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.

More research was published today showing that the honeymoon is over for American hedge fund managers and technology giant Apple. The iPhone maker was one of the top two most sold stocks by hedge funds in the fourth quarter, according to an analysis of regulatory filings by Bank of America. (The other stock was  Tyco International).

This industry-wide ditching of Apple came as AIG  replaced the iPhone maker as hedge fund land’s most loved top-10 stock holding in Q4. It was the first time Apple had been knocked out of pole position in three years. For a list of some of the big names that ditched Apple, see this story by Aaron Pressman.

Meanwhile, BofA analysts found that the top two stocks purchased by hedge funds in the three months to December were  Facebook and Citigroup. The AIG and Citi buys were part of a larger move into financials by hedge funds in the fourth quarter, the BofA Hedge Fund Monitor report showed, and away from technology companies.

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.”

Not everyone agrees that using high-speed machines to trade stocks in less time than it takes the average person to blink is a bad thing, but the people who do might be heartened by the letter a congressman sent the U.S. Securities and Exchange Commission on Friday.

Rep. Edward Markey, a Massachusetts Democrat who has waged a decades-long struggle against computerized trading sent the SEC a hint: The power to curb high-frequency trading has been within its grasp all along.

In his letter, Markey described a law he co-sponsored in 1989 to increase the agency’s power to regulate computerized trading, a precursor to HFT that employed computer programs to make trading decisions without the participation of conscious humans. The law lets the SEC “limit practices which result in extraordinary levels of volatility,” according to Markey’s citation.

By Matthew Goldstein and Jennifer Ablan

Where is the outrage? A year ago, the Occupy Wall Street movement was just getting started, with mass demonstrations across the nation against corporate malfeasance and greed.

But now it’s been crickets and we don’t mean the game. There’s been no marching on Wall Street nor on the steps of Capitol Hill since the latest revelations of bad behavior in the financial sector. The populist uproar has been rather sedate in the face of the deepening scandal that big banks rigged Libor–a benchmark lending rate; JPMorgan Chase’s mounting losses from disastrous credit bets and a possible cover-up attempt; and the disappearance of customer funds from Iowa futures broker PFGBest, discovered after its founder tried to commit suicide and left a note outlining a 20-year fraud.

But the lack of populist rage doesn’t mean there’s a lack of concern about these and other scandals. We think that’s a misreading of the temperature of the American people. And if Wall Street thinks the average person doesn’t care about the nearly $6 billion trading loss at JPMorgan Chase, or the alleged Libor manipulation scandal , then the street is badly misjudging things.

By Jennifer Ablan and Matthew Goldstein

It is small wonder mom-and-pop investors are showing no love for U.S. stocks for a fourth consecutive year.

Not only has the U.S. economic recovery remained fragile, but the so-called “headline risk” is dominating investor psyche again.

On Monday,  the Dow Jones Industrials Average extended its “June Swoon” ending flattish after being down for most of the day, after Reuters reported that finance ministers and central bank governors of the Group of Seven (G7) industrialized nations will hold a conference call on Tuesday morning amid increased concern about the European debt crisis.