(Bloomberg) — D.E. Shaw is among hedge funds buying exposure to so-called blind pools of risk sold by banks looking to reduce their regulatory burdens.
The quantitative investing giant has been using its private credit funds, primarily Diopter, to assume the risk of loan portfolios that have scant borrower information but provide details about the types of loans and their credit quality, according to people familiar with the matter.
D.E. Shaw is purchasing credit-linked notes sold by banks that transfer the risk to the buyer in exchange for a coupon payment, while keeping the assets on the lender’s balance sheet.
Banks have been pursuing these types of transactions, known as synthetic risk transfers, as they seek to lower their exposure to loan portfolios and reduce the amount of capital they must hold against assets under stricter regulations.
The Federal Reserve gave further guidance about how banks could pursue such transactions to lower their capital requirements — helping unleash a flurry of deals in the wake of a financial crisis that felled several regional lenders last year. The biggest Wall Street firms have also been using risk-transfer deals to opportunistically lower their regulatory capital burdens.
Read More: AT1 Shockwaves May Prove a Boon to Niche Area of ABS Market
Risk transfers generally fall into blind and disclosed pools, with the latter providing loan-by-loan information including the identities of the underlying borrowers, which allows the purchaser to underwrite the value of the portfolio. Blind pools reveal some particulars about the loans, such as their size, maturity date, industry and whether they’re secured or unsecured — but they don’t reveal the borrowers.
Data Science
D.E. Shaw, a quant pioneer with about $60 billion of assets, is using its data and algorithmic capabilities to analyze the less-transparent bundles of loans, the people said. Using data science, it cross-references the details in the blind pools with swaths of publicly available data to help identify the borrowers, assess risk and better price the deals.
A representative for the New York-based firm declined to comment.
Asset-based lending has emerged as a hot corner of the credit market, with major firms pursuing alternative investments that potentially offer steady cash flows and protection if defaults spike. The portfolios can include auto loans, credit card receivables, mortgages and other bundles of loans.
Disclosed pools are popular with alternative-asset managers with large credit-investing arms that can underwrite the deals.
D.E. Shaw, founded in 1988 by computer scientist David Shaw, has been making bank-issued synthetic securitization investments since 2007 as part of its human-run credit wagers. The firm has about $3 billion invested in, or committed to, private credit funds.
In late 2022, D.E. Shaw raised more than $650 million for its Diopter fund, which focuses on risk transfers, and deployed most of the cash that year. In 2021, it raised $1 billion for another private credit vehicle, Alkali Fund V, which invests in stressed and special situations investments.
The firm is now fundraising for Alkali Fund VI.
–With assistance from Dan Wilchins.
More stories like this are available on bloomberg.com
