An Indian-origin trader pioneered complex trades that shook the $10 trillion market for credit default swaps (CDS) to the core, leaving a trail of at least three lawsuits and recriminations between the Blackstone Group and the who’s who of global finance, according to a report by the Financial Times.

Share Market Live

NSE

Akshay Shah, in his capacity as the managing director of Blacktone’s GSO hedge fund unit, spearheaded a series of unconventional trades for nearly a decade, which made him the most feared operator in European credit markets, said the report.

The FT report said the Cambridge-educated Shah’s bets terrorised a string of rival hedge funds and cost them millions in trading losses.

Credit default swaps are financial instruments used to hedge an enterprise against falling into trouble or possibly not paying off its debts or as a tool of speculation over corporate defaults. They are synonymous with losses incurred by banks during the US subprime mortgage crisis.

The GSO unit where Shah worked became the biggest predator in the global CDS market by going beyond merely trying to predict when companies would fail, said the report.

Instead it used Blackstone’s substantial influence to directly intervene in struggling businesses, changing their fates in ways that maximised profits on GSO’s trades, according to the report.

The strategy allowed GSO, which manages assets worth $140 billion, to radically alter the odds in its favour by inventing a trade that had never been before — the manufactured default, said the FT report.

The report explained that GSO effectively offered a company favourable financing and convinced it to default in a way that would trigger payouts on CDS contracts, but without bringing it down.

Some of the most revered names in trading, including BlueCrest and Goldman Sachs were ensnared by GSO’s strategy, said the report.

Citing unnamed people familiar with Shah’s trading style, the report described him as a sharp-minded analyst who pores over hundreds of pages of bond or loan documents, trying to find details that others might miss.

Once he identifies chinks in the wording of a particular clause, he plots a away to construct trades using derivatives on whether a company would default on its debts, which would lure rivals to take the other side, said the report.

Shah left Blackstone in 2017 to set up his own hedge fund in London to focus on smaller distressed debt opportunities, according to the report.

First Published:Jun 5, 2018 5:20 PM IST