includes UCITS III part 1 and part 2 funds, as well as FCP and SICAV/F single investment funds.

The excellent infrastructure of Assenagon enables the unrestricted application of the full range of derivatives, including exotic derivatives. The observation of the 'Derivateverordnung' (German regulation for derivatives) is fully ensured at any point in time.

The Assenagon team has long-term experience in structured finance and derivatives solutions, including trading, risk management, reporting, regulatory issues and special fund solutions like ETFs.

Q: What, in your opinion, has been the most significant development in the credit market in recent years?
A: In the aftermath of the burst of the tech bubble in 2001/2002, the credit market was characterised by excessive risk taking, a dramatic increase in the volume of credit derivatives and by the ongoing development of highly complex structures to provide clients with an attractive return, even in a low yield environment. The high leverage in the market and embedded in many instruments just reflected the high appetite of clients to generate spread income in an environment of healthy economic growth, historical low default rates and strong technical demand for credit instruments.

The sale of CPDOs starting in August 2006 characterised the peak of risk taking in the credit space, when even credit derivatives rookies bought into highly leveraged instruments. The extreme undershooting of spreads on the back of the technical bid resulted in a historical low spread level in Q107.

At this time, the iTraxx Main broke through the 20bp threshold, just before the first signs of the sub-prime turmoil hit the market. The failure of two Bear Stearns hedge funds in June 2007 marked the turnaround of a healthy spread environment that had lasted for almost five years. I would call the period from June 2007 until now the ugly path into a new equilibrium, which will bring markets back to more realistic levels.

Q: How has this affected your business?
A: I think this is the perfect starting point for credit investments. On the one hand, many typical buyers of structured credits and credit derivatives will be out of the market for quite a while, especially banks. On the other hand, current market dislocations offer tremendous opportunities from a cyclical perspective.

Finally, new buyers will emerge, exploiting current market anomalies, while distressed structures will flood the market due to forced-selling. Providing new clients in the credit market with innovative solutions, accompanied by strategic portfolio advisory, seems to be the right answer to the current situation in credit markets.

Q: What are your key areas of focus today?
A: Although we see value especially in the distressed structured universe, even plain-vanilla credits provide investors with a decent spread income. Keep it simple, avoid highly-leveraged product, and provide transparent pricing and reporting - these are the major pillars of successful credit portfolio management. We will look at all credit assets, focusing on credit recovery and relative value opportunities.

Q: What is your strategy going forward?
A: Obviously, volatility will stay at elevated levels for several months and probably several quarters. For clients who can withstand some spread volatility, long credit exposure makes sense from a cyclical perspective. However, our focus is primarily on relative value opportunities, with the negative basis in many segments being the most obvious example.

We are able to provide clients with tailor-made solutions depending on their individual risk and return profile. Nevertheless, our recommendation is clearly to exploit current market anomalies while keeping directional risks limited.

Q: What major developments do you need/expect from the market in the future?
A: The most interesting aspect will be the answer of regulatory bodies to the sub-prime meltdown. Rising transparency and reducing counterparty risks - for example, by establishing clearing house solutions for credit derivatives - will be a major achievement in this process. This should certainly contribute to a rising popularity of credit derivatives and structured credit.

The risk is, however, that a kind of over-regulation will be implemented as a reaction to the crisis. In addition, the likelihood that governments will provide funding guarantees for non-banks on a broader scale could mean that spreads will gap in significantly from one day to another.

About Assenagon
Assenagon is a independent financial asset & risk manager in Europe, with a focus on structured investment solutions. Transparency and independence are the two essential attributes which differentiates the firm from competitors. These maxims are having a decisive relevance for its corporate culture.

Whereas most European asset managers are subsidiaries of big financial institutions, Assenagon is operating as partners of these institutions, independently, without a large back-office and highly efficiently. The fact that the firm can come to quick decisions and rapid implementation has arguably a positive bearing on the solutions it can offer; these advantages can be directly passed on to its customers. The long-term goal is to establish Assenagon as a leading independent asset and risk manager for structured solutions in Europe.