As debt-laden European countries, specifically those in the peripheral region strengthen to recovery, distressed asset investments are bearing fruit in the region. Credit Suisse Hedge Fund Index has netted a 7.03% YTD, whereas the Distressed index has gained close to double in the same period. The sub-strategy is up 12.05% YTD after adding a 1.5% return in October.
As we have noted on several previous instances, hedge funds have been grabbing any available assets, which are at times highly risky. The alternative lending space where traditional lenders like banks have moved out, is particularly popular among such investors. Hedge funds also aggressively participated in the restructuring and privatization of European companies. Seth Klarman’s Baupost Group, Canyon Capital and others are profiting these days from positions established years ago and remain on the lookout for new investments.
Howard Marks is biggest distressed debt investor
The 12% return of an average distressed asset investor has outperformed all major bond indices. Credit Suisse Leverage Loan Index has gained 5.09% through the end of October whereas Barclays High Yield Corporate Bond Index has gained 6.33% over the same period.
Howard Marks’ Oaktree Capital Group LLC (NYSE:OAK) has several billion dollars invested in the European distressed credit space. However his experience has not been as favorable as other investors. Oaktree Capital Group manages $80 billion in assets.
While speaking on Bloomberg TV, Marks said that flight to riskier assets has driven up prices, which has made it harder to find investing opportunities at attractive levels. OakTree is now targeting a 15% return in the distressed debt holdings, as opposed to an earlier expectation of +30% return. Regarding fewer opportunities, Marks said,
“My general observation is that private assets are cheaper than public assets. Money has flowed into public assets classes and institutional and have driven prices up. These are easily accessed, they are volatile as a result, ETFs you can get in any way you want. If I say you should invest in non-prime real estate, that is much harder to access and that is what OakTree is investing in.”
Canyon Value fund up in October
Mitchell Julis and Joshua Friedman have been profiting on their bets in Europe this year and their credit focused approach is particularly working well in the distressed debt area. The Canyon Value Realization Fund rose another 1.8% in October, pushing up the total return to +13.55%.
According to the monthly investor letter, a copy of which was obtained by ValueWalk, the fund managers reiterate that their strategy does not focus on traditional high yield assets that carry a lot of risk. However October proved to be a great month for risk-on bets. The after effects of no-taper cemented in and investors chose high yield ETFs as spreads fell to the lower levels. CVRF again outperformed all relevant bond indices in October, notwithstanding the massive inflows that the risky assets swept it.
Distressed credit is returning hot numbers
Among other distressed credit funds, the $11 billion King Street Capital gained 1% in October, which is now up 9.6% for the year. Paulson Credit Opportunities gained 1.8%, pushing up the YTD gain to 15.5%.
U.S-based Monarch Capital has returned 13.4% to the end of third quarter in its Debt Recovery Fund. The fund has invested in several recovery trades in Europe and manages $1.4 billion.
Davidson Kempner’s Distressed Opportunities Fund rose 2.2% in October, bringing the year to date gain to 18.3%. The fund manages nearly $900 million. Another distressed debt investor, Jon Bauer, recorded a 2.14% return in Contrarian Capital Fund I in October, which invests in several European opportunities.
Jonathan Kolatch’s Redwood Offshore Fund is also a winner in the credit space, the $3.1 billion fund recorded a 2.4% return in October, bringing up the year to date gain to +13.8%.