King Street Capital Management, the New York–based multistrategy hedge fund firm founded by O. Francis Biondi Jr. and Brian Higgins, reported solid second-quarter results that added to its first-quarter gains, thanks in part to continued wins from positions in Lehman Brothers Holdings.
The firm, launched in 1995, gained 3.5 percent in the three-month period ending in June and is now up 6.2 percent in the first half, according to a letter from a fund-of-funds firm with an investment in King Street. Biondi and Higgins, who met in the late 1980s at First Boston Corp., qualified for Alpha’s annual Rich List in 2014 for earning $325 million apiece in 2013. They managed about $19.8 billion at the beginning of the year, close to their record high.
Just as in the first quarter, all of King Street’s strategies were profitable except its portfolio hedges, which trimmed performance by about 0.4 percent. And as has been the case for the past few quarters, Lehman, King Street’s largest position, was also the best performer, kicking in more than 1 percent to second-quarter returns.
King Street’s investment in Lehman has been a major performance driver for more than two years. It accounted for about half of the firm’s 11.3 percent gain in 2013. In the first quarter King Street’s distressed portfolio accounted for nearly three quarters of its return, led by various investments in Lehman’s capital structure, which at the time made up King Street’s largest single position at roughly 18 percent of its assets, according to the fund-of-funds investor.
King Street, which historically has been press shy, focuses on long-short credit and event-driven opportunities, including distressed, stressed and out-of-favor situations; shorting of investment-grade and high-yield debt; capital structure trades; special situations involving spin-offs, litigation plays or other events; and deep-value situations with a catalyst. Equities typically account for a very small fraction of the firm’s total assets.
In the second quarter King Street also made money on TXU Energy, the power company that filed for one of the largest bankruptcies in history in April and is now called Energy Future Holdings Corp. As is often the case, King Street did not join a creditors’ committee even though it is the third-largest holder of debt, according to the fund-of-funds firm’s report. In general, the firm makes passive investments in a large number of instruments rather than taking controlling positions.
King Street is also said to have enjoyed a nearly 10 percent return from its positions in Argentinean bonds, making them one of the hedge fund’s top performers. Heading into the third quarter, the fund of funds points out that TXU and Argentinean bonds remain top positions. Meanwhile, structured credit kicked in 1 percentage point to second-quarter performance.
According to the fund-of-funds report, King Street “made progress restructuring a large group U.K. [residential mortgage-backed security].” It also notes that King Street’s collateralized loan obligations and commercial mortgage-backed securities investments “traded well” and “in line with the overall market.”
As a testament to King Street’s tendency to run a very diversified portfolio, the report notes “a dearth of material losers.” And the main losers — equity positions in Greek banks and index hedges — barely cut into results.
Earlier reports from the fund-of-funds firm noted that King Street entered 2014 with roughly 44 percent of its assets in cash, which at the time was said to be near its historical average and roughly where it stood at the beginning of 2013. In 2011 it had closer to 60 percent in cash.
The fund of funds also tells clients that King Street continues to find “good idiosyncratic opportunities” globally and across asset classes.
