Talk about an abrupt reversal of fortune.
BH Credit Catalysts, which invests all of its assets in the Brevan Howard Credit Catalysts Master Fund, in November posted its fourth straight monthly loss since we profiled the fund back in August. The fund dropped 0.5 percent for the month and lost another 0.22 percent in the first week of December, trimming its gain for the year to 4.23 percent.
This is a big change for the fund. Before this losing streak, it had been profitable for 12 straight months and lost money in only two of 30 months through June 2014. Credit Catalysts gained about 7 percent in the first half of this year, 13.6 percent last year and about 15 percent in 2012. Both funds are managed by New York–based DW Investment Management, a $6 billion global multistrategy credit management firm founded in 2009 by David Warren. The firm spun out of London-based Brevan Howard Asset Management in 2009.
In contrast, Chicago-based data tracker Hedge Fund Research’s distressed/restructuring index is up less than 1 percent year to date, having lost money in three of the past five months. Its fixed-income asset-backed index is up nearly 8 percent for the year, having suffered a slight loss in October, its only monthly decline this year. The Lyxor Credit Strategies Index is down 1.11 percent for the year after losing money in each of the past four months.
Brevan Howard’s flagship global macro strategy, which manages some $28 billion in assets, has produced middling gains in recent years and is barely positive for the year to date. So the firm’s credit funds have been something of a bright spot for the firm, at least up to now.
Credit Catalysts has not yet published its monthly analysis detailing what contributed to its loss in November.
However, in its recently published review of October results, dated December 3, the fund’s managers said its biggest losses came from its long-short portfolio of so-called performing loans, or loans that are not in or near default, explaining that “many positions suffered more from risk reduction than from changes to either the fundamental outlook for the companies or the catalysts.” The fund lost 0.7 percent that month. The managers also conceded in the report that the rough October followed what it called “a difficult third quarter for performing corporate long/short positions.”
They also stressed that October losses were diversified across various industries, including consumer discretionary, oil and gas, and media and technology. On the other hand, the fund made money from homebuilders, oil and gas short positions, technology and retail.
Heading into November, the fund’s managers said they had concentrated the fund’s risk into its “highest conviction ideas” and reduced exposures across the portfolio in general and to certain individual positions — “particularly those where catalysts were further out on the horizon,” they added.
For September, when the fund fell by 0.76 percent, the fund’s monthly letter noted that the fund lost money from corporate positions but made money from mortgage- and asset-backed holdings. “The bulk of the fund’s losses came from the performing long/short portfolio, with the majority of those from single-name equity positions,” the letter said.
More specifically, the fund suffered losses from common equity and preferred stock holdings in South Korean auto giant Hyundai Motor Co. after the company won a land auction in Seoul and said it will pay $10 billion to develop a new corporate headquarters. The fund’s managers explained that these two securities were sold off in September, wiping out earlier “solid” gains from the preferred stock holdings. The fund also lost money from South Korean conglomerate Samsung, which was also affected by the Hyundai-related selling.
“In both Hyundai and Samsung, part of our investment thesis was that the companies would begin to release their large cash holdings in shareholder-friendly ways, such as dividend increases and share buybacks,” the managers explained.
The firm also pointed out that the fund’s distressed portfolio produced mixed results but was down for the month overall. It was especially hurt by “larger capital structures” such as TXU Corp., the bankrupt Dallas-based power giant that was a source of big gains for many credit and multistrategy funds earlier in the year. The managers also noted that the fund made money from asset-backed securities in September, however.
The fund fell 1 percent in August. The portfolio was hampered mostly by performing long-short positions, led by a losing position in various debt and credit derivatives of Caesars Entertainment Corp. and its affiliates. The fund was also hurt by hedges, according to the monthly letter. Residential- and commercial-mortgage-backed investments “held up well,” while structured corporate positions “were up slightly” in August, according to the fund’s letter.
