March 15, 2023

Former Mellon CIO Launches New Asset Management Firm

BC-GUMPS’ first fund will hold a concentrated portfolio of credit default swap positions.

Reported by Michael Katz

The former CIO of Mellon Investments has launched an asset management firm that aims to provide funds that make time-sensitive investments and offer a high payoff without high risk.

In announcing the new firm, BC-GUMPS, David Daglio said his goal is to generate consistent returns through the use of time-limited opportunities with asymmetric returns, which is when an investment’s potential upside is considered much greater than its potential downside.

The unusual name of the company is taken from an acronym pilots use as a mnemonic device to remember a procedural checklist when making sure a plane is configured correctly before landing.

The firm said its research team has developed processes through a partnership with institutional research platform Valens Research to identify and deploy strategies aimed at areas of the market experiencing dislocation or severe mispricing. The first fund from BC-GUMPS, which will launch in the second quarter of this year, will hold a concentrated portfolio of credit default swap positions and will be limited to $250 million in capacity.

“Considering the extended length of the current business cycle and nascent economic challenges, we see substantial and imminent upside with such a portfolio,” a firm release stated. “Taking into account what we believe is widespread mispricing of credit, our strategy is designed to realize that upside without exposing our clients to the risk of equivalent loss.”

According to the release, BC-GUMPS’ primary goal is to uncover systematic betas and to use a repeatable process to identify and execute investment opportunities. The firm has developed a proprietary intrinsic CDS scoring system to help spot which investments are most incorrectly priced. The model takes into consideration inputs such as cash flows relative to obligations, recovery rate on debt in the event of default and the size of the business, among other factors. The firm said each of the inputs has “economic rationale” behind it.

“Between bad data, unusable credit ratings, and a structural bias to selling CDS rather than buying, there is an available value beta in the credit market today,” a blog post on the firm’s website stated. “That value beta is represented by the fact that even with potential credit market deterioration coming, and the risk that poses to investors, it is still possible to buy credit market insurance in the form of a basket of CDS contracts for overly-cheap prices.”

According to BC-GUMPS, its intrinsic CDS scoring system “is the tool we can deploy to standardize and systematize the identification of overly-cheap credit insurance.”