Echoing some other big names in the space, BlueMountain Capital Management, the $22 billion New York-based multiple strategy credit fund manager, experienced generally strong performance across its three primary investment vehicles in the second quarter, according to an investment letter reviewed by ValueWalk. Fund management said it is “underwhelmed” with its 2016 year-to-date performance and is working on a strategy expansion project, “growing our capabilities in signal-driven, systematic investing,” while seeing strong forward looking opportunities across markets and strategies. The fund, previously involved in a fight over Puerto Rican debt, has a long history of posting consistent returns in a low volatility environment.crash photo

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BlueMountain Capital Management

BlueMountain: “Very little – if any – obvious cheapness” in markets

When looking at markets broadly, there is “very little – if any – obvious cheapness,” the letter for the quarter ending June 30 noted, pointing to all markets rising. “A market environment like this reinforces our conviction in the importance of relative value investing.”

With only 75% of the portfolio invested, BlueMountain is not only in a defensive crouch but is also looking for opportunity to get more fully invested after an anticipated market value readjustment occurs.

“Given our caution in the current environment, we are not increasing our risk to reach for returns, and instead have either maintained or even reduced overall risk in order to increase the amount of dry powder we have at our disposal.”

With valuation concerns, the fund has a “moderate level of excitement about the current environment” but looks with “anticipation of potential opportunities that could arise in the foreseeable future.”

Making such pronouncements and having what BlueMountain termed “dry powder” at the ready does not mean negative market events will be upon us. “Of course, there is certainly the possibility that this market complacency persists and the opportunity set doesn’t meaningfully improve in the near term, in which case, we will continue to be patient and would advise our investors to do the same.”

It is unclear what could cause a sell-off, but BlueMountain is monitoring several factors, including negative interest rates

BlueMountain will know the time is right by watching price action, with fundamental causation for any market price slide potentially attributable to numerous factors.

Factors that the alternative asset manager is watching include “political and market uncertainties that could rattle markets.” At the top of this list is negative interest rates, which “are becoming more widespread, with no real understanding of their long run impact on financial institutions, economic growth, or consumer behavior.”

The topic of negative interest rates as an increasing risk to economic stability was addressed today in a New York Times editorial, which said the program “hasn’t worked very well” and said that “continuing to rely on negative rates could be dangerous,” as unsustainable asset bubbles are cresting that seduce investors into taking “foolish risks.”

BlueMountain also notes that investors have shrugged off Brexit – and event that increasingly might get pushed back. “We are in the early innings and there could be much more to digest from Brexit as the process plays out,” the letter said.

While US stock markets continue to climb with calm confidence leading into an unusual US Presidential election, BlueMountain nonetheless sees risk. “Of course, the US presidential and congressional elections could impact financial regulation, geopolitical stability, and global trade.” If not the presidential election, the fate of US Congress could move the needle on markets.

BlueMountain strong second quarter performance due in part to second quarter mean reversion, rotation in long / short portfolio

In the second quarter 9 of the firm’s 11 strategies experienced positive performance, but two of three investment products remain underwater year to date.

The $6.8 billion BlueMountain Credit Alternatives Fund, up 1.14% in the second quarter, is down -2.14% year to date. By contrast the HSBC Hedge Weekly Long/Short Global category is up 1.65% year to date. The fund has average annual returns of 7.79%, comparable to equity market benchmarks, but accomplishes such performance with low 5.82% average annual volatility, nearly half the volatility of major stock averages.

Distressed Long / Short credit exposure was responsible for the bulk of gains in BMCA, adding nearly 0.9% to net asset values. In a yield starved world, this gain is attributable in part to what the firm sees as price appreciation resulting from increased risk appetite for stressed and distressed credit.

The firm’s Long / Short Equity Fund, up 1.25% on the quarter, is nonetheless down -2.63% year to date. By contrast the HSBC Hedge Weekly European Long Short sub category is down -5.36% year to date, the global long / short category is down -3.61% year to date and the US sub category is down 2.27%. The average annual return is 7.89% and annualized volatility is 6.69%.

The fund experienced significant exposure rotation in the first half, with over 50% of positions being new to the portfolio. Many of these new positions were contributing and were strong causation for the second quarter gain in the fund.

The only year to date winner is the BlueMountain Equity Alternatives Fund, which was up 2.04% on the quarter and is up 3.39% on the year. The fund has an annualized average return of 8.97% and 6.12% annualized volatility. The HSBC Volatility Arbitrage sub category, where this fund self-identifies, is up 1.93% year to date.

Structured finance and arbitrage-oriented strategies posted positive gains in the second quarter after being hit by volatility in the first quarter. That first half volatility caused price relationships to diverge, which resulted in market-to-market losses in the first half. But when the asset prices diverged from their normalized patterns, the fund uncovered opportunities and when prices mean reverted in the second quarter the fund benefited.

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