SocGen is touting a rules-based strategy that mimics repo trades used by hedge funds, which have long arbitraged the difference charged between short- and long-term borrowing against assets. The idea is that investors can enjoy the same returns by simply tracking an index hitched to equity repo. The trade speculates on the cost of borrowing against a basket of stocks constituting the EuroStoxx 50 Index.
The repo market’s hefty premiums are said to offer an attractive stomping ground for yield-chasing investors. Olivier Daviaud, a strategist at the French bank, said in an interview with Bloomberg: “As of today it’s one of the few strategies that provides an interesting entry point without being in a large drawdown.”
The SocGen strategy is exposed to all manner of risks, not least a rise in the equity repo rate itself and a steepening of the futures curve. Repo watchers such as Credit Suisse’s Zoltan Pozsar have warned that deep-rooted problems make the short-term funding market more prone to clogging up.
It’s a natural pitch for SocGen in one key respect: structured-product issuers like the French bank buy longer-dated total-return futures to hedge their own debt exposures, according to Stuart Heath of Eurex’s equity and index product design team, speaking to Bloomberg. The more buying demand on the other side of the trade, the easier it is for issuing institutions to offset those exposures: “This trade existed previously in the over-the-counter market,” said Heath to Bloomberg. As for a systematic strategy, “there’s enough volume, open interest and liquidity to make that potentially sensible,” he said.
The full article is available at https://www.bloomberg.com/news/articles/2020-04-22/socgen-quants-aim-to-disrupt-a-slice-of-12-trillion-repo-market