SALT: Credit Hedge Funds Love the Volcker Rule

A dispatch from the Skybridge Alternatives Conference, where financial regulation is surprisingly popular among one set—hedge fund managers specializing in credit.

(May 9, 2013) — The Volcker Rule and Basel III have a fan club at the Skybridge Alternatives Conference.

On Wednesday afternoon a panel of hedge fund managers pursuing niche credit strategies discussed the substantial opportunities that have opened up for the alternatives industry.

“The regulatory environment creates fewer competitors and more opportunities—it’s been great,” said Jack Ross, principal and co-founder of Waterfall Asset Management. The $2.1 billion firm specializes in high-yield asset backed securities and distressed debt.

“If you look at the prop desks, they used to be one of our biggest competitors,” Ross said. “And now with the Volcker Rule, they’re pretty much gone.”

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The CIO of 400 Capital Management—a firm that launched near the peak of the financial crisis in October 2008—echoed Ross’ take on the situation.

“The changes in regulations couldn’t be better for us,” Chris Hentemann said. “There is this silent repeal of Glass-Steagall as Volcker and Basel III go into effect. It is forcing a recapitalization of credit risk to be done by specialists, which are lightly regulated—which is us.”

With regulation having taken out much of the competition, the managers were bullish on the profit potential in their sector.

“It’s opportunity rich,” Hentemann said. “Commercial real estate in the US is showing the same trends as residential, with about a 12-month lag. Particularly in student loans, there are some tactical opportunities. They’ve been getting a lot of attention as an area that might be another bubble, and that’s creating inefficiencies we’re taking advantage of.”

Regulators’ slaying of propriety trading desks has created one final opportunity for credit-focused hedge fund managers, according to York Capital Management Partner William Vrattos. “Prop desks are an abundant resource for recruiting—there’s a lot of talent there.”

A dispatch from the Skybridge Alternatives Conference, where Morgan Stanley’s David Darst aired wide-ranging predictions, from currency markets to social issues.

(May 9, 2013) – There’s more to securing David Swensen-style returns than beefing up on hedge funds and private equity, cautioned Morgan Stanley’s Chief Investment Strategist David Darst.

“60% of endowment portfolios that are over $1 billion are in alternatives,” Darst said during his “Morning Market Call” to open the 2013 Skybridge Alternatives Conference at the Bellagio Hotel in Las Vegas.

“Everybody’s trying to copy David Swensen. It’s like you, when you were a child and watching science experiments on TV. Then you try to follow along and you blow yourself up.”

The Morgan Stanley managing partner advised the vast room of hedge fund managers, service providers, and investors that the US stock market would be a wise place to invest because other investors haven’t been pursuing it aggressively.

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“Where have institutions been putting their money? Alternatives!” He listed off the various kinds of asset allocators-banks, insurance companies, individuals, etc.-and said all of them have been focusing on unlisted assets.

Furthermore, Darst said that nationwide economic growth would fuel public equities markets. “The United States is entering the third or fourth inning of its recovery,” he said. “It meets none of the criteria for a double dip: Is the Fed tightening? No. Are bond yield spreads widening? No, they are still getting narrower.”

“Be prepared for a big four to five year upwards US dollar move.” Innovations in the science and technology sectors will drive a strong economy, Darst projected, while emerging markets will provide consumers for that output.

A final area on which the high-energy Darst was bullish: women’s rights. “This will be the generation that is about the abolition of the oppression of women.”

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