Canyon Capital Advisors has suffered a major — but possibly temporary — management loss.
Allen Ba, a partner and a senior portfolio manager who has been with the firm since 2001, has taken a sabbatical from the Los Angeles–based multistrategy firm. He is expected to return in the fourth quarter.
Ba is mostly responsible for structured-debt products, particularly residential mortgage-backed securities, as well as investments in financial, insurance, real estate, energy, utility and chemical companies, according to the firm’s website.
Ba has taken a leave for personal reasons. However, whenever a key person leaves a firm for what is billed as a temporary period, it tends to raise questions.
After all, hedge fund followers may recall that in July 2014, Viking Global Investors announced that Thomas Purcell, the firm’s co-chief investment officer at the time, was taking a six-month sabbatical. However, six months later the Greenwich, Connecticut, firm co-founded by O. Andreas Halvorsen announced Purcell was leaving the firm for good.
Last year Canyon’s Canyon Value Realization Fund lost 1.5 percent. The fund lost another 3 percent or so in the first two months of this year. However, it had a strong March and finished the first quarter down 0.25 percent. Altogether, the Canyon Value Realization strategy — which also includes the Canyon Value Realization Fund (Cayman) — managed $9.1 billion at year-end.
The much smaller Canyon Balanced Fund, a more concentrated version of CVR, lost 8 percent last year and another 2 percent in the first quarter.
Canyon Value Realization was in positive territory last year through October but lost about 2.5 percent over the final two months of the year.
“In general, the performance of our equity book in 2015 was disappointing, while our credit book held up reasonably well,” Canyon told clients in its fourth-quarter letter, obtained by Alpha.
The letter noted that the hedge fund’s equities strategy was the worst performer among four strategies, posting a 9.4 percent loss, versus a 1.4 percent gain for the Standard & Poor’s 500 stock index. Equities also cost the hedge fund 285 basis points, or nearly 3 percentage points, of its gross return. The firm said more than half of this loss was attributable to its three most costly equity positions.
“In recent months, the complex value equities and credit-sensitive levered equities we tend to gravitate to have come under intense pressure,” states the letter, dated February 12, which almost coincides with the bottom of the market during its early-year sell-off. “This has occurred in part because of stress within the alternative investment community, which tends to form a larger proportion of the holder base in these kinds of companies. Additionally, with the capital markets virtually shutting down for a broad swath of industries and low credit quality companies, any stocks with real or perceived dependence on capital markets access have been severely punished.”
While Canyon’s bonds and distressed-bonds allocation lost 4.1 percent, this compared with a 4.5 percent loss for the strategy’s benchmark, the Barclays U.S. Corporate High Yield index. In the report, Canyon stresses that the bonds in its portfolio have a much lower credit quality than the index, noting that 64 percent of its bond portfolio is rated CC or below. Another 17 percent of its bond portfolio is rated CCC. On the other hand, RMBSs were up 5.8 percent, but Canyon notes there is no comparable benchmark. Loans and distressed loans posted a 12.3 percent return versus a slight loss for the benchmark.
As of February 1, RMBSs enjoyed the largest exposure among eight different asset classes in Canyon’s portfolio, at 23 percent, consistent with the previous year or so. That segment was followed by bonds and distressed bonds at 20 percent, again mostly consistent with prior periods going back to the beginning of 2015.
However, equities had dropped to 17 percent from 22 percent the prior month and 30 percent at the beginning of the third and fourth quarters of 2015. At the time of the letter’s writing, Canyon stressed it expected most of its “incremental credit deployment” from that point out would be on the credit side.
