Tradex Global Short-Biased High Yield Fund Ranked #3 Fixed Income - HY Fund in January by BarclayHedge

The Tradex Global Short-Biased High Yield Fund was ranked the #3 "Fixed Income - High Yield" Fund by BarclayHedge for January. Please see the below award:

This fund was ranked based on the data in BarclayHedge's Database of hedge fund managers

Tradex Global Short-Biased High Yield Fund Ranked #7 Fixed Income - HY Fund in 2015 by BarclayHedge

The Tradex Global Short-Biased High Yield Fund was ranked the #7 "Fixed Income - High Yield" Fund by BarclayHedge for 2015. Please see the below award:

This fund was ranked based on the data in BarclayHedge's Database of hedge fund managers

Tradex Global Short-Biased High Yield Fund Ranked #1 Fixed Income - HY Fund in November by BarclayHedge

In November, the Tradex Global Short-Biased High Yield Fund was ranked in the Top 10 for the 5th time in the last 6 months by BarclayHedge, this time appearing as the #1 "Fixed Income - High Yield" Fund. Please see the below award:

This fund was ranked based on the data in BarclayHedge's Database of hedge fund managers

Tremors: The Evolution of a Short High Yield Strategy

The current high yield (HY) bubble can be thought of as an impending earthquake that is severe in magnitude and warning local inhabitants with foreboding tremors. We have been discussing the state of the HY market with investors for approximately two years now, shooting up flares and ringing alarms, like these communications in December 2013 and March 2014 (before and when our short strategy launched). The basic investment thesis has been that there are hundreds of companies that have had near unfettered access to capital markets due to unprecedented easy-money policies. Many of these companies did not merit this access, but nevertheless it was still cheap and easy for them to find refinancing or to issue new debt. These companies probably knew that at some point capital markets would become much harder and more expensive to access. The tremors are now much closer to each other and carry much more force, as we wind down a year that will result in the first annual HY loss since 2008. The “worst-of-breed” HY companies that we target are becoming easier to find, because there are so many of them. In this blog, we will review the evolution of a short high yield bond strategy in recent years.

City-life is bustling – 2009 to 2012: The Financial Crisis is over and companies that barely made it out of 2008 have licked their wounds. Helicopter Ben is QE’ing like crazy and capital markets are open for business. High yield companies have access and can raise large amounts of low-cost debt.  What do they do with it?  They extend their Ponzi-schemes by refinancing prior debt, by paying out dividends, by initiating expensive share buy-back plans and by making ill-advised acquisitions and LBOs.  In CCC’s, less than 10% of new bond issuance is used for corporate purposes, CAPEX or project finance.

Seismic activity deep underground – 2012 to 2014:  CCC’s that hung on in 2008 and levered up afterwards are seeing their businesses grind slower, with huge amounts of new competition, negative revenue trends, volatile EBITDA, declining and negative free cash flow and rapidly increasing levels of leverage.  Refinancing activity reaches fever pitch levels in 2014, accounting for 33% of all CCC new issuance activity by purpose.  The companies need breathing room and they need it fast. Yield-to-worst in the JPM US HY Index hits 5% as the Fed has indirectly forced investors into taking undue, credit-agnostic risk. Some HY companies secretly hope that they find a seat before the music stops. Seismic activity is starting to be registered, some small tremors are felt and some early adopters reduce exposures and start to prepare for the coming quake. 

A tectonic shift occurs – 2014 to 2015:  Macro headwinds persist and are being recognized and pointed out by many well-known market participants.  The inevitability of the cyclical nature of markets looms large – equity markets are tired and overextended, commodity markets are shaky and need EM growth to sustain, high yield markets are frothy. Famous market mavens are warning the masses. An interest rate hike is imminent and the Fed’s level of conviction is not confidence-inspiring. Over the last 43 years, on average, 56% of CCC issuance defaults within 7 years of issuance. The time is up. As flows turn negative, volumes recede, new issue activity slows, liquidity dries up and performance turns negative, can this time really be different?  As Mark Twain famously said, “History does not repeat itself, but it rhymes”.

Evacuation plans are put into effect – 2015 to TBD:  The tremors are no longer subtle and the fault lines are apparent. The collapse in oil prices has global impact, effecting commodity pricing across the spectrum, threatening employment gains, failing to positively incentivize the consumer to spend more and raising geopolitical tensions.  Bankers, who have plenty of choices for raising debt, recognize that capital markets are no longer quite as accommodative and choose safer borrowers to bring to market. Risk reassessment occurs overnight, repricing certain sectors such as telecom, cable and chemicals (ie. Sprint, Cablevision/Altice and Olin/Dow Chemical, respectively).The constant push and pull between bulls and bears is starting to shift to the bear side and liquidity is tested. 

Destruction followed by rebuilding – TBD:  The inevitable earthquake occurs swiftly, and companies will be torn down. Default rates have spiked and distressed players start looking for reclamation projects. This is a great time to be a long distressed buyer, but before that becomes a viable option, there will be lots of pain taken.

There is still time to get short of high yield bonds at asymmetric price levels. But, once the tipping point is crossed, market dynamics shift quickly and these bonds can no longer be borrowed. We have already established shorts near par in preparation for the earthquake in HY. This strategy is clearly an opportunistic one, and now is the time to protect a portion of your portfolio. Good luck out there.  #shortHY

Richard Travia,

Partner, Director of Research

FLASH UPDATE: What's Next in Credit

What’s Next in Credit

As credit sectors post lackluster returns and the residential mortgage backed securities (RMBS) market normalizes, many market participants are left to determine what lies ahead in mortgage credit investing.  With this blog, we share our perspective on potential opportunities in mortgage credit.

The heightened volatility experienced in Q3-2015 has affected several sectors in both equity and fixed-income investments. Although real estate fundamentals remain strong, non-agency RMBS have experienced spread widening alongside high yield and other risky assets – albeit less severe. While the flat to low-single-digit YTD returns posted by many mortgage credit hedge funds is favorable in comparison to those of other strategies, it highlights the notion that the double-digit returns witnessed the last five years are likely a thing of the past.  This shift in outlook has forced mortgage credit managers to pursue other potentially higher returning and riskier opportunities in mortgage credit. 

GSE Credit Risk Transfer (CRT) – Government-sponsored enterprises (GSEs), like Fannie Mae, Ginnie Mae and Freddie Mac, issue credit risk transfer (CRT) bonds to transfer a portion of credit risk on mortgages they guarantee to private investors. Such a transfer has the added benefit of diversifying credit risk among several investors, as opposed to concentrating it in the hands of GSEs. Spread widening and risk-off sentiment has pushed CRT spreads wider and the credit curve steeper.  At the same time, and the housing market continues to recover and the current low interest rate environment (i.e. low refinancing incentive for borrowers) remain supportive of fundamentals.  While there is value across the CRT space as a whole, we see the best risk/reward in the last cash flow (LCF) tranches. These classes have benefitted from strong housing fundamentals, resulting in homeowner balance sheet deleveraging due to strong prepayments and low defaults. With spreads 450 to 500 over swaps and spread durations of 7 to 8 years, we see this sector as having the potential to return 7 to 10 percent over the next year with strong carry and modest roll-down/spread tightening.  Issuance of CRT remains strong and by all accounts, the market is here to stay.

NPL/RPL – Non-performing loans (NPL) are those for which the debtor has not made his or her scheduled payments for at least 90 days. Consequently, the odds that these loans will be repaid in full is substantially reduced. Re-performing loans (RPLs) include NPLs where the debtor has started to make payments again. Overall, we view the market as vibrant given NPL and RPL residential whole loan issuance is starting to pick up, having reached over $20 billion thus far in 2015.  Yields are in the mid-single digits for relatively short average lives (2 to 3 years) and the bonds are often over-collateralized with strong underlying fundamentals.  With nearly $500 billion of collateral on GSE and financial institution balance sheets, we anticipate that loan sales will increase, as will subsequent securitizations.  Given the size of the pipeline, NPL/RPL remain a viable avenue for relatively steady mid-single digit returns for early adopters of the asset class.

Non-QM – The qualified mortgage (QM) rules opened the door for private investors to originate non-qualified mortgages, and these loans are now becoming a factor in the RMBS market.  Lenders are now seeking access to the securitization market, after reshaping the credit box to provide financing to creditworthy borrowers who were left out by the restrictive QM regulations, such as a debt-to-income ratios of 43% or less.   In September, Loan Star issued a $72 million transaction that stands as the first transaction secured primarily by non-QM loans.  The M1 tranche of that transaction has 6% of credit support and bears a 6.8% coupon. We expect more deals like this to price, offering potentially attractive investments in the credit space that can be exploited opportunistically.

CMBS - While there are pockets of opportunity in the legacy CMBS market, most securities are priced to optimistic scenarios.  Legacy CMBS bonds are also running off quickly as we navigate the 2015 – 2017 maturity wave.  Going forward, CMBS 2.0/3.0 will likely provide tactical and strategic opportunities to investors who are able to discern between the various loan pools. In-depth analysis is key to security selection for finding misunderstood pools that may not be priced to optimistic scenarios. CMBX tranches also provide investors with a liquid means of expressing positive or negative views in this sector.  At present, the BBB tranches look attractive after suffering during the global rout in August and September.  The 2.0 BBBs trade at spreads in the mid-300s over swaps with average lives of 6 to 7 years.  New issue 3.0 BBBs carry more spread duration with WALs of 9 to 10 years, but trade with spreads closer to 500bp over swaps.  At current levels, these securities yield 5 to 7% and offer good carry with fixed rate coupons.  As we pass through the 2015-2017 maturity wave, loan demand and issuance will begin to taper, resulting in technicals that are supportive to spreads. The present situation in CMBS may be prime for investment managers with cash holdings and deep knowledge of the space to opportunistically navigate the coming quarters.  

Single Family Rentals (SFR) – Containing features of both RMBS & CMBS, this component of the mortgage credit universe will remain relevant due to homeownership trends.  The overbuilding and rise in homeownership rate during the boom has led to the creation of a viable single-family rental asset class.  These securities currently offer an early adopter advantage and the sweet spot in the capital structure from a risk/return perspective is the single-A and BBB part of the stack.  Spreads range from 300 to 450 over swaps, depending on the shelf and tranche, assuming the 2yr base-case WAL that most deals carry. We see this as another opportunity for credit investors to capitalize on the sector’s evolution in the near to medium term.   

Summary

Mortgage credit sectors have undergone structural changes that make this space attractive to astute managers armed with cash holdings and the flexibility to strike opportunistically. Going forward, strong residential and commercial real estate fundamentals will likely support strong performance in GSE CRT, NPL/RPL, Non-QM and SFR securities. In addition, knowing how to re-underwrite CMBS deals will enable active managers to reap benefits from in-depth analysis of targeted loan pools.  Overall, the potential opportunities in mortgage credit make this investment space interesting for early adopters equipped with the expertise and cash on hand to take advantage of what’s next.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Tradex Global Short-Biased High Yield Fund Ranked #2 Fixed Income - HY Fund in August by BarclayHedge

In August, the Tradex Global Short-Biased High Yield Fund was ranked for the 3rd month in a row by BarclayHedge, this time appearing as the #2 "Fixed Income - High Yield" Fund.  Please see the below award:

Hedge fund performance as ranked by the BarclayHedge's database

Tradex Global Short-Biased High Yield Fund Ranked #3 Fixed Income - HY Fund in July by BarclayHedge

In July, the Tradex Global Short-Biased High Yield Fund was ranked for the 2nd month in a row by BarclayHedge, this time appearing as the #3 "Fixed Income - High Yield" Fund.  Please see the below award:

This fund was ranked based on the data in Barclay Hedge's hedge fund database

URGENT TRADEX SHORT HY UPDATE: Global market rout gives investors another chance to short HY bonds

Warning signs have been flashing for quite some time now in the HY market.  Investors are seeing, in many cases, one to three years of gains in their underperforming hedge funds wiped out in days.  This global market rout may be one last warning sign for investors to get out of their risky high yield bonds with only a few bumps and bruises and to GET SHORT.  Macroeconomic headwinds and questionable fundamentals in these habitually underperforming companies will make new issuances and refinancings increasingly difficult, if not impossible.  Poor operating results over the last several years have not limited these companies’ ability to lever up, but we think that time is coming to an end.  Liquidity in the overall high yield market has tightened and shows continuing signs of erosion. All of these dynamics combined make right now the opportune time to consider investing in the Tradex Short-Biased High Yield strategy.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global