Unstructured Finance

The answer to the moderator’s question was a resounding: yes. The question, asked to several credit hedge fund managers during a conference on Thursday, was: did you make money last year? In fact, the managers from Pine River, BlueMountain, Cerberus and Brevan Howard made a lot. But 2013 is not going to be so easy, they said.

Hedge funds that specialize in credit, especially those who focus on mortgage-backed securities (MBS), blasted past their stock market competitors in 2012. One of those traders, Steve Kuhn, was on stage for the aforementioned credit panel at Absolute Return’s Spring Symposium. Kuhn, a portfolio manager for Pine River Capital Management, saw his fixed income fund rise 35 percent last year.

Kuhn doesn’t see a repeat of those monster returns in 2013. It’s all about security selection this year, he said and that that selection process is going to require a lot of work. It’s a view we reported in early March, and one that Scott Stelzer, a CMBS specialist for Cerberus Capital Management and David Warren, the CEO of DW Investment Management and CIO for a Brevan Howard credit fund also echoed at the conference in mid-town Manhattan.

So, where are these managers allocating capital this year? At the moment, Steve Kuhn likes convertible bonds in Asia. He said there’s still some alpha in the RMBS market, but the beta trade is now a now 6/10, whereas it was 10/10 a year ago. He’s also excited about opportunities to invest in new issuance as Fannie and Freddie begin to reduce their 95 percent mortgage-market footprint.

Cerberus’ Stelzer, who still likes the CMBS trade, emphasized that last year’s desperate yield search had seen a ton of players move into those securities where they probably should have stayed away. This style-drift has occurred as hedge fund managers moved outside of their specialties, desperate to boost returns in the a low-interest rate environment. We reported, for example, on the move into CLOs and CDOs in the second half of last year.

By Matthew Goldstein

Hedge fund titan Ray Dalio is really bullish on stocks and all things risky–at least he was in early January.

A few weeks ago, our competitors at Bloomberg and The Wall Street Journal did a good job reporting on Dalio’s macro market thesis for 2013 when they got a transcript of an investor call (Bloomberg) and a sneak peak at Bridgewater Associates’ year-end report to investors (WSJ). But after taking my own recent look at Bridgewater’s year-end investor note–book is probably a better description for the 300-page plus bound treatise–you realize that bullish just doesn’t describe Bridgewater’s stance going in 2013.

Here’s a sampler of some of Bridgewater’s comments to investors:

“Cash in the developed world is a terrible asset.” “We would be short cash of all the major developed currencies” And this: “Bonds will be a lousy investment but cash will be worse.”

Jenn Ablan likes to tell me that people are always writing about PIMCO and Bill Gross, the long reigning “king of bonds.” And when you think of it there’s a lot of truth to that assertion.

Gross’ mammoth $263 billion Total Return Fund gets endless coverage because–by its very size–it really is the bond market. It’s one reason why so much ink is spilled whenever the Total Return Fund has a month where investors pull more money out of the fund than put in.  And it’s why there’s so much analysis of what Gross & Co. are doing with Treasuries and mortgage-backed securities–and whether they are using lots of leverage and derivatives to boost exposures.

Then again, it’s hard to ignore Gross & Co. since the bond king and his co-partner and heir apparent, Mohamed El-Erian are on TV virtually everyday offering their views on just about anything doing with the economy.

Daniel Loeb, who runs $8.7 billion at his hedge fund Third Point, has been an opportunistic buyer in the bonds of Chesapeake Energy, the embattled natural gas producer, according to sources familiar with the matter.

But Loeb, known to rattle the cages of companies for years (see: war with Yahoo), isn’t piggybacking on Carl Icahn’s or O. Mason Hawkins’s activist role in Chesapeake, demanding changes in management or the overhaul of its business practices.  Indeed, all the elements are there for a veteran agitator like Loeb, as Chesapeake has been embroiled in scandal over a controversial investment program involving CEO Aubrey McClendon.

But the New York-based hedge fund manager, who told his investors in June that Chesapeake is now his fund’s fourth largest position, could simply be making a straight investment play and leaving the rest to Icahn and Hawkins. Imagine that?

By Matthew Goldstein

David Einhorn’s decision to plunk $200 million on the cash-strapped NY Mets could be a bullish development for investors holding the bonds to finance the baseball team’s new stadium.

At last look, most of the bonds that were sold in 2006 to finance the construction of Citi Fields were selling for between 79 cents and 85 cents on the dollar. The distressed price for the $547 million bond issuance is a reflection of the dire financial situation the Mets are in and the reason principal owner Fred Wilpon is selling a big minority stake to Einhorn.

But if Major League Baseball approves the deal with the Greenlight Capital hedge fund manager, it could boost the value of those stadium bonds.