Investors including pension funds are boosting returns by locking up money for longer periods in funds that invest in harder-to-trade and more complex assets, said BlueMountain Capital Management LLC’s Stephen Siderow.
BlueMountain, the $11 billion hedge fund manager, raised $1.5 billion in its Credit Opportunities Master Fund I, more than what the firm expected to raise, Siderow, the firm’s president, said today in an interview with Deirdre Bolton on Bloomberg Television’s “Money Moves.” The amount was surprising given “the preference investors have had since 2008 for more liquid investment” where they “can get their money back really quickly,” he said.
“We thought this would be a harder fund to raise,” he said. Investors, primarily pension funds in the U.S., Canada, Japan, and Europe, “told us that if we were able to deliver higher returns, that is, get paid sufficiently for that additional long-term lockup, they’d be willing to invest with that longer term.”
The Federal Reserve’s resolve to hold interest rates at about zero for another three years has pushed yields on corporate debt to the lowest ever. Bonds with maturities from one to three years have returned 3.9 percent this year, compared with 10.8 percent for debt with seven- to 10-year maturities, according to Bank of America Merrill Lynch index data.
Looking for Partners
The demand for shorter-dated assets that can be easily sold has created a premium of as much as 10 percentage points of return for harder-to-trade and more complex assets, Siderow said. BlueMountain is investing in structured corporate credit, asset-backed securities and “more off-the-run single names” as banks in the U.S. and Europe cut risk and raise capital to comply with tougher global capital requirements and the Dodd- Frank Act in the U.S., he said.
“The way they’re doing it is not in wholesale asset sales of loans etc., but they’re looking for partners, hedge funds like us with capital, with specialized expertise who can engage in negotiated transactions,” he said. Last year, BlueMountain bought a portfolio of synthetic collateralized debt obligation assets from Credit Agricole SA (ACA) in a “single negotiated transaction of a decent scale,” he said. “We think there will be more of those types of transactions.”
Siderow co-founded New York-based BlueMountain in 2003 with Harvard Law School friend Andrew Feldstein in a spinoff from BlueCrest Capital Management LLP. The hedge fund has generated almost 10 percent annual average returns largely by spotting abnormalities in the price relationships in credit swaps.
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