Balyasny Asset Management had difficulty in April managing a de-risking environment in both the firm’s offerings, according to an investor letter reviewed by ValueWalk.

Balyasny Asset Management May 2014

“Throughout the volatile unwind, it has been critical to manage risk and quickly adapt to changing markets,” Managing Partner Dmitry Balyasny wrote. The AGI fund was down 1.61% in April and is up 1.75% year to date while the AEF fund was down 2.80% in April and is up 3% year to date.

Focus on longs un-loved by hedge funds

“For longs, we focused on significantly variant ideas, with clear near-term catalysts that were under-owned by hedge funds,” the investor letter said. Balyasny was at one point considered a competitor to SAC Capital until the firm changed focus. “For short ideas, we used rallies to lean into crowded, high valuation momentum names particularly when they failed after positive news.”

The Chicago-based fund considered the main strategy points going forward in this market environment, including trading in choppy markets as opposed to market environments of price persistence, or trending markets.  They anticipate holding macro allocations in the same historical range of 10-25% of firm risk “depending on opportunities” and are currently in the middle at 17%. “One of the reasons we have been able to outperform others in macro is that we have a larger number of nimbler specialized teams who are able to tactically trade choppy markets as opposed to just riding larger trends.”

Balyasny: “Easy money may have been made”

Balyasny notes “the easy money shorting momentum names may have been made,” and then considers the possibility “weakness will spread as we head into summer.”  The broad market benefited from a rotation, he notes, “as investors exit growth names and reallocate to value, credit, and the S&P, but that could quickly change.”

When considering the probabilities of future market environments, one possibility on BAM portfolio manager’s mind is that “once investors de-risk, the rest of the market will be fine. The other possibility is that the de-risking marked the beginning of a broader risk-off move and simply started with the most crowded and expensive sectors.”  Balyasny is flexible depending on how the market unfolds.  “We remain open to both possibilities and will let the markets tell us which narrative is more likely to play out. Regardless of which way markets go, there is a good chance that new leaders will emerge from this rotational period.”