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
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
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
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.