LONDON Nov 11 Hedge fund start-up Rhodium
Capital, run by former Bank of America star trader
Iftikhar Ali, has begun life betting on a strong performance
from corporate bonds over coming months.
Bond prices were hit over the summer by fears the U.S.
Federal Reserve would scale back its bond-buying economic
stimulus programme and also by political wrangling over lifting
the U.S. government's debt ceiling.
That pushed up yields - which move inversely to prices - on
both government and corporate bonds and widened the spread
between the two, a sign of investor nervousness.
However Rhodium, which launched at the start of the month
with an initial $30 million, is predicting a calmer November and
December at least.
"The stormy summer market caused a correction but now the
big scares are out of the way so we see further spread
compression from here," said chief investment officer Ali, who
has produced an average annual return of 16 percent since 2005,
according to a Rhodium information document.
Rhodium can adjust its portfolio to be up to 50 percent net
long - where bets on rising prices exceed bets on falling prices
- or up to 50 percent net short - where bets on lower prices
exceed bets on higher prices. It has started out with a
portfolio that is net long, towards the top end of the range.
While many investors now do not expect the Fed to start
scaling back bond purchases until March or April, Ali believes
it could be an even more distant prospect.
"We need consecutive quarters of robust data and recovery so
far has been very delicate. (Incoming Fed chair Janet) Yellen
doesn't want to come in and immediately cause instability. I
think it will be pushed back even further," he told Reuters.
Ali added that November and December should see greater bond
issuance by borrowers, offering more opportunities for
investors, before U.S. debt ceiling talks resume, while bonds
could also benefit from the need by some hedge funds to take
bigger bets to boost their calendar year performance.
"Some hedge funds have not performed well in 2013 so there
should be a bit of performance chasing and greater risk-taking,"
he said. Corporate fixed-income hedge funds have gained 4.9
percent on average this year, according to Hedge Fund Research.
Ali said volatility could rise by early February as the
deadline for the next U.S. debt ceiling talks approaches.
Reuters reported in June that Ali, former head of
international proprietary credit trading at Bank of America and
more recently hedge fund manager at Observatory Capital, was
launching Rhodium as a long-short fund, along with Jeffrey
Tirman as CEO.
Ali said he liked the bonds of some banks in Russia and
Turkey, and saw opportunities in the European cable sector.
"There's the possibility of further consolidation, which
could mean M&A activity positive for bondholders," he said of
the cable sector.