We talk to specialist investment house TabCap about how it makes money in areas such as credit derivatives.

At a time when diversification appears more urgent than ever, it is important to remember that the market for what are called credit derivatives can notch up significant returns, and provide wide diversification and liquidity, an investment firm says. 

One way to play credit derivatives such as credit default swaps (CDS) is to hold an index based on a basket of over a 100 of them, thereby spreading risk and avoiding the cost of dealing in individual contracts, as used to be the case.

At TabCap, an investment firm founded by David Peacock and John Weiss in 2020, it operates in this market of credit indices, via a number of strategies. And it says results have been robust. The firm’s leveraged investment grade credit strategies have compounded at 13.5 per cent since inception in 2002. The flagship Total Return Credit Fund has compounded at 11.5 per cent since its launch in 2006.

“Credit derivatives got a bad rap in the GFC because many investors and bank trading desks ran excessively high gross and net leverage on margins causing a disorderly unwind during that market dislocation. Things have evolved since then,” Weiss told WealthBriefing in an interview. 

To play the credit story today, the firm prefers to gain exposure via indices of credit default swaps – a market that is highly liquid and centrally cleared. After the GFC in 2008/09, the single name credit derivative market became less liquid relative to the credit derivative indices which now have a daily trading volume in excess of  $150 billion per day.

A credit derivative is a derivative whose redemption value is linked to specified credit-related events, such as bankruptcy or credit downgrade. A common variant is a credit default swap, an insurance-like instrument used to hedge against credit default or capture a yield by selling such insurance. 

This is a vast market. According to a November 2024 report by the International Swaps and Derivatives Association (ISDA), total CDS trading fell to $31.4 trillion in 2023 from a high point of $38.7 trillion in 2022 but remained above the 2021 level. In the first half of last year, market activity was $15.1 trillion versus $16.6 trillion in the first half of 2023. And strikingly, the index of CDS consistently accounted for 90 per cent or more of total CDS market activity. 

TabCap’s Peacock noted, for example, that the iTraxx index of CDS has 125 of the most liquid names in the European market; they are equal-weighted. Vintages of the index components are refreshed every six months. A defaulting issue will be kicked out. This gives a great deal of robustness, he said.

Rebrand
TabCap took its new name in February when it was rebranded from Tabula Capital Limited after selling its ETF business to Janus Henderson.

The firm has nearly $700 million in AuM across four active funds as of March 2025: Liquid Credit Income, Structured Credit Income, Balanced Credit and Macro Credit Opps.

TabCap focuses on what it calls “macro credit products,” including iTraxx and CDX indices, credit options and tranches instead of single-name credit default swaps or specific corporate bonds. 

Peacock said family offices and private banks are interested. 

“You can arguably get a better yield than in the private credit market,” Peacock said, when asked about some of the marketing hype and publicity around private credit in recent years.

Rolldown
An important concept to grasp is that investors in these indices make money from “rolldown.” TabCap and others want to capture “rolldown” of the index positions once every 6 to 12 months. The rolldown process means that investors can capture a return significantly above the yield to maturity on a given credit risk.  

To illustrate, if a five-year index is re-set after six months, the investor makes money through the six months of “carry” (the quoted index spread) locked in at initiating the trade, plus money from unwinding the position at a tighter spread six months later. This process is only really possible with these indices which can be rolled with virtually no transaction costs. If this process is cycled on an open-ended basis, portfolio returns can be boosted by more than 50 per cent over the long term.

It is generally not possible to capture rolldown with conventional bonds since the bid-offer costs are too high to benefit from such regular trading, Weiss said. 

“The strategy can also work with the use of leverage – which is particularly appropriate with the investment grade credit indices. They can be levered for very little cost via the clearing houses. TabCap uses tightly constrained leverage, with systematic hedging to limit the downside risk,” he said. 

These CDS indices has a life of either five, seven or 10 years. They are created every six months (known as the roll), based on a poll which attempts to identify those bonds (subject to the criteria) that bond traders believe are most liquid and should be included, according to one explanation. 

This seemingly remorseless, disciplined approach is rather different from the helter-skelter image of rapid-fire stock or bond trading. To get to an understanding of the value of this model took time: Peacock and Weiss have more than 55 years’ combined experience in the credit markets, working together at JP Morgan, Goldman Sachs and Cheyne Capital. 

They were senior partners and co-founders of the corporate credit team at Cheyne Capital from 2002 to 2020, which grew to more than $2.5 billion in total assets.

TabCap has two income funds (Liquid Credit Income, Structured Credit Income) whose returns come from carry and rolldown, and two hedge funds (Balanced Credit and Macro Credit Opportunities).

The largest fund (Liquid Credit Income, with more than $400 million in AuM) is a cross-border European UCITS fund, with daily liquidity. This is on some private banker platforms, used by private banks, family offices, etc. 

“While the NAV will move with the market day-to-day, persistent carry and rolldown offsets these market moves over the medium to long term,” Peacock said.

Not a niche
At a time when there is a keen focus on private credit markets – attracting interest because of the higher yields paid to compensate for less liquidity than with conventional bonds – the CDS story deserves more attention, the men said. 

“You can arguably get a better yield than in the private credit market,” Peacock said, when asked about some of the marketing hype and publicity around private credit in recent years. This sort of market is not a “niche,” he continued. Advisors and clients need to be continually educated, Peacock said.

“Some bankers are attuned to taking on differentiated products and they will take the time to learn about them, he said. The firm’s main footprint is in Europe with increasing inflows coming from Asia. It will look at the US market later this year, Peacock added.

The CDS market, which is more than two decades’ old, started as an over-the-counter (OTC) market – involving direct trades between counterparties. It was led by banks such as JP Morgan and Deutsche Bank, trading CDS on the debt of governments and companies. After the 2008 financial crisis, when the CDS market got some of the blame for inflaming risk rather than spreading it, reforms pushed credit default swaps onto exchanges acting as a central counterparty. This was designed to remove counterparty risk. Investors can use indices to track a whole sector in one hit. 

Swiss private bank Union Bancaire Privée has argued that funds holding CDS indices outperform the wider fixed income market for a variety of reasons. One reason is that CDS indices are more liquid than cash bonds – that liquidity can actually rise when markets are stressed, while individual bonds’ and loans’ liquidity can dry up.