LONDON 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.
(Editing by Mark Potter)