Many existing BGI clients are "interested and very willing to accept our kind of product, so that provides us a big advantage," said Peter Knez, chief investment officer of global fixed income.
BGI's flagship long-short corporate credit strategy has generated $500 million in commitments since its introduction last May, and is expected to reach capacity of $1 billion soon, said Brian Zalaznick, managing director of global fixed income. The company has not promoted the product beyond existing institutional clients that can invest up to $50 million apiece.
Within the long-short credit area, BGI is preparing to introduce by the end of the year a structured vehicle focused on consumer credit and a global sovereign strategy. The capacity for either strategy hasn't been determined, Mr. Zalaznick said.
Under the approach, BGI managers screen more than 1,000 public issues of investment-grade and high-yield bonds each day to weed out the most overvalued and undervalued companies. Then they produce an expected risk forecast for each issuer and look at historical and forecast transaction costs. The firm also leverages research between its equity and fixed-income teams to help guide investment decisions.
"It's the opposite of a black-box approach," said Mr. Wilson, the portfolio manager. "We know why we're putting on a bet in a portfolio and measuring that bet, and attributing that performance."
The need for new twists on market-neutral fixed-income strategies speaks to the evolving nature of the credit default swaps market. That market has become increasingly liquid and transparent over the past several years, making it easier for managers to employ the long-short approach, Mr. Knez said.
"The evolution taking place in the credit derivatives market was such that (the long-short credit strategy) was going to provide a lot of opportunities," he said.
Credit derivatives notionals (the amount on which protection is bought or sold) jumped 44% in the first half of 2004 to $5.44 trillion, compared with 33% growth during the second half of 2003, according to the International Swaps and Derivatives Association, New York.
The long-short corporate credit strategy aims to return eight to 10 percentage points, gross of fees and expenses, over the one-month London interbank offered rate.
Overall, BGI execs said they see fixed-income investing moving away from traditional mandates where investors are benchmarked to an index, and toward the separation of beta and alpha.
Mr. Zalaznick would not comment on fees associated with the long-short corporate credit strategy, which is registered as a hedge fund.
The commonly quoted hedge fund fee structure is "2 and 20," or 2% of net assets (annual management charge) and 20% of net gains (performance fee).
That fee structure is much more lucrative than traditional bond management strategies. For example, PIMCO charges 34 basis points on a $100 million investment in its Core Plus Total Return strategy, according to data from Morningstar Inc., Chicago. BlackRock Inc., New York, charges 25 basis points on a $100 million investment in its core-plus vehicle, Morningstar data showed.
As the credit default swap market grows, the market for credit-based long-short strategies is gaining prominence and more firms are joining the party. For example, BlackRock introduced Galaxite, a credit-based hedge fund, about six months ago, said Barbara Novick, managing director.
"There is a whole avenue of opportunities that have opened for fixed-income managers due to the development of the credit default swap market," said David Morton, a partner at consultant Rocaton Investment Advisors LLC, Norwalk, Conn.
Opportunities in long-short credit strategies are "best when credit has some volatility," Mr. Wilson said. Earlier this year, there was little dispersion in the credit market. Now with the Federal Reserve raising interest rates and certain industries, such as automakers, skidding, BGI is spying more opportunities.
James Sullivan, senior managing director and head of fixed income at Prudential Investment Management LLC, Newark, N.J., said his firm is considering a credit-based, long-short approach that could make its way into the market next year.
"We have products on the drawing board now where we have talked to institutional clients," he said, noting the firm does offer a market-neutral fixed-income "leveraged hedge strategy" that invests in instruments such as Treasuries and has $470 million in assets.
For BGI's part, business development is well under way. Fifteen new team members have been dispersed between San Francisco and London to fill jobs in areas such as fixed-income quantitative research, portfolio management and trading. Another 15 to 25 employees will be recruited in these areas before the end of the year. On the information technology side, six hires have been made, with another 14 expected by the end of 2005.
Overall, 80% of new employees will work in BGI's San Francisco and London offices, while the rest will be staffed in Canada and Japan, Mr. Knez said.