- During the market turmoil of March caused by the coronavirus pandemic, big-name credit funds run by managers like Canyon Partners, CQS, and Angelo Gordon fell by double-digits.
- Industry observers still expect the credit funds to scoop up assets in the coming months, particularly debt investors with experience in distressed situations.
- “If you can raise cash right now, raise it.”
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March was a month of margin calls, crashing markets, and turmoil for many credit hedge funds.
Big-name managers like Canyon Partners and CQS lost 20% and 30% for the month, respectively, while Angelo Gordon sued RBC over the bank’s seizure of commercial-mortgage-backed securities that had tumbled as the coronavirus forced many brick-and-mortar retailers to close their doors.
Bloomberg first reported the news of the losses of Canyon Partners and CQS. A report from the Wall Street notes that Gordon’s AG Mortgage Value Partners fund was down 31% in March.
Two debt funds run by III Capital Management lost roughly 15% each, sources say, while Toronto-based RP Investment Advisors lost nearly 10% in its $2 billion Debt Opportunities fund through the first two weeks of March.
Credit hedge funds overall dropped 6.4% on average in March, according to PivotalPath, a consultant database for the industry that has more than 2,000 managers and $2.3 trillion in assets on its platform, with certain segments doing worse than others.
Structured credit and mortgage-related funds fell by more than 12% on average, and distressed fell by 11%, found the database.
Jon Caplis, CEO of PivotalPath, notes that many managers have not yet reported performance to the platform halfway through April because there’s no buyers for illiquid securities, and managers have not been able to mark-to-market their losses. When the final numbers for the month come in, they’re “likely to be much worse,” he said.
All of the volatility hasn’t dampened enthusiasm for debt managers however, according to Shannon Murphy, head of strategic content for Jefferies’ prime services unit.
“March was a really tough month for some of them, while others think this is the best opportunity set for the next 15 years,” Murphy said.
That opportunity set is for distressed debt investors who have been struggling to find opportunities for roughly a decade, but now might have $1 trillion worth of securities to pick through.
And distress investors are readying war chests to take advantage. Bloomberg reported that PIMCO is in the process of raising $3 billion for a distressed debt fund, while Oaktree is raising $15 billion. Billionaire founder of Avenue Capital Marc Lasry said earlier this year that a recession brings opportunities for investors like himself.
In good times for the markets, “we can make 10-15%” in a year, Lasry said at an event hosted by the New York Alternative Investment Roundtable earlier in the year. But in recessions, “we can make 15-20%.”
Managers should be quick to raising capital. A recent Preqin report found that more than half of allocators surveyed are dialing back on their alternatives investments this year, compared to what they had projected for 2020 at the end of last year.
“If you can raise cash right now, raise it,” Murphy said. Credit is one of the few hedge-fund categories that Jefferies expects there to be net inflows in for the year, with capital expected to come from family offices and funds-of-funds that can deploy money quickly.
“Institutions just can’t pull the trigger that quickly.”
But returns on these investments might not happen as quick as some of the most optimistic managers believe they will, says Chris Acito, CIO of fund-of-funds Gapstow Capital, which invests primarily in credit.
“We still don’t know a lot about how the economy is going to perform,” he said. Policy questions that are massively important for credit managers, like who will pay missed mortgages and through what mechanism, still haven’t been answered.
Acito started Gapstow during the first quarter of 2009, when the credit cycle last hit the depths it’s currently in. While there are a few parallels, Acito said now feels different — mainly, the “unprecedented” speed of the selloff and the potential investment back into credit by managers who had been sitting on billions in dry powder.
At Aon, which consults on more than $25 billion in hedge fund investments globally, credit strategies are a focus, with a manager of collateralized loan obligations and mortgage specialist picking up additional assets at the end of March, according to Chris Walvoord, global head of hedge fund research.
In the short-term in particular, he believes mortgage-backed securities are targets for managers able to move quickly, since “a lot of those securities still have tremendous value,” but were forced to be sold as banks called for their money back from REITs and other real-estate investors.
In the long-term, Aon is watching corporate credit and bankruptcies despite the equity markets picking back up.
“Certainly the economic distress is real,” Walvoord said, “which is why we are investing in these credit strategies that more closely line up with the economy.”