Brevan Howard is one hedge fund manager which has benefited from opportunities in the credit markets in the first half of 2012 to produce a return of 6% from a range of strategies in one of its credit funds.
Charlotte Valeur, chair of the BH Credit Catalysts investment trust commented: “Central banks have recognised that most Western countries have to carry out significant deleveraging and have fiscal problems – this is not just in Spain and Greece, but also in countries like the USA. So by keeping interest rates very low, this is pushing investors to take more risk in order to earn income and this means going out on the risk spectrum into areas like high yield and mortgagebacked securities. Investors know that this is where they are supposed to go, but they played this game before and have been burnt in the past, so they are asking ‘is it safe?’.”
Commenting on the sources of credit returns, a source close to the fund said that there are good opportunities in US corporate debt. “Companies have deleveraged and repaired their balance sheets after 2009 and the high yield default rate has recovered from a high of around 10% to under 2%”. He added that there is now a sweet spot in high yield debt and said: “This is not an area without risk, but the investment manager thinks high yield will probably out-earn its risk profile this year, unless there is a real calamity such as Europe breaking apart and that would create problems for all assets.”
Another opportunity is in corporate credit derivatives or synthetic corporate CDOs. “There are some huge anomalies in this market; an example is the recent story about JP Morgan’s trading here”, the source added. It is understood that the Brevan Howard fund was able to take advantage to the ‘London Whale’ at JP Morgan by selling protection at very high prices or putting on relative value trades, which earned a return. Mortgage-backed securities also offer positive returns, according to an investor in the fund. It is understood that the Credit Catalysts fund typically owns bonds trading at 28 cents which are problem securities. They are not necessarily to escape from a default, but before they default the fund can get back 40, 50 or 60 cents of cash and earn a nice return. Valeur commented: “This is not an area for investors to pursue themselves unless they have a lot of experience and access to data here.”