Alistair Lumsden and Steven Swallow realized in December 2005 that they had a problem with their asset-backed investment strategy: Their employer, Dutch bank Rabobank Group, didn’t allow them to buy protection on any of their long positions.
But Lumsden and Swallow, who are longtime friends and colleagues, knew full well that the mortgage market that was underpinning the $10 billion in structured-finance assets they were managing for Rabobank was teetering. So when they were introduced to executives at London-based hedge fund firm CQS by a former colleague, they made the leap. By October 2006 the CQS ABS Fund was up and running, and they were in charge of it, promptly turning their newfound freedom into profits.
In 2007, its first full year of operation, the ABS Fund delivered a net return of 45.18 percent; last year it did even better, returning 72.81 percent. It was a notable achievement in...