Episode summary
Nancy Zimmerman: People, Process, and Fixed Income Arbitrage at Bracebridge Capital
Capital Allocators with Ted Seides
· · 50 min · Hosts: Ted Seides · Guests: Nancy Zimmerman
Summary
Nancy Zimmerman argues that fixed income arbitrage works because markets keep creating similar or economically linked instruments that trade at different prices, and those gaps persist because of segmentation, mandates, ratings lags, benchmark design, and mechanical flows from ETFs and passive investing. She describes Bracebridge Capital as an alpha-generating strategy meant to diversify portfolios without taking direction on rates, curves, equities, or currencies.
She traces her path from pricing options at O’Connor and Goldman to realizing that she wanted to spend her time on investing, not just quoting prices. Early on, she and Gabe Sunshine learned to separate pricing from portfolio construction, catalysts, holding periods, and the difference between a drawdown and capital impairment. Over time, the firm expanded from developed market rates into structured credit, corporates, and emerging markets as those areas exposed new arbitrage relationships.
Zimmerman also emphasizes process: bottoms-up idea generation, stress testing, correlation analysis, concentration control, and liquidity for crisis periods. She says the best environment for the strategy is one with unusual rate dynamics, large issuance, and shifting duration demand, and she sees today’s market as unusually rich in opportunities.
Key takeaways
- Zimmerman says Bracebridge seeks uncorrelated alpha that should diversify portfolios without adding exposure to the level or shape of rates.
- She argues inefficiencies persist because of investor constraints, benchmark-driven behavior, ratings lag, and mechanical ETF flows.
- She says the firm’s process starts with asking whether a trade is true arbitrage, what the catalyst is, and how much capital it can consume.
- Zimmerman says crises reward liquidity, flexibility, and stress testing, especially when buying power matters most.
- She expects today’s environment to remain fertile because of unusual rate conditions, heavy issuance, and a vacuum in traditional bond demand.
Notable quotes
“Process plus people is how you get performance. I wish I knew that when I was 18”
“Our strategy is an alpha generating strategy that should allow you to diversify without giving up expected return”
“We are looking for inefficiencies across two things that are similar, substantially similar or can be made to be similar through cows”
“You learn a few things during crisises. You want to have liquidity, flexibility to be able to lean into dislocations, especially things where you know them well”
“The opportunity set has to be in charge. We don't stock the lake. We just fish here”
How the episode opens
You learn a few things during crisises. You want to have liquidity, flexibility to be able to lean into dislocations, especially things where you know them well. You feel like you are positioned to take advantage of it, maybe make it go away.
Every crisis teaches and reinforces that you want to stress test. You want to think carefully about what factors could cause a draw down in your portfolio. You want to think hard about what's the difference between a draw down and a capital impairment because those are different things.
Also thinking about what doesn't work. What are you relying on in terms of institutions, courts, banks, counterparties, these kinds of things. You learn them in your first crisis and you never forget them.
Stuff begins to rhyme for you. The most important thing that we learn is good people who are curious, have thought through things and can maintain their curiosity, their bearings and have a real sense of rigor and purpose are vital to those moments. I'm Ted Sides and this is Capital Allocators.
My guest on today's show is Nancy Zimmerman, the co-founder and managing partner of Bracebridge Capital, a $13 billion alternative asset manager specializing in fixed income arbitrage that she founded over 30 years ago in 1994 alongside Gabe Sunshine with capital from David Swenson at Yale. Our conversation traces NY's evolution from pricing securities to investing and the enduring sources of inefficiency in fixed income markets. We discussed the nature of arbitrage opportunities and their persistence over time and then turned to hunting for mispricings today across developed market rates, structured credit, corporates, and emerging markets.
Along the way, we cover Brace Bridg's process for sourcing ideas, assessing relative value, determining position sizes, constructing a portfolio, and managing risk. We close with building a team, aligning the organization and its clients, investing in today's exciting and unusual environment, and transferring investment knowledge to work on the investment committee and brain science research at NY's alma mater, Brown University.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fixed income arbitrage
- duration risk
- structured credit
- relative value
- portfolio construction
Companies and tickers mentioned
- GS
- Goldman Sachs
- Bracebridge Capital
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Capital Allocators with Ted Seides, this episode and its artwork belong to Ted Seides – Allocator and Asset Management Expert. Octagon is not affiliated with the show; this page is an independent summary.
