Came across this piece giving a bit of detail on Saba's position in Greek debt and was hoping to get a few insights on it and Boaz. Based on this it seems he's long the 30yr, short near term bond(s), and locks in the basis with the recovery locks. Is that about right? If so, why is that a good trade - isn't that similar to what caused the huge loss at DB? Is he a credit trader that doesn't take into account counterparty risk - meaning he takes the view that if they can't pay then it's all gone to hell anyway so he may as well make as much as he can until the sh!t hits the fan? What are people's view on him...next Meriwether, or is he legit? "One such fund is Boaz Weinstein's $3.4 billion Saba Capital Management, which has been buying long-dated Greek bonds that are selling for about 40 cents on the dollar, said a person familiar with the fund's strategy. The former Deutsche Bank bond trader is said to favor Greece's 30-year sovereign debt because it sells at a substantial discount to the nation's short-term debt notes. A person familiar with the trade said Saba is simultaneously buying so-called recovery swaps on those Greek bonds, a derivative that effectively locks in the price a bond would fetch in the event of a default. In the case of Greece, recovery swaps on the nation's 30-year sovereign bonds are selling for about 37 cents on the dollar. Industry analysts say most hedge funds are shying away from the kind of Greek trade that Saba Capital, up about 3.5 percent this year, is doing because of the risk." Link: http://www.reuters.com/article/2011/07/05/ba-hedgefunds-performance-idUSN1E7600WH20110705
If a fund's risk models allow it I think it's a great trade. Very high returns compared to the risk that Greece is going to default. Even if that risk is very high the returns are still good.
It makes a lot of sense, although it's sensitive to the legal language of the recovery lock contract and also to the dystfunctional repo mkt. In general, if those frictions were removed, it would be a no-brainer trade. It's a trade that works in either of the two extreme scenarios, but you have to pay carry to have it on. So it's like being long a straddle or a strangle. At least that's as much as I can ascertain from the brief description given.
Well, he did blow up on these basis trades, supposedly, and the mark-to-mkt can kill you, for sure. These things are not bad bets, if you can hold on to them. Moreover, his entry point on the GGBs is quite a bit better and it's not a straight basis trade, more like term structure bet.
It's the Magnetar trade in sovereign debt. Magnetar bought the shit equity tranche and bought the default swaps on the paper. BZ is replicating the trade in Greece, but BZ can't afford to take on a full hedge, IOW he's nothing approaching neutrality. Magnetar bought those swaps on the cheap, but I suspect the news is out on Greece.
It's a good trade... I've looked at it and, if I had faith in sovereign credit derivatives and the repo mkt, I would do this trade all day long.
So the article implies he's arbed (or marked currently) to +300 basis? I find it odd that the stuff is entirely fungible.
It's not exactly and I am sure there's a lot of technical sh1t that goes on. I am not an expert on the deriv side, 'cause I think the whole sov credit deriv mkt is a shambles and I refuse to participate in it. My guess (and this is based solely on the trade that I have looked at) is that it's not about straight 30y basis, but rather about locking in the fwd yield (smth like 20y 10y fwd) implied by the mkt prices for the 30y GGB and the recovery locks.