Institutional investors are answering their own burning question about the prospects for credit investments after the 2009 rally: long/short credit.
After being whipsawed by horrible returns during 2008's credit crisis and a rally that boosted virtually every credit security in 2009, more institutional investors are looking to reduce their long exposure to credit and protect their portfolios on the downside.
”Investors have been riding credit for the last 18 months, but the beta rally now is in the eighth or ninth inning and investors want to get their chips off the table. Institutional investors are ready to take advantage of a lot of opportunities in credit this year, but generating alpha in this market takes a very market-neutral approach,” said Boaz Weinstein, founder and chief investment officer of Saba Capital Management LP, New York.
Mr. Weinstein, who has a long pedigree in long/short credit management, launched his firm in April2009. The firm's long/short credit hedge fund now has $875 million and is enjoying “a very big spike in interest from institutional investors,” Mr. Weinstein said.
Investors definitely are sweeping those chips off the table, confirmed Steve Vogt, CIO of hedge funds-of-funds manager Mesirow Advanced Strategies Inc., Chicago.
Mesirow “got into credit opportunities pretty early,” Mr. Vogt said. At the end of the second quarter of 2009, the firm began to shift weightings within both commingled and separate account versions of its hedge funds of funds toward long/short strategies.
“Our credit managers all were dead long at the beginning of 2009. We've been selectively harvesting (assets from) long-biased managers and redeploying assets into long/short credit. The portfolios are pretty much long/short neutral at this point,” Mr. Vogt said. He noted that many institutional investors already are long corporate credit exposure in their other portfolios and recognize they need to reduce that exposure.
Mesirow managed $12.7 billion in hedge funds of funds as of May 1.
Other institutional investors were less deliberate in managing their credit investments in 2008 and 2009 and now are seeking a way to ensure alpha generation through strong long bets and to achieve downside protection through short bets.
“Institutional investors got out of jail. Their credit investments sank in 2008, but they were able to ride a beta rally in 2009 ... The real question now is what they do with their credit investments,” said Peter Warren, head of new business for credit hedge fund manager CQS (UK) LLP, London.
“In 2009, everything went up and credit spreads tightened. But in November, spreads became more volatile and widened in January, (when) there was more debt supply, more choices and more dispersionbetween individual credits.
“The choppier trading environment that started in the fourth quarter lends itself well to long/short credit strategies,” Mr. Warren said.
CQS managed $6.9 billion as of May 1, of which $115 million was in a dedicated long/short credit hedge fund that launched in the third quarter.