Vishal Bhutani, md at Structured Portfolio Management, answers SCI's questions

Q: How and when did Structured Portfolio Management (SPM) become involved in the structured credit/securitisation markets?
A: SPM has been involved with structured credit and securitisation since its beginnings in 1997. Best known for its work in the mortgage markets, SPM has a well-established, rigorous analytical framework for identifying and profiting from short-term displacements in markets as well as longer-term structural anomalies, each of which creates opportunities for alpha capture.

Q: What are your key areas of focus today?
A: We at SPM have always looked to create niches in different areas of the financial markets as opportunities have opened up for exploitation. One such opportunity has been in the corporate debt markets where the turmoil of last year had left credit spreads much higher than what the fundamentals would suggest. They were pricing in a depression in the global economy and the debt of companies in a very strong financial position was trading at well below historical trading levels.

We looked at the opportunity and, after extensive due diligence, decided to add corporate capital structure trading to our mix of products. We now specialise in our core mortgage-related products, as well as a rapidly growing presence in the corporate debt markets.

As in the mortgage markets, we have created a niche for ourselves in corporate capital structure trading. We have also devoted considerable time analysing the volatilities of the term structure of interest rates.

We would look to take advantage of opportunities in that space when they present themselves. There is a common thread uniting all the strategies we employ: they are backed with a great deal of analytical rigour and thought.

Q: What has been 2009's most transformative change in the credit market?
A: We should look at 2009 in two phases. The first phase was one of extreme fear and flight to quality that lasted until March; the second phase started after the March bottom and has seen an explosion of risk taking.

The first phase was precipitated by a high degree of suspicion regarding the collapse of the global banking system. The share price of Citigroup trading below US$1 did not inspire market participants with confidence in the health of the US financial system.

In response, the stimulative measures announced by the US Treasury and the never-before-seen accommodative measures by the US Federal Reserve (and other central banks) initiated a second phase and helped liquidity return to the financial markets. With the advent of liquidity came the return of risk taking, which caused the capital markets to open up - first for high quality corporates and, then, for lower quality ones.

As credit started to become available (ever so slightly) to Main Street, it resulted in the American economy starting to recover from the depths of this 'Great Recession'. Together with renewed growth in the BRIC economies, this helped global growth to perk up.

The opening up of the capital markets and stabilisation of the global economy has caused a flood of new money entering the credit markets, which has resulted in massive tightening of credit spreads. The Fed's TALF programme has also helped open up the frozen ABS markets.

Q: How has this affected your business?
A: We have been a beneficiary of the shake-out in the hedge fund industry. The turmoil of 2008 created many opportunities for SPM.

The firm positioned itself to benefit across all its products and add new products in areas that were witnessing a liquidity squeeze. SPM employed sophisticated risk management techniques to survive last year (undoubtedly the most difficult year for our industry) and utilised a balanced risk-reward framework to add assets when others were deleveraging to meet margin calls.

As credit markets returned to a degree of normalcy, we benefited tremendously in our mortgage derivatives portfolio. We predict that the structural changes in the markets we operate in will continue over the next two to three years and we expect to reap rich rewards over that timeframe.

In addition, as discussed above, SPM has added new products in corporate debt investing and is looking to build that into a pre-eminent investing platform. We are also looking to make additional, selective hires in this environment, as there is abundant talent in the marketplace with not a lot of openings.

Q: What major developments do you expect from the market in the future?
A: We expect great opportunities to appear as the global economy continues to be in a relatively unstable state. Such instability is usually mirrored in outsized financial market volatility, which can lead to great gains in wealth - but also presents great dangers to those who fail to properly identify and mitigate the relevant risks.

The challenge, as we see it, is to position ourselves to continue to benefit from the short-term dislocations and longer-term structural changes we see, while continuing vigilance in risk matters. We know one thing with certainty: phase two will be followed by phase three.