Hedge Fund Panel: Credit Opportunities In The Current Environment (Lasry, Altman, Eberts)

This is the last article in a series on the hedge fund panels that recently took place. Over the past few days, we've covered an introductory post that outlined key takeaways from the event and a separate post that detailed the "Case For Global Equities in 2010" from a panel of prominent long/short equity hedge fund managers. Additionally, we highlighted the hedge fund manager panel on the global investment landscape in 2010 as well as the discussion of alpha in asset allocation.

The last hedge fund panel we're covering includes thoughts from Anchorage Advisors' Kevin Ulrich, Avenue Capital's Marc Lasry, Goldman Sachs' Kenneth Eberts, and Owl Creek's Jeffrey Altman.

Credit Opportunities In The Current Environment: Where Do We Go From Here?


The panel agreed that 2009 was fueled by liquidity. They note that the easy money has been made and many situations actually played out very fast. The cycle is not over; there is more to come and there was disagreement as to where the most opportunity was: mid-caps or large credits that are restructuring.

Marc Lasry (Avenue Capital): Lasry thinks that the large cap opportunities are gone for 2010 and that mid-caps provide the best opportunity as there is still $1 trillion to be re-financed there. Avenue really likes restructurings and is adding to their staff to take advantage of it. Lasry thinks that middle market companies are discounted since there's not much liquidity (banks aren't providing them capital). He mentioned that in 2009 you "had" to be invested and you can tell who did well from a credit perspective by looking at the returns. Avenue's international fund was up 66% last year as detailed in our post on 2009 hedge fund performance numbers.


Jeffrey Altman (Owl Creek Asset Management): Altman and Owl Creek are contrarians by nature and think the opportunities will be in one-off's rather than entire sectors like it was in 2009. They see opportunity in finance and healthcare because many other investors aren't fond of those arenas as they are filled with volatility. Last year, they mainly focused on process driven trades and as those are maturing, they're interested in moving forward with LBO's that needed restructuring. Right now they have tail hedges on via S&P puts and CDS because they are worried that if there is another economic/financial problem that the government won't be able to do much since rates are already at 0%. Overall though, Altman sees opportunity for those with capital to deploy as private equity firms and banks are doing less in the arena.


Kenneth Eberts (Goldman Sachs): Eberts mentioned that Goldman Sachs Investment Partners was heavily invested in capital structure arbitrage in 2009 as they thought it was the best way to own the economic tails (buy equity, short debt). Moving to 2010, they are honing in on the short side in investment grade as they feel it is the 'worst priced' since it's the tightest. He notes that if everything is fine and dandy in the world, they won't move much. However, if we start to see problems again, these will be seen as mis-priced and will fall hard. Lastly, he thinks that if China doesn't buy the excess Treasuries supply coming to market in 2010 that you could see a credit widening.


Kevin Ulrich (Anchorage Advisors): Ulrich focused on how the liquidity-driven 2009 is a thing of the past and that there are still opportunities on the long side in the distressed segment. Anchorage likes cyclicals near-term as there is an opportunity to benefit from financial and operational leverage. He mentions that credit default swaps (CDS) are still the best way to short, but notes they have definitely become less liquid. However, he does think a clearing house would be an improvement.


That ends the coverage of the conference. Head to all the posts on the hedge fund panels including:

- The Case For Global Equities in 2010

- Is There Alpha in Asset Allocation?

- The Global Investment Landscape in 2010

- Key Takeaways From The Event

Hedge Fund Panel: Is There Alpha In Asset Allocation? (Och, Mindich, Singh & More)

We're moving along in coverage of the hedge fund panels that recently took place. Yesterday there was coverage of key takeaways from the event and the "Case For Global Equities in 2010" from a panel of prominent long/short equity hedge fund managers. Additionally, there was a hedge fund manager panel on the global investment landscape in 2010.

Next up are the thoughts of Eton Park's Eric Mindich, Highbridge Capital's Glenn Dubin, Highfields Capital's Jonathon Jacobson, Och-Ziff Capital Management's Daniel Och, and TPG-Axon's Dinakar Singh from the panel on:

The Art of Multi-Disciplinary Investing: Is There Alpha In Asset Allocation?

Overall, the panelists thought that multi-strategy was the best fund format to take advantage of all the attractive opportunities. They debated as to whether there would be further consolidation in the hedge fund industry, but agreed that if regulation becomes too onerous that more funds will close and managers will run their own capital. Larger funds are more aptly suited to provide the increased transparency that investors are requiring now. There was a consensus that letting fund managers focus on investing rather than administration was essential and this favored larger funds.


Daniel Och (Och-Ziff Capital Management): Och's outlook focused on a bottom-up basis where he noted that this is an extremely attractive period overshadowed by macro risks. He notes that interest rates are likely to rise and that we should expect a similar experience as in 1993-1994 when we saw global quantitative easing (i.e. a bumpy ride of up's and down's but overall a good environment for investors).

On the topic of hedge funds, Och felt that an alignment of interests and incentives at a firm is crucial to success. He favors multi-strategy because it allows access to many more research and deal flow resources. One interesting note on firm culture is he wants an environment where people talk about how they can be better, not how good they are. Regarding hedge fund consolidation, he thinks it is talked about too frequently and that in 5 years time there will be ample smaller firms finding success. Och Ziff's master fund was up 23% for 2009 as noted in our hedge fund performance numbers post. Their Asia master fund was up 33.6%.


Eric Mindich (Eton Park Capital): Mindich's market outlook focused on the deleveraging that is taking place. He said that this creates opportunity on a micro basis even though there are headwinds and signaled that merger arbitrage will pick up. Mindich also noted that there has been a reduction in prop capital that has allowed Eton Park to capitalize on new opportunities as hedge funds provide this transitional capital now. Eton Park is a part of our custom Market Folly portfolio that is seeing over 25% annualized returns, created with Alphaclone. In our recent portfolio coverage of Mindich's firm, we noted that Eton Park expanded its UK holdings.


Dinakar Singh (TPG-Axon Capital): Singh's outlook focused on the fact that there is still policy risk, as well as funding and China risk. That said, he thinks that in the next 6-18 months that investors will underestimate the industrial improvements in America (TPG-Axon is currently finding many attractive opportunities there). He also noted that rates will go up over time and they will use credit to hedge equity. Lastly, the global world is more challenging than ever to invest in and that the alternative industry needs to be proactive in terms of regulation. They are not going to focus on every strategy, as they know when to say 'pass' on certain strategies.


Jonathon Jacobson (Highfields Capital): Jacobson reminded everyone of the old adage that investing is a marathon, not a sprint. The easy money has been made and markets are now more fairly priced. He thinks that the US is the most attractive geographic region and that the large cap, high quality names are the cheapest plays. This is sentiment we've seen out of many prominent hedge funds now. Bill Ackman & hedge fund Pershing Square recently started a large Kraft (KFT) position and is one of the many examples. The "high quality names are cheap" meme was echoed on the long/short equity panel we covered yesterday.

Highfields doesn't want to swing at every pitch, but rather just the big ones where they can hit home runs. They have 70 employees (25 investment professionals) and they like to keep the firm smaller. They note that the barriers to entry in the hedge fund industry are higher than in the past as investors want more transparency, counter-party management, and there will be a higher regulatory environment. This obviously favors larger funds that have the resources to let the investment team focus on the investments and the back office team focus on administrating.


Glenn Dubin (Highbridge Capital): Dubin's outlook centered on two major assumptions: that we will be in a churning economic environment for a while and that the last two years have been dominated by beta. He thinks 2010 will be more focused on alpha and that the amount of money allocated to event-driven strategies is the lowest he's seen in a while. Highbridge sees attractive returns there and also finds Asia very interesting. In terms of hedge fund culture, Highbridge says culture is critical and they spend a lot of time on interviews as they want team-players. Lastly, turning to the topic of investing in hedge funds, he said that allocators have to focus on the risk/reward of investing with experienced versus newer managers.

This wraps up the "Is There Alpha in Asset Allocation?" conversation. Head to the overview of the conference, the post on the long/short equity panel, as well as coverage on the global investment landscape in 2010. Check back tomorrow for summaries of the remaining hedge fund panels.

Hedge Fund Panel: Global Investment Landscape In 2010 (Druckenmiller, Singer, Dimitrijevic)

Yesterday, there was an introductory post that outlined key takeaways from the event. Then there was also a separate post that detailed the "Case For Global Equities in 2010" from a panel of prominent long/short equity hedge fund managers. The next panel discussed the Global Investment Landscape In 2010. Hedgies in this discussion included Duquesne Capital's Stanley Druckenmiller, Elliott Management's Paul Singer, and Everest Capital's Marko Dimitrijevic.

The Global Investment Landscape In 2010: The government's role, the global landscape, and monetary policy.


Paul Singer (Elliott Management): Singer talked about how government has always been a part of investing, but even more so now. He says that capital will flow to wherever it is welcome and wherever there are defined rules and laws. Singer honed in on some particular legislation that he feels will have damaging impacts. He focused on the Wall Street Reform and Consumer Protection Act of 2009. This would charge banks over $75 billion and hedge funds over $10 billion in open-ended assessment. He wonders why hedge funds would have to pay for the mistakes of 'highly levered and "mis-managed financial institutions'.

He also lashes out at the notion that this legislation designates institutions that are 'too big to fail'. He wonders how the government could identify those institutions ahead of time? Rather than forcing this definition on a few select companies, why not focus on making all of them NOT too big to fail. He thinks the way to do this is via margin requirements and regulations. Singer almost led a "call to arms" with his talk as his main point was that leaving capitalists worried about future punishment isn't the way to fix the system. On the topic of emerging markets, Singer actually thinks there is a "fair race" between the developed world and emerging markets going forward. Last year, we also covered Singer's thoughts at the Ira Sohn Investment Conference.


Stanley Druckenmiller (Duquesne Capital): Druckenmiller focused on monetary policy and asserted that it is not responsible for the financial crisis. He notes that zero and/or negative interest rates often cause dislocations that don't have anything to do with inflation. Instead, they affect other factors by discouraging saving, encouraging spending, and causing financial institutions to lever-up even more.

Druckenmiller did admit that cutting rates was appropriate as it truly was an emergency, but thinks an increase in rates is past due. (He disagrees with the assertion that low rates are needed for growth). Druckenmiller's thoughts overall could be summed up as bearish. In terms of investing, he mentioned that emerging markets offered much better balance sheets and faster growth. At the same time, he notes that the US dollar is the reserve currency and so monetary policy outside of America becomes less meaningful. We haven't covered Druckenmiller on the site much, but in the past have noted that he was on Forbes' billionaire list.


Marko Dimitrijevic (Everest Capital): Dimitrijevic focused on his niche topic of emerging markets and said they represent almost 13% of the MSCI index. He points out that this figure is misleading since nominally, emerging markets are a third of world assets. Additionally, emerging markets surged past developed markets on a purchasing power parity basis for the first time ever. One of Dimitrijevic's most intriguing points was the notion that the emerging market consumer overtook the US consumer and this shift seems to be overlooked. For more on Dimitrijevic, we've previously profiled Everest Capital.


This wraps up the "Global Investment Landscape In 2010" conversation. Head to the overview of the hedge fund panel and also coverage of the long/short equity panel. Check back tomorrow for summaries of the rest of the panels.

Hedge Fund Panel Report: Morgan Stanley Breakers Conference

Today we are delighted to begin a series of posts detailing the recent hedge fund panels that took place at the Morgan Stanley Breakers Conference on January 25th & 26th, 2010. This is an introductory post that outlines the key takeaways from the event and then progresses to separate summaries regarding the specific hedge fund manager panels.

In terms of outlook from the various hedge fund managers, many are bearish. While they don't deny opportunities still exist, they are concerned about macro factors and the massive equity gains we've already seen. They note that shorting was extremely difficult in 2009 as almost all their shorts went up. This was compared to the environment in 2003 where things were very similar.

Moving forward, managers think 2010 will require a lot of patience but will provide ample opportunities to generate alpha, contrary to 2008 and 2009 where beta drove most of the returns. Many hedgies think 2010 will be like 2004, a stockpicker's market. Hedge fund managers are anticipating a lot of mergers and acquisitions going forward and see the event-driven strategy as very attractive. Specifically focusing on credit, they think the easy money has been made. The majority of hedgies felt that mid-cap restructurings would be the most attractive area. Instead of seeing the credit cycle as 'over,' they think it has merely been extended since many companies have extended their debt.

In the alternative investment industry in general, there is less competition as there are few hedge funds and less capital competing with hedge fund managers. They are also seeing a trend of investors investing directly in hedge funds, bypassing fund of funds and that additional layer of fees. Many believe that large hedge fund firms have more difficulties ahead as they have to manage investor demand and regulations, but they see room for smaller firms to blossom as they have less to worry about and can focus on investing. Regulation was a big concern for many and they could see managers leaving the industry if it becomes too onerous to run a hedge fund, instead opting to manage their own capital.

This conference was absolutely loaded with big-name hedgies in the following panels:

The Case for Global Equities in 2010: What Should Investors Expect? Panelists included:

• Roberto Mignone (Bridger Management)
• Clint Carlson (Carlson Capital)
• Larry Robbins (Glenview Capital)
• Pierre Lagrange (GLG Partners)
• Lee Ainslie (Maverick Capital)
  

The Art of Multi-Disciplinary Investing: Is There Alpha in Asset Allocation? Panelists included:

• Eric Mindich (Eton Park Capital)
• Glenn Dubin (Highbridge Capital)
• Jonathon S. Jacobson (Highfields Capital)
• Daniel Och (Och-Ziff Capital Management)
• Dinakar Singh (TPG-Axon Capital)

Credit Opportunities in the Current Environment: Where Do We Go From Here? Panelists included:

• Kevin Ulrich (Anchorage Advisors)
• Marc Lasry (Avenue Capital Group)
• Kenneth Eberts (Goldman Sachs)
• Jeffrey A. Altman (Owel Creek Asset Management)

The Global Investment Landscape in 2010. Panelists included:

• Stanley Druckenmiller (Duquesne Capital)
• Paul Singer (Elliott Management)
• Marko Dimitrijevic (Everest Capital)

First up (in a separate post): the long/short equity panel.