Snowden: The risks of being 'hedged and wedged'

Fixed income managers using credit default swaps as hedges are exposing themselves to 'very dangerous positions' due to price dislocation between the derivatives and the underlying market, said Kames Capital's Stephen Snowden.

Speaking at Investment Week's Senate Summer Investment Conference in Monte Carlo, Snowden, manager of the Kames Capital Investment Grade Bond fund, said he is "very nervous" about such CDS positions, using them only sparingly within his own portfolios. Managers offsetting long positions by shorting CDS can find themselves 'hedged and wedged' in the event of a sharp market rally, Snowden said, as spreads between the cash bond and CDS markets diverge. "Unless you are opposing the flow, you cannot trade in this market, because liquidity is so poor, so everyone sells via the CDS market. B...