BOSTON Nov 8 When Sir Michael Hintze surveys a world rattled by fears that easy money policies may soon end, the billionaire investor sees a chance to make money by moving from fixed-rate to floating-rate securities.
Hintze's Directional Opportunities Fund, one of a handful of portfolios run within his $12 billion hedge fund firm CQS, is up 12 percent this year, according to investors, even as some of his biggest rivals stumbled when the U.S. Federal Reserve hinted in the second quarter it might start to withdraw its stimulus.
The 60-year-old manager, whose 36 percent return in 2012 ranked him as one of the industry's best performers, began to rethink his investments early in 2013, opting for floating-rate securities, whose periodically reset interest payments are seen as protecting portfolios near the end of low-interest cycles.
Hintze acted long before others who were focusing on mortgage debt were caught off-guard by the Fed's signal it might ease up on its monthly bond buying, pushing debt prices lower. Some of these funds, including Deepak Narula's Metacapital Mortgage Opportunities Master Fund, which ranked as last year's best performer, nursed double-digit losses for the first half and have only slowly made up ground.
Now Hintze is approaching the new investment climate with a focus on credit risk instead of interest-rate risks and said that a shift from fixed-rate to floating-rate securities will likely be a big theme into 2014.
"We are at the beginning of a strategic reallocation," Hintze said in an interview.
Part of his success is rooted in what Hintze calls a global view for the portfolio, something that distinguishes CQS from U.S.-based rivals that tend to focus more exclusively on domestic investments.
Born in China, raised in Australia and now living in England, Hintze said he and his portfolio managers are comfortable playing worldwide markets with some of his most lucrative bets including asset-backed securities, European senior secured loans as well as structured credit.
"There is more value in the European mortgage-backed securities space as the European dangers become less stark," he said in a interview. "Europe has turned and Mario Draghi has done a good job," he added, referring to the president of the European Central Bank.
Many of those specific bets are housed in CQS's ABS fund managed by a team led by Simon Finch. The seven-year-old fund now has $2 billion in assets and has returned an average 25.5 percent per year since launching, investors familiar with the numbers said.
Hintze, who earned an MBA from Harvard and was classmates with JPMorgan chief Jamie Dimon and hedge fund manager Seth Klarman, says that post-financial crisis regulation, which he calls the "Great Dislocation," is creating new opportunities for investors like him because banks are no longer as powerful in some sectors.
The Volcker rule that is part of the Wall Street reforms, for example, prevents banks from making certain kinds of speculative investments, and Basel III is meant to strengthen bank capital requirements. To comply, banks have been cutting their holdings of corporate bonds since 2008 with U.S. primary dealers now owning only about one fifth of what they held five years ago, Hintze said.
With banks selling securities rated B and BB, Hintze said there are more buying options for fund managers.
In light of CQS's eye-popping returns last year and this year's strong performance, which has topped most credit-oriented funds' roughly 6 percent gain this year, Hintze and his team are among a small handful of funds that pension fund managers and other institutional investors are eager to meet.
Many of the industry's best-performing funds, including Daniel Loeb's Third Point and Klarman's Baupost Group, are no longer taking new money. In fact, both men have told their investors that they would be sending some money back.
But CQS's portfolios still have room to grown. Hintze said that for as long as he sees more good investment opportunities, there is room for carefully calibrated inflows.