(Corrects and changes description of Pamli Capital Management
in third-to-last paragraph to "global credit-focused fund," from
* Credit funds up 4.1 pct through May
* Stock funds gained 2.4 pct
* Tepper, Paulson, others have big gains in credit
By Katya Wachtel
NEW YORK, June 14 In a year of uneven returns
for many U.S. hedge funds, managers who invest mainly in bonds
have outshone stockpickers.
Over the first five months of the year, credit-focused hedge
fund portfolios were up 4.11 percent compared with a 2.4 percent
gain for stock-focused ones, according to hedge fund tracking
Well-known managers like David Tepper and Daniel Loeb have
seen hefty returns in their credit-focused portfolios on bets
they made in the second half of 2011.
Some managers are profiting from those shrewd trades, which
they made on mortgage-related securities, U.S. corporate debt
and beaten-down European sovereign and corporate bonds. Others,
meanwhile, benefited from an early move into junk bonds, which
have been one of the credit market's better-performing sectors
It is another indication that in a year of great turbulence
in the stock market, bonds have been the place to be despite the
yield on the 10-year U.S. Treasury hovering around 1.61 percent.
"At the end of last year, European financials were massively
battered down so we went long those corporate credits -
they were great investments," said Peter Faulkner, a credit
portfolio manager at $2 billion P. Schoenfeld Asset Management.
Similarly, Third Point's Dan Loeb, in a May 4 investor
letter, said successful bets on corporate credit during a debt
market selloff last October, led to strong gains on those
positions in the first quarter.
PSAM's credit fund, which was up 6.6 percent through May
according to HFN, also benefited from gains in corporate credits
that have exposure to U.S housing such as iStar Financial Inc
and Residential Capital LLC.
James Malley, who co-manages the PSAM credit fund with
Faulkner, likened the fund's gains this year to "harvesting"
investments it made last year.
The PSAM fund profited, in part, from the European Central
Bank's move to pump more money into the euro zone banking system
earlier this year in an attempt to stabilize the economic
situation. The effort temporarily boosted liquidity and
confidence, which led to a rise in corporate bond prices around
Also funds that were early to buying high-yield debt
benefited from a growing sentiment that corporate defaults were
unlikely given signs of a strengthening economy and a search by
investors for securities that yield more Treasuries.
But the high-yield market has given back some of this year's
gains in the wake of recent weaker jobs data and renewed worries
ROUGHER ROAD AHEAD?
This year retail investors have made a similar big move into
bond mutual funds, as they flee stocks and seek to avoid risk.
Through May, bond mutual funds gained $139.84 billion in net
inflows, while equity mutual funds saw $27.21 billion in net
outflows, according to estimated data from the Investment
But some analysts wonder whether the big gains for credit
funds in the hedge fund universe have already been achieved for
the year. These analysts suggest it will be much tougher for
debt funds going forward with yields on high-quality corporate
debt declining and an uptick in U.S. home foreclosures that
could spell trouble for mortgage-backed securities.
"Most of the positive year-to-date performance in credit
strategies can be attributed to January through March," said
Minkyu Michael Cho, a research analyst at eVestment|HFN.
In May, credit-focused portfolios fell 0.02 percent,
according to eVestment|HFN. But that was not as bad as the sharp
3.31 percent decline registered by stock-focused funds in May.
Still, the credit market also has proved to be a bumper crop
for Tepper's Palomino fund, which is one of the largest
portfolios managed by his Appaloosa Management. The $5 billion
credit fund rose 12.94 percent through April 30, according to
data collected by HSBC Private Bank.
Another top performer is Andrew Feldstein's Bluemountain
Credit Alternatives Fund, which was up 7.85 percent through May
25, according to HSBC data.
The Brevan Howard Credit Catalysts Fund has risen roughly
6.5 percent through May 25, and a CQS ABS Feeder Fund had gains
of almost 5 percent through April 30. Meanwhile, the
Mariner-Tricadia Credit Strategies fund was up 5.14 percent
through May 15.
The stand out performance by credit-focused funds has helped
some managers offset sharp losses in their stock funds. One
example is John Paulson, whose flagship Paulson Advantage fund
is down 6.3 percent this year, while Paulson & Co's Credit
Opportunities Fund is up 5.26 percent.
Global credit-focused fund Pamli Capital Management, which
earned big gains earlier in the year on trades in
mortgage-backed securities, has risen 1.6 percent for the year,
according to an investor note.
But eVestment's Cho said with yields coming down on
high-grade U.S. corporate debt and Treasuries, the easy money
may have been had.
"It seems the move to safer assets may actually have hurt
credit strategies over the course of the year," he said. "Yields
have come down across the board for U.S treasuries since highs
in March, and yields have also come down for U.S. AAA
(Reporting By Katya Wachtel with additional reporting by Sam
Forgione; edited by Matthew Goldstein and Matthew Lewis)