Columbus Avenue Chooses SuperDerivatives As Independent Platform for Valuing Credit Derivatives

Hedge fund administrator Columbus Avenue Consulting, LLC, selected the Super Derivatives Credit derivatives platform, SD-CD, to price its hedge fund clients' portfolios of credit default swaps. The decision points to a growing demand for independent valuation sources, as hedge fund portfolios are hedging or placing bets on the fixed-income market using credit default swaps or indexes.Columbus Avenue values hedge fund portfolios and then provides that information to the clients. "Historically the way to value those securities is to go to broker dealer quotes which is a time consuming task," explains Joseph Holman, president and CEO of Columbus Avenue which has $6.5 billion in assets under administration and 45 employees worldwide.

With credit default swaps and CDS indexes becoming more prevalent in hedge fund portfolios, Holman says Columbus Avenue wanted a third-party pricing service to validate the quotes it was getting from brokers. "My whole function is to be able to report to them what the values are in their portfolio," says Holman. In addition, Columbus Avenue had clients that wanted to receive quotes intra month. "If you can't get a dealer quote intra-month, then you're just using the quotes you had last time you marked the book, which is often from the beginning of the month," he says. If the administrator is not able to get enough quotes, it can end up with stale pricing, he says.

After conducting a search among the various pricing vendors, Columbus Avenue signed up with SuperDerivatives SD-CD on Jan. 1st . Prior to signing up with SD, it tested the prices that SD produces against actual trades and dealer quotes it received at month-end November and in December. Though Holman declined to name the other pricing vendors it considered, Columbus Avenue does use Bloomberg for valuing all equities and exchange traded options as well as other instruments. He indicated that some of the services that had CDS prices were not very accurate or took a long time to get the prices out there. SD covers a broad variety of credit default single names such as sovereigns, agencies, corporates and municipals, as well as credit default indices. "What we needed was something that we could get pricing on a T+1 basis as of value date yesterday or the day before, whereas some of the other services required you to send it out and get it back in three or four days," he says.

Since the SD-CD system is set up as an ASP, Columbus is able to dial in via the Web. The hedge fund administrator looks at the prices as of yesterday. One advantage of SD is that Columbus can expert the valuation into Excel and is able to easily input it into its portfolio accounting system. Columbus uses VPM from Sungard, which is one of the strongest portfolio systems for derivatives, he says.

One of the problems with broker-dealer supplied quotes, is that "The brokers don't want to send it to you," he says. "They're not making any money when they send you quotes. It's pulling teeth to get the brokers to give intra-day quotes because they make their living trading the derivatives, so anything that takes them away from trading, they balk at," says Holman. Another issue is that the hedge fund client is the significant revenue producer for the brokers, so if the client is asking the broker for a price, there's a question of how independent are the prices, relates Holman.

Rather than having the hedge fund client call the brokers, SD calls up the dealer and asks the broker to send Columbus a dealer quote on a Ford Motor Company CDS. "That's really the difference," says Holman. The use of an independent pricing service could help the administrator attract more hedge fund clients. "It helps us to take on hedge funds that have significant books in these instruments," says Holman. "When you're sitting there getting CDS quotes, it's painful," says the CEO. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio