The investment bank has heralded the product as a “watershed in credit” that will open up new investment strategies on the iTraxx index. “This is the latest evolution in the credit market, enhancing levels of liquidity and broadening the range of investors that can access the market,” said Jonny Goulden, a credit derivatives strategist at the US investment bank.
The iTraxx TRS will enable traditional credit investors to remove the burden of settlement procedures for defaults. Non-traditional credit investors, meanwhile, can obtain greater diversification for their portfolios through a new asset class, the investment bank said.
JP Morgan expects demand for the product to come both from market-tracking funds, seeking to obtain broad market exposure, or beta, from their portfolios, along with investors pursuing 'alpha isolation' strategies to obtain a return above the index. “You can imagine strategies that combine a position in a credit fund with a position in an iTraxx total return swap (and through that manage to isolate the alpha, which is generated by the fund)," Goulden said
"This alpha can be regarded as a kind of additional asset class which may be less correlated with returns in general asset classes, for example credit itself, thereby providing attractive diversification opportunities to investors," he added.
Investors in the iTraxx TRS will purchase a principal amount and after typically one or two years receive their principal plus a leveraged return on the performance of the index over that period.