Distressed asset hedge fund Canyon Value Partners was up 2.6% in the second quarter, bringing up the year-to-date gain to 5.2%.

Canyon is not a generic investor

In its quarterly letter, Canyon stresses that its style of investing and types of holdings have little in common with the average ways of the market. Canyon said that less than 25% of its equity portfolio is allocated to the S&P 500 (INDEXSP:.INX). Another unique thing about Canyon’s portfolio is that the fund likes to hold cash. In the second quarter, Canyon upgraded its cash holdings to 15% of its assets. Managers expect to use cash both as a source of dry powder for possible new investments and as a hedge against turbulent market conditions.

The fund goes on to explain how it has searched and collected cheap assets from everywhere and combined them into one of their least thematic portfolios. Over the year, Canyon has grossed the highest return in its bonds and RMBS portfolio. At the end of Q2, the fund had sold $200 million worth of RMBS.

Canyon capital

Canyon’s least thematic portfolio

One of the cornerstones of Canyon’s current portfolio is picking up assets that Wall Street’s banks are not interested in anymore as part of their de-leveraging process and compliance to a stricter regulatory framework. The fund has also been buying assets that European financial institutions are divesting to a limited market of buyers. Just like several others in the hedge fund industry, Canyon also seeks to benefit from M&A activity and restructurings.

The letter said that in this process of balance sheet engineering of companies, there are many opportunities that the fund likes to tap into to make a profit. Structured credit is one of Canyon’s most profitable asset classes, as the fund continues to find new ways to benefit from products that caused the financial crisis six years ago.

Bonds and RMBs return high profits

Canyon sold $200 million worth of RMBS in the last quarter. Other sales included the IG debt of a company which is an acquisition target. The fund also bought new positions in loans of a toll road company. Canyon thinks that this holding will be valuable in the future, as the road is well-invested and the major caterer to long-haul traffic. Canyon also bought $100 million worth of bonds in a supermarket company which was in the process of acquiring a peer.

The fund also talked about its real estate affiliate, Canyon Capital Realty Advisors. CCRA provides secured loans, preferred equity and joint venture equity for commercial real estate. Canyon Value Partners also operates 2 CDOs and 4 CLOs, which are separate from its hedge funds. Managers said that these entities are well-positioned to provide risk-adjusted returns and that they intend to launch new CLOs whenever the opportunity set is attractive.