November 20, 2013 / 2:21 AM / 6 years ago

Pine River hedge fund says will gain from stricter rules

NEW YORK (Reuters) - Colin Teichholtz, co-head of fixed income trading at $14 billion Pine River Capital Management, said the hedge fund firm will benefit from new Wall Street regulations as investment banks pull out of markets it likes to trade in.

Colin Teichholtz, partner and senior portfolio manager at Pine River Capital Management, speaks at the Reuters Global Investment Outlook summit at the Thomson Reuters building in New York, November 19, 2013. REUTERS/Shannon Stapleton

Teichholtz, speaking at the Reuters Global Investment Summit in New York on Tuesday, said his firm is already seeing the perks of the stricter environment.

“All of these rules are basically sending the same message to big banks - you have got to reinvent your fixed income business,” Teichholtz said of regulations including the Dodd-Frank Wall Street reforms, the Volcker Rule and the Basel III framework.

When Goldman Sachs’ (GS.N) fixed income, currency and commodity trading business tumbles 47 percent, as it did last quarter, “it’s telling you something,” he said. “It’s become a lot harder even for the best to be able to make money on a Wall Street deal or platform.”

“From my perspective that means there’s a lot less competition from Wall Street ... for the trades I want to do.”

Teichholtz said that while Pine River, two of whose fixed income funds had industry-best performance last year, still has a “meaningful allocation” to residential mortgage-backed securities (RMBS), the dynamics of the trade have changed.

In commercial mortgage-backed securities (CMBS) “we are being paid very well to take the risk” relative to corporate credit and non-agency mortgages, Teichholtz said.

While there has been frustration for investors at the lack of new RMBS issuance, Teichholtz said, the CMBS market is offering up a bounty of opportunities “across the capital structure” in legacy CMBS, such as AM bonds, which are a type of AAA-rated tranche in the CMBS capital structure, and also in the new issues market.

He also said he thinks there “is going to be a de-acceleration” of home prices over the next 12 months, describing the pace in 2014 as “more of a steady grind upward.”


Investors have also often failed to look closely enough at the municipal bond market, with different kinds of debt getting lumped together, Teichholtz said.

“The muni market is one that’s very prone to throwing the baby out with the bathwater,” he said. “There’s not the differentiation that there should be,” leading to mispricing and therefore opportunities for Pine River, he said.

Teichholtz said the fund had bought up Puerto Rican municipal debt as worries about the economy there sent interest rates on the island’s debt soaring. “The bonds crashed at times when fundamentals were beginning to improve,” creating an opportunity for the fund to jump in.

“COFINA bonds, which are secured by sales tax receivables, were getting hit just as hard as GOs,” or general obligation bonds, in Puerto Rico, Teichholtz said. “We thought that created an opportunity.”

“We’ve been a net buyer after previously not having played” in that space, he said.

Last week Fitch said it could soon cut Puerto Rico’s credit rating to junk, which would make the U.S. territory the largest municipal bond issuer to date to slide into speculative territory.

He also said Pine River likes bonds backed by the Texas Permanent Education Fund, which were “cheapening along with everything else” in the wake of the Detroit default. The credit, “backed by oil and oil receivables and oil in the ground” seemed “pretty fantastic,” Teichholtz said.

“We were able to buy those at the long end of the curve and get paid an extra 100 basis points of spread relative to where U.S. Treasuries trade.”


Teichholtz also spoke about reinsurance, an area many hedge funds have recently become more interested in, in part because it offers access to steady capital.

With Steven A. Cohen’s SAC Capital Advisors now turning into a family office, the company’s reinsurance arm SAC RE has been on the block. Pine River has been one of a number of hedge funds named as a possible buyer, according to a report in the Wall Street Journal. Teichholtz declined to say anything about SAC Re but said “I’m intrigued by reinsurance.”

“We do see an opportunity in catastrophe bonds,” he said, adding however that he was slightly concerned about the amount of money flowing into that sector.

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(For other news from Reuters Global Investment Outlook Summit, click here)

Reporting by Katya Wachtel and Luciana Lopez; Additional reporting by Svea Herbst-Bayliss; Editing by Phil Berlowitz

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