Nancy Zimmerman – People, Process, and Fixed Income Arbitrage at Bracebridge (EP.517)

From pricing to investing

Zimmerman's path began at O'Connor and Associates in 1983, an options arbitrage firm at the CBOE that heavily trained staff in put-call parity, binomial trees, and distributional thinking about trades, while deliberately ignoring macro views. She later became a Swiss franc options market maker (present during the 1985 Plaza Accord), then moved into bonds after O'Connor's Bond Options Group, learning cash-and-carry and cheapest-to-deliver arbitrage. After the 1987 crash prompted O'Connor's retrenchment from equities, she joined Goldman Sachs, splitting her time between market-making, client/platform building, and proprietary trading — the proprietary third being what "lit her up." A meeting with Yale's David Swensen and Dean Takahashi led to Yale seeding Bracebridge in 1994 alongside Gabe Sunshine; Swensen, she says, taught them the difference between pricing an instrument and actually investing — weighing catalysts, holding periods, and portfolio co-variance — a transition she says took roughly five years to complete.

Four business lines and enduring inefficiency

Bracebridge grew organically into four groups: developed market rates (its oldest, still finding opportunities despite 43 instruments now describing the same near-term rate curve versus 3 originally); structured credit (an outgrowth of Sunshine's mortgage/CMO background); corporates (evolving from tranche/index CDS trading pre-crisis into single-name CDS-bond basis and full capital-stack pricing); and emerging markets (dollar bonds vs. local-currency bonds of the same obligor, exploiting general investor aversion to EM exposure). Zimmerman says inefficiencies persist because of constrained economic agents, investor habitat, market segmentation, benchmark-driven passive/ETF flows with mechanical creation-and-destruction dynamics, and backward-looking, serially-correlated ratings agency behavior.

Sourcing, sizing, and risk process

Idea generation combines quantitative screening for near-identical instruments trading at different prices with deep, curious market expertise and even direct outreach — illustrated by a case where Bracebridge's structured-products and corporates teams jointly refinanced a cash-strapped healthcare REIT's unencumbered property (lending secured money around 11.25% while borrowing at 8.5%) and hedged survival risk by shorting elsewhere in the capital structure. Position sizing follows a bottoms-up process constrained by concentration guidelines, collateral correlation with its underlying sector, and the recognition that "good" and "bad" arbitrageurs occupying the same trade type still represent aggregate crowding risk. Crisis lessons from LTCM, 2008, and COVID reinforced the importance of liquidity and flexibility to lean into dislocations (e.g., buying escrowed Treasuries at 80 cents during COVID), stress-testing for drawdown scenarios, and distinguishing a mere drawdown from permanent capital impairment.

People, incentives, and opportunity-set discipline

Zimmerman credits Swensen's "people, people, people" philosophy and says curiosity, humility, rigor, and willingness to be challenged define successful arbitrageurs. Alignment is built by making senior staff investors so they're paid more when clients do well, and by incentivizing collaboration and creation of shared research "public goods." Capital deployment is capacity-constrained by the opportunity set itself ("we don't stock the lake, we just fish") — Bracebridge has closed to new capital for roughly a decade at points — with candid client communication cited as key to retaining investor trust through lean periods.

Corporates, liability management, and current conditions

On liability management exercises where distressed-debt negotiations turn adversarial ("if you're not at the table, you're on the menu"), Zimmerman says outcomes hinge less on personalities than on legal constraints — enforceability, voting rights, and security interests — layered atop qualitative judgment about whether a business model can refinance debt taken on during 2021-22's low-rate era. She sees the next three-to-five years resembling the last, buoyed by AI/compute-driven market activity and what she calls Bracebridge's strongest-ever partner team.

Outside pursuits

Beyond Bracebridge, Zimmerman serves on Brown University's investment committee (praising leaders Joe Dowling, Jane, and Chris Paxson) and supports brain-science research there, drawing parallels between training young investors and training postdocs in communication, tool adoption, and course-correction. She reflects on her marriage to economist Andrei Shleifer, whom she met around the 1987 crash, and closes by saying she underestimated early in her career how much disciplined process — not just talented people — drives long-run investment performance.