SALT: Credit Hedge Funds Love the Volcker Rule

(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.”

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.”