Analysis Moving fast pays off for hedge funds Credit managers which were able to assess rapid fluctuations across markets and react accordingly performed best last year. Conservative positioning in Q1 also helped generate returns

Credit hedge fund highest and lowest returns vs CLO index

30 May 2020, 32.42%

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-10

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Highest return (%) -40 Lowest return (%) Creditflux CLO Index March 2020, -52.90%

-50 Creditflux Source:

Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20

by Michelle D’Souza & Robin Armitage Napier Park strategy takes top spot started selling single name and CLO 020 was an up and down year Napier Park Global Capital’s credit strategy, mezz and equity, as markets were initially in credit, and credit hedge fund which invests across junior CLO tranches, ignoring the growing early signs of covid managers had to move quickly to leveraged and high yield, claimed the , at least until liquidity dried up in early 2capture opportunities from the top spot in our hedge fund rankings. March. Raising early gave the manager dislocations that inevitably opened up. Michael Micko, partner and head of Euro- firepower to aggressively buy dislocated Early on, covid were not priced in, pean credit at Napier Park, says the general CLO paper at the peak of the March but this quickly changed as lockdowns were approach is to carefully underwrite indi- enforced globally. The sudden scale of the vidual credits and CLO structures. The firm crisis — and the rapid recovery — meant increased hedging in February and early that timing investments was crucial. March, placing individual shorts in travel- For CLOs, the covid crisis caused related names while also increasing existing term pain but the pace of the recovery has hedges through liquid credit indices. Micko 30.3% meant that CLOs have successfully navi- says the strategy crystallised most of the gated another crisis. Five funds in our top gains at the peak of the dislocation. Return of top performing Napier Park strategy in 2020 10 invest in CLOs. At the same time, Micko says Napier Park

Creditflux March 2021 Reprinted with permission for Napier Park Analysis credit

Top 30 credit hedge funds by 2020 returns Fund Name Manager Category Return (%) 1 Napier Park European Credit Strategy Napier Park CLOs 30.26 The bid-offer 2 CLO Compartment Taunus CIS CLOs 21.80 widened out 3 Millstreet Credit Fund Millstreet corporate -short 21.38 4 Zais LevHY Fund I Zais credit multi-strategy 20.59 dramatically 5 CIFC CLO Opportunity Fund II CIFC CLOs 17.39 Michael Micko Head of European credit 6 Serenitas Credit Gamma Master Fund LMCG 16.79 Napier Park 7 Wasserstein Debt Opportunities Fund Wasserstein US high yield 16.54 8 Lupus Alpha CLO Opportunity Notes I Lupus Alpha CLOs 16.08 9 Olea Special Opportunities Fund Orchard corporate long-short 14.84 10 Flat Rock Opportunity Fund Flat Rock CLOs 14.50 The CLO market offers fund manag- 11 Algebris Global Credit Opportunities Fund Algebris Ucits credit 13.99 ers the ability to invest across a range of 12 Advent Global Partners UCITS Fund Advent Ucits credit 13.88 tranches, but Zais successfully applied a 13 Orchard Liquid Credit Fund Orchard corporate long-short 13.46 multi-strategy approach across the broader 14 Oxbridge Partners Sandalwood credit funds of funds 13.43 credit universe. Officials say they reposi- 15 Shenkman Opportunistic Credit Fund Shenkman corporate distressed 12.44 tioned the throughout the year. 16 Cheyne Convertibles Fund Cheyne Ucits credit 12.44 Zais LevHY Fund I locked in fourth place 17 CIFC CLO Opportunity Fund III CIFC CLOs 12.19 in the 2020 overall rankings and topped 18 Blueglen European Credit Fund II-24 Blueglen credit multi-strategy 12.10 the multi-strategy credit category after 19 Makaseb Income Fund Mashreq emerging markets 11.95 returning 20.59%. The firm launched the 20 Loomis Sayles Global Credit Fund Loomis Sayles Ucits credit 11.72 fund at the end of 2019. 21 Sente Fund Vibrant CLOs 11.40 Denise Crowley, head of securitised 22 AG Corporate Credit Opportunities Fund corporate distressed 10.81 credit at Zais, says the firm was mindful 23 Carmignac Portfolio Unconstrained Credit Carmignac corporate long-short 10.65 of the relatively flat credit curve and was 24 Advent Global Partners Fund Advent credit multi-strategy 10.50 conservative early in the year. 25 Flat Rock Core Income Fund Flat Rock US high yield 10.02 “As the pandemic advanced, we were 26 Owl Creek Credit Opportunities Fund Owl Creek credit multi-strategy 9.95 able to reposition our portfolio and move 27 BK Opportunities Fund V Crystal CLOs 9.57 further down in credit in order to capitalise 28 Hellebore Credit Hellebore credit multi-strategy 9.29 on the steeper curve. The chaotic price 29 Lyxor Chenavari Credit Fund Chenavari Ucits credit 8.27 action enabled us to take advantage of 30 Loomis Sayles Strategic Alpha Fund Loomis Sayles Ucits credit 8.23 some great buys,” she says. “We took the opportunity to buy sub-mezzanine classes, especially CLOs, sell-off. “The bid-offer widened out dramat- CRTs and CMBS notes, and were able to ically for all asset classes,” says Micko. “At pick relatively higher credit quality bonds the peak, HY was down 20-25 points on within those sectors.” average and leveraged loans were down >100% around 20 points. But dislocation was Distressed window may open again most pronounced in CLOs — double Bs Turnover in long positions for Distressed debt managers raised record 2020 in Napier Park’s strategy were down 30-40 points, single Bs 50-60 amounts of capital in 2020, with points, and equity maybe 30-40 points seeking to capitalise on coronavirus-related from lower starting cash prices.” dislocation. And, after years of waiting for By April, Napier Park focused on double took second spot in our rankings with deployment opportunities, the crisis perhaps Bs but Micko says the key was picking the 21.80% returns. The firm focuses on niche produced fewer distressed opportunities top quartile quality deals, adding that prices CLO equity with an emphasis on US CLOs. than many anticipated. The good news is were homogeneous across the quality Inès Bartsch, owner and portfolio man- that the high volume of liquidity from central range. The rebound in April and May driven ager, says the majority of capital raised for and governments is keeping bor- by central banks and liquidity support led to the strategy came in Q1, meaning the firm rowers afloat and could produce excellent the firm rotating out of double Bs and into could utilise this through the downturn. opportunities for managers to put dry pow- single Bs and select CLO equity in order to While most CLO funds struggled with der to work in the upcoming year. capture a second leg of the dislocation. double digit losses in March, CIS was one Shenkman Capital Management topped Amit Sanghani, product managing direc- of only two managers to achieve positive Creditflux’s distressed hedge fund listings tor in the London-based team, says strategy returns in the month (0.19%). “Our invest- in 2020 with its Shenkman Opportunistic turnover for 2020 in long positions was over ments during the ramp-up period of two Credit Fund, after it returned 12.44% for the 100%. “We traded over $1.65 billion across CLOs paid off when they closed just before year. Justin Slatky, chief investment officer CLO equity and mezz in Europe alone, in coronavirus restrictions, allowing them to at Shenkman, says key to the firm’s perfor- addition to rotating the portfolios and sell- ramp up significant additional par,” Frank- mance was being able to analyse credits ing around $600 million notional,” he says. furt-based Bartsch says. “This helped the quickly before governments drove recovery. CLO Alpha Compartment Taunus, a CLO fund keep its head above water in March “During the March lows, 37% of the high fund managed by CIS , and April when other CLO funds struggled.” yield market was distressed but by the end

Reprinted with permission for Napier Park March 2021 Creditflux Analysis credit of the year, less than 3% was,” he says, add- CLOs: monthly returns ing this recovery took around three years in the 2008 financial crisis. He says Shenkman 20 was able to take advantage of the firm’s research database during the sell-off. Napier Park European Credit Stategy Flexibility and being active in the market also helped achieve steady returns. Shenk- 10 man had five distinct rotations through the year. “At the end of the March sell-off, we 0 took advantage of IG names where there an Feb Mar Apr Ma un ul Aug Sep Oct Nov ec were forced sellers and, by April, we had market average rotated the book into higher quality high -10 yield,” Slatky says. By June and July, capital markets recovered and Slatky says the firm took advantage of lower dollar priced cred- -20 its they thought would be repriced higher as it was clear many of these CLOs were not going bankrupt. -30 Shenkman monetised those positions by the end of summer and moved into a more

Corporate distressed: monthly returns Credit multi-strategy: monthly returns

15 15 Shenkman Opportunistic Credit Fund Zais LevHY Fund I We capitalised 10 10 corporate distressed on the steeper 5 5 curve 0 0 Denise Crowley an Feb Mar Apr Ma un ul Aug Sep Oct Nov ec an Feb Mar Apr Ma un ul Aug Sep Oct Nov ec Head of securitised credit -5 -5 Zais market average -10 -10 market average -15 -15 defensive portfolio by the election, he says. credit multi-strategy index “It was only after the election and vaccine -20 -20 news came out that we started to ramp up on distressed covid-related names.” Structured finance: monthly returns US high yield: monthly returns

Recovery and the outlook for 2021 15 15 The historic sell-off in Q1 also signalled an Serenitas Credit Gamma Master Fund Wasserstein Debt Opportunities Fund opportunity for many US high yield funds as 10 10 market average liquid instruments such as bonds traded up 5 5 in the aftermath. 0 0 Wasserstein’s Debt Opportunities Fund an Feb Mar Apr Ma un ul Aug Sep Oct Nov ec an Feb Mar Apr Ma un ul Aug Sep Oct Nov ec led the category in 2020 as it returned -5 -5 16.54%. Rajay Bagaria, president and chief US high yield market average investment officer at Wasserstein says the -10 -10 firm re-underwrote its portfolio in March structured finance -15 -15 and focused on opportunities that could withstand a lower-for-longer environment. -20 -20 database Creditflux in funds other all from taken are figures average * Market “We positioned our portfolio conserv- atively in first-dollar debt and focused on covid-beneficiaries as well as GDP-sensi- optimistic about the macro backdrop going tive credits that would recover with improv- into 2021, with strong growth potential in Methodology ing economic activity,” he says. the economy and investors awash with • All figures are taken from monthly Bagaria points to Wasserstein’s positions cash, while rates remain low. However, they NAV returns net of fees. in home improvement tool manufacturers are mindful of the potential for inflation. • Full data can be found online at and specialty chemical producers which For now, though, Crowley says easy mon- creditflux.com/hedgefunds helped generate returns in the second half etary policy and economic growth should • Contact [email protected] of 2020 as the economy rebounded. remain supportive and could reveal oppor- to add a fund to the listing. Many fund managers say they are tunities for attractive returns in 2021.

Creditflux March 2021 Reprinted with permission for Napier Park