Highbridge Capital Management posted relatively strong results in its first year of operating with a slimmed-down structure following changes to its business.
Last March, the firm sold its Highbridge Principal Strategies group (now called HPS Investment Partners), which focuses on non-investment-grade credit, to its partners. In 2015 it sold Gávea Investimentos to the founders of the Brazilian asset manager. This left Highbridge, a subsidiary of JPMorgan Chase, with about $5 billion or so in assets.
Last year, its main multi-strategy fund, Highbridge Capital Corporation (which is also called Highbridge Multi-Strategy Fund) gained about 6.2 percent after returning 0.84 percent in the fourth quarter. This is the fund’s fifth straight single-digit annual gain. Highbridge declined to comment.
Even so, 2016 stacks up favorably against most multistrategy funds, which returned between 3 percent and 6 percent last year. However, we did point out earlier that Elliott Associates, the flagship fund of Paul Singer’s Elliott Management, was up 13.1 percent.
“In a year of extremely challenging market conditions for active managers, we are pleased to have generated another year of high quality, alpha-driven returns for our investors,” Highbridge tells clients in its fourth-quarter letter.
It adds that “monumental global political and economic events” throughout the year hardly affected the fund, stressing that performance “was driven by idiosyncratic positions and not by directional calls around specific macro events.”
The letter provides some valuable insight into what worked at Highbridge last year, breaking down performance among about 15 different strategies. This is much more diversified than Highbridge’s flagship fund was in its early days, when it was dominated by convertible strategies and managed by childhood buddies Glenn Dubin and Henry Swieca, who founded the firm.
The letter points out that performance last year was mostly led by convertible credit and capital structure arbitrage, citing “superb security selection and effective hedging.” The strategy returned 1.1 percent in the fourth quarter and 5.2 percent for the year.
Three factors drove performance in the strategy. Highbridge cites the fact it held on to capital and had a lot of dry powder to deploy during a rough 2014 to 2015 period. The firm also highlighted the normalization of credit markets after 2015 and “outstanding security selection,” especially driven by the ANR/Contura Energy situation.
Contura Energy was formed as a result of the acquisition of certain core coal assets from Alpha Natural Resources in connection with Alpha’s restructuring. It is majority-owned by a group of Alpha’s first lien lenders.
Asia Arbitrage was Highbridge’s second most successful strategy last year, mostly due to its capital structure sub-strategy as opposed to long-short. Asia Arb gained 2.2 percent for the year. Highbridge cites “a strong second half of the year in idiosyncratic positioning across the strategy’s portfolio.” The only other significant contributor to full-year results was its convertible and volatility arbitrage strategy, despite that strategy posting a flat fourth quarter.
On the other hand, the report says the biggest detractors to performance for the year most came during the first half from strategies it has since eliminated. It doesn’t say which strategies, however.
Of those it still deploys, European relative value credit showed the worst performance, losing about 3.5 percent for the year, although the loss in the fourth quarter was very small.
“We believe our 2016 results set us up well to start 2017 from a position of strength,” Highbridge tells clients.
It especially expects continued gains from convertible credit and capital structure arbitrage, driven by several key factors. For example, it foresees a “ripe macro backdrop for robust mid-cap convertible bond issuance,” new non-commodity linked distressed opportunities, multiple corporate actions, its ability “to more broadly monitor European convertible and credit opportunities,” and an expected pick-up in bond-level dispersion, among other factors.
“We continue to have incredibly high conviction in this strategy’s positioning and believe it has inherent edge as a result of the team’s expertise and process and because of the small and mid-cap nature of its focus market,” Highbridge adds.
It also sees a much better environment for fundamental stock picking. It has added capital to the strategy, increasing allocations to financials, industrials and consumer portfolios, noting each “offers a way to play the nascent reflation trade on both the long and short side.”
Highbridge tells clients eight years of central bank dominance and zero interest rates is coming to an end and giving way to Fed tightening and Trump-era fiscal spending and policy. More specifically, it has built out its line-up of sectors that include real estate, financials, industrials, consumer, TMT (technology-media-telecommunications) and healthcare.
Highbridge also tells clients it sees “an interesting environment” for event-focused North American long-short equity, citing the Trump administration’s impact on a number of factors, including a potentially more lenient antitrust environment for merger deals, tax reform, and repatriation of cash. In fact, in January Highbridge increased its allocation to its equity capital markets strategy as a way to capitalize on what the firm expects will be a more active capital markets environment this year. This strategy was also very profitable in 2016 despite the dearth of IPOs.
In fact, Highbridge is so bullish on this sub-strategy that after 12 years of grouping it with the convertible and volatility arbitrage strategy due to its small size, it will now create a separate strategy for reporting purposes thanks to a sizable increase in its allocation.
“Looking ahead, there is no shortage of potentially disruptive events on the horizon for 2017,” Highbridge states. “However any of these events play out, they look set to create many opportunities for our relative value strategies amidst a breakdown in consensus and lower correlation among securities.”
