Gideon King, CEO and CIO of Loeb Capital Management, wrote extensively about his views on the current outlook on U.S. economy in his Q2 investor letter. King has appeared on Bloomberg a number of times where he has discussed activist investing and the future of theM&A market. Loeb Arbitrage Fund, an event driven program, was down 0.5% in June, but managed to post a +1.22% return in Q2 overall. The fund is 3.6% for the year so far. According to BarclayHedge, the Loeb Asia Fund is up 12.4% YTD.
Before the financial crisis hit the markets, Loeb Capital managed more than $1 billion in 2007. However after meeting a flood of redemptions, AUM crumbled to $500 million. The flagship fund kept up a stellar record of 13% annualized return for nineteen years until 2007, and during this period the fund had no down year. As of now, there is no indication of how much the firm manages in its onshore and offshore accounts. Loeb Capital Management’s founders have a rich background in financial markets, and the asset management unit takes its roots from the brokerage firm that Carl Loeb founded in 1930s. Loeb Capital was founded by Carl Loeb’s grandson, Thomas Kempner Sr.
Loeb Capital’s Gideon King on equity markets in rising rates
In his quarterly missive, King talks about the future of equity-focused investments in a rising interest rate environment. He expressed his fears that the current situation reminds him of the haunting times of 1994 when bonds reversed after nearly three years of bull market, and equity markets dipped so sharply that several sectors saw near total outflows. Just like today, at that time Japanese rates were anticipated to be lower with struggling growth in the country, Europe was not doing any better and the U.S. was considered a “sweet spot” where conditions were much better than these regions and the economy looked like it was headed on a positive trajectory.
Then the Federal Reserve tightened rates in February of 1994 and everything went loose. Even at a time when outright hawkish fiscal policy was in play, the majority of traders did not see it coming. And when they did, they sold with such zest that all major markets crashed. King said that he does not want to draw unnecessary parallels, but the same things were seen happening in the last month. Risky investors, who naturally had the largest bets, went scrambling for exits and the excessive selling shook both bond and stock markets.
The unknown “other side” of the money printing experiment
King says that after artificially controlling currency worth for the past five years, letting things take their natural course can be scary and this is what happened in June. Loeb Capital’s analysis shows that there is a surprisingly low correlation between Treasury rates and high yield bonds, at 0.1 since 1997. On the other hand, junk bonds have considerable corrleation with the S&P 500 index, at 0.42. This suggests that as interest rates spike, high yield indices soar and consequently the same will happen with equity markets.
King admits that all mathematical analysis and predictions can be flawed, and even the statements from market veterans can fall short as their judgements are also clouded by personal perceptions. He says the same about his own thoughts about the 1994 crisis, adding that several factors are different in today’s economy—for instance that the Fed is unlikely to tighten for at least a year, and absolute yields were much higher in 1994 than today’s lows. There is the possibility that some good can come out of the Fed’s current experimentation with economy, since nobody has seen how these experiments end. King is rooting for better returns in the event driven equity strategy, and he sees this approach as least vulnerable to the Fed’s machinations. He finds credit space unattractive from a risk/reward perspective.
Adam Weingarten has taken the position of Director of Value and Event-Driven Credit after Gilles Guillon left Loeb Capital.