Bloomberg Hedge Fund Summit 2012 now features John M. Bader, Chairman and CIO, Halcyon Asset Management LLC, a $10 billion hedge fund, talks about special situation investing. Bloomberg hedge fund reporter, Kelly Bit is interviewing John.
1:28PM EST: Halcyon is up approximately 10% this year, many successful investments were in liquidations, and credit strategies in general.
1:31: John thinks that the Eurozone will stay in tact but there will be restructuring. There are still major issues in the middle east, and problems in the US. Liquidations are attractive because they are not highly correlated to market movements.
1:33: Madoff is an example of a recent liquidation. There was a total of $57 billion of claims, some investors bought the claims at $0.20 on the dollar, but John thought it was not worth the risk. However, by earlier this year, $11 billion in cash had been recovered. Additionally, the claims were reduced to $17 billion.
1:34 The claims were worth $0.63, but were trading at $0.57.
1:35: Most hedge funds who bought Lehman bought debt of the holding company, however, there seem to be much risk with this approach, as there were many unknowns.
1:36: John liked the papers of Lehman commodities, which was trading in the low 70s, even though the distributions would be nearly in the 50s on the dollar. He is still finding opportunities sometimes in same companies but different silos.
1:38: John has three conditions; 1. asset value, cash is best. 2. reduction in claims or claim to path for reductions, and 3. real visibility regarding distributions. With Lehman, John did not look to where highest returns were, but rather where the least downside was.
1:40: John started with merger arb in the 1980s, and high returns were available. However, today it is totally different. Only 3% of Halcyon's assets are in merger arb plays. Today, many situations the risk reward ratio is totally skewed. He likes to look where there is dislocation like 2010.
1:42: Halcyon found even more opportunities even as spreads tightening in 2010. Today, there have been numerous bidding wars, which have created opportunities. Additionally, some situations which were misunderstood created more opportunities.
1:44: Halcyon does not have an allocation set for 2013, it all depends on what value is available. However, special situation dividend stories look like they will be a big area for opportunity in the coming months.