What D.E. Shaw’s Credit Team Is Doing Next

The quant pioneer is capitalizing on banks’ need to better manage risk, optimize balance sheets, and improve long-term profitability.

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Multistrategy and macro giant D.E. Shaw Group is seeking capital for a new credit-related hedge fund, D.E. Shaw Diopter International Fund II, and its companion, D.E. Shaw Diopter Fund II, according to regulatory filings and someone familiar with the fundraising.

The hedge fund firm declined to comment.

The source says that D.E. Shaw hopes to capitalize on bank issuance of synthetic securitizations and other capital optimization instruments, which reached an all-time high in 2023, with a compound annual growth rate of about 25 percent. The firm expects this trend to persist for several reasons. For one, the regulatory and accounting landscape for financial institutions continues to evolve, the source explains.

In addition, D.E. Shaw believes the banking sector is proactively seeking to better manage risk, optimize balance sheets, and improve long-term profitability. And it thinks that policymakers are trying to limit bailout risks for taxpayers by supporting the shifting of risk out of the banking sector and into capital markets.

The Diopter II Fund is expected to pursue investments related to capital relief, capital optimization, risk sharing, risk transfer, and other similar transactions, including synthetic securitizations, according to the source familiar with the fund. The main objectives of synthetic SRT and related transactions for financial institutions are risk management and associated regulatory capital relief as well as increasing the capital available for core lending and other activities, the source says.

The new funds are similar to the first Diopter Fund, which completed fundraising in February 2023, with $650 million.

Diopter II will be overseen by D.E. Shaw Group’s private credit investment unit and regulatory capital optimization strategies. Three managing directors from the firm’s discretionary credit businesses — Rich McKinney, Marianna Fassinotti, and Steve Eilenberg — are expected to be co–portfolio managers for the fund.

The D.E. Shaw Group has participated in synthetic securitization investments since 2007 and decided to dedicate resources to these activities in 2016. Since 2016, the firm has invested about $4.2 billion across more than 40 such deals.

D.E. Shaw tells clients it believes it is in a strong position because issuing financial institutions seek to execute transactions with counterparties that have an understanding of applicable banking regulations, a proven ability to design tailored securitization solutions, and a history of successfully closing transactions.

D.E. Shaw Group had more than $60 billion in investment and committed capital as of March 1, 2024. It deploys more than $8 billion of capital in credit-related strategies, including about $2 billion in private credit funds. The D.E. Shaw Composite Fund, the firm’s broad-based multistrategy fund, was up 5.34 percent for the year through April, according to an investor.