Contrarian Capital Management is a value oriented hedge fund specializing in distressed debt. The firm currently has over $3 billion in AUM.
The flagship hedge Fund was up 0.31 percent in the second quarter of 2012 and declined 2.75 percent on S&P 500. The year to date gain is 9.36 percent. Since inception in 1986, the fund has returned over 12% per annum. Contrarion increased their short exposure towards the beginning of second quarter (upto 25 percent), owing to high volatility. During the period, the fund profited from corporate bonds, sovereign bonds, and shorts in S&P 500. The management expects that the third quarter will be more stable, and therefore reduced short trades as Q2 ended.
The bulk of CCI’s investments in Q2 2012 were in US performing debts, equities, bankruptcy, and trade claims. The highest percentage of gross returns were gained on shorts (7.02%), and CCI lost the most in emerging market debts (-7.32%).
CCI gained on the shortside with, positions on spanish sovereign bonds, the report concludes that Spain’s total debt/GDP ratio surpasses that of any other European country. The economy also has a load of housing related loans, these have not been deflated yet. CCI gained from the Bankia bailout, which devalued Spanish bonds in the middle of June. On the long side, the fund expects high gains from a Swiss Franc-denominated bond, which is expected to increase in yield. The fund likes Spanish regional debt, and is long Catalonia Swiss Franc-denominated bonds maturing in 2014, most of which which is mostly domestically owned.
The letter details that thermal coal business will further deteriorate in response to low natgas prices, citing Patriot Coal (PNK: PCXCQ), convertibles yieling 3.25%. Patriot Coal (PNK: PCXCQ) has filed for bankruptcy, CCI gained on the short side of this investment.
CCI was up 2.24% on US performing credits in Q2. The fund profited off Audio Visual Services’s debt, and also gained from NYC Industrial Development Agency Bonds used to finance Mets/Citi field. CCI recommends the value of Energy Future Holdings Corp (TXU).
In non agency RMBS, the hedge fund likes non agency bonds insured by Ambac Financial Group, Inc. (PINK:ABKFQ).
CCI gained 0.34 percent on European performing credits in Q2. The fund sold off positions on unsecured Bank of Ireland (NYSE:IRE) debt, The E.W. Scripps Company (NYSE:SSP) bank debt, Starbucks Corporation (NASDAQ:SBUX), a global food and beverage operator. Contrarion purchased bonds of CMA CGM, a leader in container shipping, and believes that this industry is now at a point where safe investements can be made.
The fund gained 1.06 percent on bankruptcy claims. The top performer was Lehman Brothers. The fund has received $18.5 million so far and expects this amount to multiply many folds. CCI also expects to gain from the bankruptcy situation of Education Media, as it regains its strength in the coming years.
For the next quarter the fund is dialing down on short side investments and buying new holdings. CCI, like other hedge funds, is cautiously optimistic about the future, and expects to gain from mid-sized corporates that will be in need of bailouts in future.