Bloomberg hedge fund summit 2012 continues with David C. Gottlieb, Senior Principal and Portfolio Manager, EMF Financial Products LLC, Greg Margolies, Senior Partner and Head of Capital Markets Group, Ares Management LLC and Bruce Richards, CEO and Founding Partner, Marathon Asset Management. The interviewer is Mary Childs. The discussion focuses on credit markets.
Greg sees opportunities in Europe, because it is the only place distressed. The banks need to sell several trillion dollars in assets. Structured credit is another area of opportunity. American Airlines debt was purchased at 20 cents on the dollar. That debt now trades at 70-75 cents on the dollar. Special situations and Europe are the bulk of the money makers.
Greg believes that now resembles 2006, as credit tightens and there is a search for yield. He fears that there is too much complacency in the credit markets.
Bruce Richards notes that fed funds will be low for years to come, these are the lowest yields in the history of this country. Treasuries today are cheapest in 495 years. We have high duration, high risk and low returns. Pension funds need to earn 8%, and high yield is at 4.65% today, which makes the eight percent goal almost impossible. The only way to do it is to take liquidity risk. That is why his hedge fund is going out in duration, because he would rather have greater illiquidity with not selling, than going short duration.
The problem fixed income managers have, is that they have to take the highest leverage when spreads are the tightest and this is not the type or risk to be taking.
Jason says that Bernanke will be successful in forcing investors into risky assets. However, the results will be higher yields for treasuries and other safe assets, likely sometime in the second or third quarter of 2013.
Greg notes that many companies are relying on low libor rates to survive. When rates rise these companies will be in trouble.
Bruce believes that rates will go up, but it is hard to fight the Fed. The Fed funds are at zero until at least mid 2015, Ben’s term is done in 2014. Janet Yellen will probably take over after Bernanke. She is a carbon copy of Ben Bernanke. It is hard to fight the Fed, but to prepare for rate rises, investors can buy assets which will not be impacted by the rise. However, the rise will not come any-time soon. Additionally, another recession will come eventually, and that will cause rates to go down.
Bruce says that the Fed is creating a bubble. Hedging is very important for Marathon Asset Management, as the hedge fund experienced in 1998, 2008 etc. 1000 basis point drops.