Savvy credit bets pushed the hedge fund performance at Leon Black’s Apollo Global Management into the stratosphere in 2009, but the firm is reversing course in 2010. The Apollo Strategic Value Fund returned 76.84%, bouncing back decisively from its 30% loss in 2008 to bring the fund’s net annualized return since inception to 10.45%. But the managers are now backing away from credit and moving toward investments in restructurings, arguing that equities will produce bigger gains in this market.
“At the start of 2010, the baton has clearly been passed to the equity market, where a combination of anemic returns in recent years and dramatically lower volatility has created the framework for a highly attractive risk-return tradeoff in the year ahead,” said the fund’s December 31, 2009 letter to investors. “This dynamic has played into our thematic push over the past several months away from credit exposure and into restructuring transactions.”
These deals, according to the letter, reduce leverage while creating equity-like upside. An example is Apollo’s investment in Panolam Industries, a laminate products manufacturer. Panolam emerged from a prepackaged bankruptcy in December and is well positioned to benefit from an increase in business as customers boost their spending on maintenance and as its distributors replenish inventory, Apollo argued. That theme worked out, and Panolam was the fund’s leading position in December.
Like many cautious hedge funds, Strategic Value was hurt by hedging its exposure to a rising stock market—its S&P 500 hedge was the biggest loser in its portfolio in 2009—and the fund also gave back some of its recent gains from positions in Charter Communications and Gala Gaming. The fund also suffered losses from investments in Canadian oil services companies Big Eagle Services and MEG Energy, as both were hurt by declines in energy spending and pricing, though Apollo believes that recent increases in oil prices, along with expanded drilling budgets, bode well for these companies.
Strategic Value is part of a $1.7 billion strategy that invests in bank debt, senior and subordinated bonds, convertible bonds, stocks, credit and equity indices, credit default swaps, options, preferred stock and trade claims. Apollo was founded in 1990 and is led by managing partners Black, Josh Harris and Marc Rowan. The firm manages $51.8 billion: $33.5 billion in private equity, $18.1 billion in capital markets (which includes hedge funds, distressed funds, mezzanine funds, senior credit funds and one nonperforming loan fund) and $200 million in real estate.
--Suzy Kenly
