Credit managers are awash in cash from institutional investors, but markets aren't making it easy for them to put it to work, especially bigger bets.
Executives at larger firms — who asked not to be identified — report their credit weightings are down significantly, or are completely gone. Some have parked billions in cash as they wait for volatility, disaster or some other catalyst to roil credit markets and create pricing inefficiencies they can exploit.
Credit managers are nostalgic about the heady days after the 2008 financial crisis. Panic, mispricing and frequent fire sales made it much easier to invest billions in lots of deals at rock-bottom prices.
“In 2009, you could pick up anything and it would make money,” said Erik A. Falk, member and co-head of leveraged credit, Kohlberg Kravis Roberts & Co. LP, New York.
Of its $83.5 billion in assets as of June 30, KKR managed $19 billion in credit hedge funds and long-only funds.
“In 2009, credit spreads widened to an exceptional level,” said Michael Barnes, managing partner, Tricadia Capital Management LLC, New York. The U.S. Troubled Asset Relief Program “gave credit traders a measure of confidence and all of the credit markets rallied together.”
Halcyon conditions extended into 2010, as directional beta within the credit markets continued to buoy up many deals, Mr. Barnes said. Since then, ever-tightening spreads have forced “credit managers to move back into what they do best: apply an opportunistic, fundamental approach to source the best alpha opportunities,” he said.
Tricadia managed $3.4 billion as of Sept. 30, all in credit strategies.
Despite the lack of blowout opportunities and lower expected returns — projected at 12% in 2013 compared to 25% annualized between 2009 and 2012 — institutional investors continue to direct large allocations to opportunistic credit strategies as an alternative to traditional fixed income. Public pension funds that have made recent, good-sized allocations of $100 million to $200 million include the $42 billion Los Angeles County Employees' Retirement Association, Pasadena, Calif.; the $7.2 billion Sacramento County (Calif.) Employees' Retirement System; and the $69.2 billion Ohio Public Employees Retirement System, Columbus.