The Liontrust credit absolute return fund will be similar to the Cayman Islands-domiciled long/ short European credit hedge fund which Thorp brought across with him from Ilex, the firm he co-founded. However, its Ucits III structure will make it “20 per cent more restrictive” than the hedge fund, says Thorp.
The Luxembourg-domiciled fund will invest in the most liquid parts of the European credit market. At launch it is likely to have 65 per cent in high yield and 35 per cent in investment grade credit.
“It will have three ’buckets’ of different positions,” Thorp says. “The core portfolio will include improving credits unloved by the market, and on the short side credits that will deteriorate over time and are overpriced.
“Between 10 per cent and 15 per cent of relative value will be intra-sector or capital structure arbs [arbitrage] where there is mispricing.
“The last bucket is event driven-the primary driver of change in the price of a credit instrument driven by financial restructuring, M&A [mergers and acquisitions], IPOs [initial public offerings] or LBOs [leveraged buyouts].” (article continues below)
Thorp says he will hold bonds and credit default swaps, will never short any structured credit and will not get involved in private placements.
In net market exposure, the hedge fund has a small net long position, which may be mirrored in the forth coming fund.
Thorp says he is viewing a recent sell-off in European credit markets as a technical sell-off driven by rising interest rates and sovereign concerns in Europe rather than the start of a credit bear market.
“We think there are opportunities to be a bit long, and maybe the market will have a small rally driven by equities clawing back some of their losses.”
On the long side, Thorp likes tier one financial debt, with holdings including Lloyds and Commerz bank. “There is great value in some more esoteric bonds in the financial sector,” he says.