| Aurora Investment Management founder Roxanne Martino |
Roxanne Martino, the founder and CEO of 25-year-old Aurora Investment Management in Chicago, thinks 2014 is going to be a good year for several out-of-favor strategies. Aurora, a $9.3 billion multistrategy fund of funds, has begun allocating more capital to distressed European credit and bank assets as well as long-short equity. Martino spoke with Alpha about her search for the best of the bad assets.
The search for yield in credit has sent a lot of funds to ever more esoteric investments such as CLOs and mortgage securities. But you’ve been putting more money into basic long-short credit strategies. What is the attraction?
Most investors are moving away from long-short credit strategies but not us. We have about 25 percent of our allocations in credit, and it has been our top-performing area in 2013, up about 21 percent for the first 11 months. We have some small positions in South American sovereign debt. We think Argentina, in particular, is becoming undervalued as the political environment appears to be shifting to a more business-friendly approach and economic growth picks up. We also think Greece is presenting opportunities due to the ongoing underlying support from the rest of Europe, although there is still a lack of investors.
There is no shortage of distressed debt in Europe, but it hasn’t been an easy market for hedge funds.
We are seeing fund managers take advantage of dislocations in European sovereign and corporate debt. Credit fund managers who might have had nothing in the European markets three years ago might now have one-third to one-fourth of their allocations in European credit. We have seen a number of managers set up offices in Europe. One didn’t go to Greece at all last year but told us he’s been there seven times this year.
Are managers also finding more opportunities in distressed European banks?
Yes. Three years ago asset managers were waiting to take advantage of the huge distressed cycle in Europe that ultimately didn’t materialize. In particular, the asset managers expected banks to open the floodgates for distressed assets and sell them at bargain-basement prices. That didn’t happen primarily because of the liquidity infusion from the European Central Bank’s longer-term refinancing operations, but it also had a lot to do with mandatory capital ratios under Basel III. The banks preferred to hold onto their assets, even troubled assets, rather than sell them cheaply and cut into their capital ratios.
But now they are starting to exit some of their troubled-debt securities that are coming due. It isn’t wholesale selling off; the banks are selling very specific tranches, very selectively. They’ll invite one, two or three hedge funds to come in and work out a deal, but if they can’t come to an agreement they’ll move to the next group. For hedge fund managers who can work through complex situations, this trend could be the gift that keeps on giving, as the pace of the activity will vary depending on the schedule of maturing debt.
Where do you plan to allocate your equity investments in 2014?
We’re looking especially at the event-driven and long-short equity categories. The first is doing very well in a way we haven’t seen in a long time. Many big institutional investors have cut their exposure to event-driven due to somewhat anemic activity in the space relative to the expectations they had after the stock market’s healthy recovery from the March 2009 bottoming out.
But we see a lot of opportunities in the months ahead. I’ve been in the investment business for about 35 years, and until the last few years, most event-driven action came from arbitraging merger events. Now it’s shareholder action that’s driving the strategy. More and more we’re seeing corporate management responding not so much to an investor going in with guns blazing, but to investors leading discussions about how they can create shareholder value, as in the example of ValueAct Capital working with Microsoft. We’re seeing management of many companies responding to activist investors with such measures as spin-offs, increasing dividends or giving back cash. That also helps provide a tailwind to our long-short equity strategies. Managers in both strategies see tremendous embedded value, which the activists are willing to help unlock.
Are you concerned that rising stock markets have made it difficult for long-short strategies to perform well?
We’ve boosted our allocation to long-short equity by about 6 percent in the last couple of months. Correlations among stocks have come down dramatically in the past year, which means that stocks are trading more on fundamentals. We still have some market conditions that keep companies going when they really don’t have the fundamental factors to keep them afloat. Low interest rates, for example, allow some troubled companies to borrow in order to survive.
But now we’re finding that some of the smartest long-short equity managers are shorting companies in industries that don’t show much promise. They might, for example, rely on outdated technology or overly hyped new technology. One new technology that we think has led to overvaluations is 3-D printing. Eventually, investors will look at the economics of 3-D printing and decide the multiples are unsustainably high. We think those who time it right will also do well by short-selling retail companies that are still relying on brick-and-mortar shopping. I’m seeing that people approach their own shopping far differently now than they did just a year ago. Are you going to rush out and buy something at Macy’s? People have begun to check Amazon first to see if they can get the item for less.
