By Susan Barreto, Editor of Alternatives Watch
As market volatility rises and valuations crater, distressed hedge funds are reporting mild losses in the first quarter of 2020.
If past downturns, including the 2008 financial crisis, are any indication the opportunities within distressed may be being sourced even now in the midst of the volatile and uncertain times we are all now experiencing.
According to a white paper from Cambridge Associates published in 2018, distressed players can often benefit from open capital markets and moderate stress/distress in late-stage expansion economic climates. In times of contraction, meanwhile, the majority of distressed managers enjoy the broadest opportunity set, officials at the consulting firm pointed out.
Consulting firm Verus in a webinar earlier this week with clients pointed to increased opportunity for rescue capital providers (i.e. direct lenders) and distressed investors.
Jason Mudrick’s Mudrick Distressed Opportunity Fund is down 6.21% so far this year through March 13, but recent weeks have taken their toll too as the strategy was down 2% through February, according to fund performance information obtained by Alternatives Watch.
It is a significant downturn for stellar hedge fund manager, who finished 2019 with gains of 22.44%. Mudrick invests primarily in North America and looks across the capital structure, most notably investing in vaping company and Juul competitor Njoy.
The $2 billion hedge fund firm has three share classes. Its share class with quarterly redemptions is closed to new investors, but two other share classes only allow investors to redeem annually or every three years with 90 days’ notice that reflects the illiquid nature of the firm’s portfolio.
Mudrick’s strategy is to achieve equity-like returns with credit-like risk and volatility in an uncorrelated fashion to the overall equity and credit markets by constructing a diversified portfolio of longs and short investments in distressed leveraged loans, distressed bonds, post-bankruptcy securities and other event-driven special situations.
The HFR Event Driven Index was down 3.67% in 2020 through March 13.
Other distressed securities funds have seen downturns in 2020 too, including merger arbitrage-focused Canyon Value Realization Fund. The fund was down 3.68% for the year-to-date through February, according to figures from HSBC. In 2019, the fund returned 9.42% and in 2018 Canyon reported losses of 2.64%.
Still other distressed players saw flat returns to modest gains in the market mayhem that has dominated headlines at the tail-end of February.
The Monarch Debt Recovery Fund was down 0.11% in February, while OWS Credit Opportunity Fund, managed by OWS Capital Management, was up 0.25% in February. Early March figures were not available for either firm.