DE Shaw is one of a number of hedge funds buying exposure to blind pools of risk being sold by banks to reduce their regulatory burden, in the form of credit-linked notes that transfer the risk to the buyer in exchange for a coupon payment, according to a report by Bloomberg.
The report cites unnamed people familiar with the matter as revealing that the quant major, which has about $60m in assets, has been making the so-called synthetic risk transfers via its private credit funds, primarily Diopter.
The credit notes come with limited information about the underlying portfolio's borrowers, but do provide details about the types of loans and their credit quality. DE Shaw is reportedly using its data and algorithmic capabilities to cross-reference those details with swaths of publicly available data to identify the borrowers, assess the pools' risk more accurately, and better price the deals.
The sales help banks reduce the amount of capital they must hold against their assets to comply with stricter capital requirements regulations stemming from the financial crisis last year that saw several regional US lenders fail.
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