|L-R: Kuhn, Smith,
Stelzer, moderator Mark Johnson, Stewart, Warren (Photo:
The great rotation to stocks that will crush bond investors
is a myth, according to leading credit managers.
Top hedge fund investors largely scoffed at the thesis,
which was much repeated at the Absolute Return Symposium,
saying that the credit markets still had plenty to offer,
including plays in mortgage backed securities, high yield and
convertible bonds and options on various defaults.
"People are not selling bonds and buying equities. They are
buying bonds and buying equities and selling cash, which is
exactly what the Fed wants us to do," said David Warren, chief
executive officer of $4.1 billion DW Investment Management and
chief investment officer for the
Brevan Howard Credit Catalysts Fund, which gained 15.34% in
2012 and is up 1.87% through February. "The great rotation?
This is just not happening. It may happen at some point in the
future, but there isn't any evidence anywhere as we start
Warren, who specializes in high yield corporate credit, said
defaults will remain low and recommended such opportunities as
going long the bonds of retailer J.C. Penney, mortgage insurer
MGIC, bond insurer Radian Group, Texas electricity company TXU
Energy and radio station company Clear Channel Communications.
"There are lots and lots of credit opportunities and ways to
trade that have nothing to do with getting long or short the
beta of credit," Warren said.
Pine River Capital Management fixed income trading head
Steve Kuhn said mortgage investors like him were unlikely this
year to replicate the
blowout returns of 2012 but that there was still plenty of
money to be made in mortgage backed securities.
"The 1,000 basis point tightening game is over, but I don't
think 6% is a horrible level," said Kuhn of residential MBS,
whose $3.53 billion
Pine River Fixed Income Fund rose 34.95% last year and is
up 6.09% through February. "As a base source of beta it's a
terrible investment, but there's a lot of work to do in
security selection...there's a lot of alpha in that."
Scott Stelzer of Cerberus Capital Management emphasized the
opportunity is commercial MBS. "I think the opportunities are
in securities that are structurally or credit complex," said
Stelzer, who likes riskier CMBS tranches in part because of the
relatively inexperienced investors moving into the space.
"There's certain areas where it's the deeper end of the pool,
frankly, and there's a little less competition."
Stelzer, Cerberus' CMBS head is preparing to launch a
dedicated CMBS fund in the second quarter. Distressed
specialist Cerberus manages more than $20 billion overall,
including $8.9 billion in hedge fund assets, according to the
Absolute Return Billion Dollar Club.
Derek Smith of $8.9 billion BlueMountain Capital Management
said unsecured credit was risky relative to other credit
investments. "It's significantly rich as an asset class," he
Smith likes both longs and shorts because of increased
dispersion within the sector but said now was also a good time
to buy tail risk protection given widespread economic optimism.
"This is exactly the time when you want to start buying
volatility and convexity," he said.
Smith also noted long opportunities in the equity tranches
of collateralized loan obligations and short opportunities in
such potentially distressed industries as steel and shipping.
BlueMountain Credit Alternatives Fund gained 14.47% last
year and is up 1.54% through January.
Despite the relative optimism for niche, short term credit
investing, panelists urged some measure of caution. "It's not a
bad environment for credit but the factor is do you have a
disadvantageous move in interest rates at some point during the
course of the year which could unsettle it to an extent where
folks start to pile on losses on an absolute basis," said Joe
Stewart, a hedge fund sales executive at UBS. "That could
create some fear."