The big run-up in credit prices over the past year has top hedge fund managers looking for short positions. King Street Capital Management, Cerberus Capital Management, Third Point, York Capital Management, Perry Capital and Eton Park Capital Management are among the top players that think credit may be overpriced right now.
Although he hasn’t taken down exposure that much, Third Point founder Dan Loeb has told investors he is “waiting for the other shoe to drop in the credit markets,” according to one investor. Third Point was up 10.7% through March 13. “What people thought would take four years took 15 months,” the investor continued, referring to the comeback in the credit markets in 2009.
In a recent conference call with investors, Cerberus founder Steve Feinberg said he believes the fundamentals don’t justify the runup in credit over the past year. Cerberus’s flagship hedge fund was flat last year, but it is not in a position to invest because investors have been clamoring for their money back. Cerberus suspended redemptions last year, and most investors agreed to move assets into a new vehicle last summer.
Given the drama in Greece, European sovereign credits are some of the short plays that have been gaining traction this year. Japan is another country whose debt seems a potential feast for short sellers, and the U.S. remains a wild card.
However, hedge funds have been wary and had to shift gears quickly before. Co-managers Francis Biondi and Brian Higgins of King Street entered into 2009 short credit, a position that helped them turn a profit in 2008. But like many of its peers, King Street started to take off its short positions in the second quarter of 2009, enabling the $18.5 billion distressed and credit fund to gain roughly 20% for the year. While King Street isn’t net short yet, it has built up both its short book and its cash position this year. King Street was up 2.5% for the year through mid-March.
This year, the short-credit players are worried about a double-dip recession that could force the default rate back up within six to 12 months. As one investor asks: “It’s a technical run; where’s the beef?”
—Michelle Celarier
