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New York (HedgeCo.net) – According to an article in last week’s Wall Street Journal, a sizable contingent of bond fund managers are taking advantage of this year’s robust market for debt securities by locking in yearly gains, content to wait until January to seek out any new opportunities.
In particular, managers of funds investing in riskier debt, such as junk bonds, asset-backed securities, and leveraged loans have spearheaded the trend. Given the elevated level of risk associated with these strategies, many managers appear satisfied to let year-to-date returns speak for themselves. As of November 10, junk bonds have returned 52.38% year-to-date, while asset-backed securities have posted a 24.69% return. Additionally, leveraged loans have returned 48.5% on average. Concedes Chris Munck, a trader at B. Riley & Co., “We have had a hell of a rally here. I can’t imagine there is any more upside.”
This theme reflects one of the investment community’s headline trends of 2009, the return to risk. For the opportunistic hedge fund or money manager, the end of 2008 presented a tremendous buying opportunity. While a significant number of funds unloaded assets in order to meet investor redemptions, purchasers were able to scoop up assets, especially less-liquid debt instruments, considerably cheaply.
Meanwhile, with the backing of a fresh string of government programs, including the Term Asset-Backed Liquidity Facility and the Federal Reserve Bank’s purchases of Treasury and mortgage bonds, these assets have recovered their values quite quickly, rewarding opportunistic buyers as the demand-and with it, prices- for such securities has risen.
Dave Wormus
Contributing Writer, HedgeCo.net
news@hedgeco.net
Bloomberg – Gennaro Pucci, formerly head of trading at credit manager Credaris, has started a $100 million hedge fund that will trade mostly European corporate debt, credit derivatives and asset-backed securities.
Christian Evans and Rachel Barnard, both formerly at UBS AG, will help manage the Matrix-PVE Global Credit Fund from London as a joint-venture with Matrix Group Ltd., Pucci said in a telephone interview. The fund will use Matrix infrastructure, operations, compliance and sales.
Rival hedge fund managers have also been raising capital to trade European debt on expectations the region’s recovery from its worst recession since World War II will create opportunities to make money. Pucci left Credaris, a London-based credit specialist asset management firm that manages more than $1 billion in credit and derivatives, in April.
Financial Times – The US Federal Reserve will launch its financing programme, worth up to $1,000bn, for consumer and business loans in the coming days, amid concerns that hedge funds might find it difficult to take advantage of the scheme.
The programme – the term asset-backed securities loan facility (Talf) – is the cornerstone of the US authorities’ push to jump-start the credit market. Officials at the central bank say it will be up and running by the end of this month.
Fed and Treasury officials say this is an essential complement to efforts to repair the banking system. The idea is to boost the supply of new credit-card loans, student loans and car loans by providing low-cost finance to investors who buy these loans bundled up as securities in the secondary market.
But the Talf relies on private-sector investors being willing and able to take advantage of the financing the Fed makes available.
Consultations have revealed potential obstacles to participation. The most significant of these are limits on the ability of investors who use Talf finance to buy an asset to transfer the loan when they sell it.
An asset sold with low-cost three-year financing attached would command a higher price than an asset that had to be financed in distressed private markets at the point of sale.
Moreover, most hedge funds do not have permanent capital so they have to consider the risk that redemptions could force them to sell the assets before the three years are up.
Reuters – A handful of hedge funds has resisted the global crisis ravaging their rivals, reaping bumper returns in 2008 in a sign some niche players will always beat the market no matter how dire the outlook.
There is no single recipe to explain why CQS’s Asset-Backed Securities rose 72.81 percent or Hugh Hendry’s Eclectica fund 31.2 percent, other than that they doggedly clung to a strategy they thought would bring in the money.
"To many observers, my behaviour became increasingly erratic," Eclectica Asset Management partner Hendry wrote in his latest client letter.
"Rather than embrace risk, like everyone else, I shunned it … I was written off as a gloomy character, one of life’s perennial bears," he said.
FierceFinance – The government is committed to keeping the wheels of consumer credit greased. To that end, it has launched a $200 billion effort to support the market for consumer receivables.
The Fed announced it will "offer low-cost three-year funding to any U.S. company investing in securitized consumer loans under the Term Asset-backed Securities Loan Facility (TALF)," reports the Financial Times.
"This includes hedge funds, which have never been able to borrow from the U.S. central bank before." The TALF will likely be expanded to cover mortgage-backed securities next year. We’ll have to see if this really adds liquidity to the secondary markets.
domain-B – Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200-billion programme intended to support consumer credit.
The new programme is aimed at injecting credit for consumers and small businesses including auto loans and credit cards will be launched in February.
The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before.
The New York Fed will offer loans under the TALF on a monthly basis. On a fixed day each month, borrowers will be able to borrow by means of one or more loans by indicating for each loan the eligible collateral, the desired amount, the desired interest rate format — fixed or floating.
