Hedge fund firm CQS bets credit rally can last

Date: Wednesday, August 11, 2010
Author: Laurence Fletcher, Reuters

Hedge fund firm CQS is betting on a further improvement across credit markets, believing cheap valuations and a benign outlook for interest rates will prolong the recent rally in bond prices.

The firm -- which runs $7.5 billion in credit, asset-backed security and convertible bond funds -- raised its bets in junk and investment-grade credit three to four weeks ago, said CEO Michael Hintze, although it sold some positions in the rally.

"Markets had moved downwards and valuations were beginning to look more attractive in light of generally positive Q2 earnings," the Australian executive told Reuters.

"As markets have rallied, we've begun to take a little bit of credit risk off the table in financials and property but we're still positioned for a continued improvement in credit markets in the short term," added CQS Chief Investment Officer Oliver Dobbs.

Credit spreads, which had risen above 1,000 basis points during the credit crisis, widened this year on fears over southern European debt worries to top 620 basis points in June, as measured by the Markit iTraxx Crossover index of 50 mostly junk-rated credits.

However, they have since narrowed to 478 basis points on Tuesday as fears of a severe double-dip recession have receded.

Hintze's Directional Opportunities multi-strategy fund rose an estimated 6.9 percent last month, helped by buoyant credit, convertible bond and equity markets, taking gains so far this year to an estimated 11 percent.

The average fund is up 1.52 percent in the first seven months of the year, according to Hedge Fund Research, after suffering losses in May's volatile markets.

Hintze, who set up CQS in 1999 and was worth an estimated 210 million pounds in last year's Sunday Times Rich List, said subdued economic growth will keep interest rates low, thus supporting bond prices.

"We don't think economic growth in Europe and the U.S. is strong enough that interest rates are likely to rise in the short term," he said. "We thought we might be in for a period where markets would climb a wall of worry."

Dobbs added that recent new bond issues had increased the number of opportunities available, although security selection was key.

"New issuance is also broadening the opportunity set and there has been strong issuance in U.S. corporate bonds and some notable successes in Asian convertible bond issuance such as Acer (2353.TW) and Agricultural Bank of China (601288.SS).

"Opportunities are very idiosyncratic and we're very focused on individual names."