A UBS Asset Management hedge fund beat peers in the first half with relative-value trades that shorted pandemic-struck stocks, and is now pouncing on the market’s next dislocations.
The $2.2 billion UBS O’Connor multi-strategy fund gained 11.5% through the end of June, according to a person with knowledge of returns who declined to be identified as the data isn’t public. A spokesman for the firm declined to comment on performance. Funds that follow a multi-strategy relative value approach are down 0.7% over the same period, according to Hedge Fund Research Inc.
Their relative-value trades offer a glimpse into survival strategies of hedge funds that rode the first half’s roller-coaster crisis markets. The UBS team paired securities of the same company up against one another, like shorting the stock of an airline while buying its credit. That paid off as the Federal Reserve dove into corporate bonds and stoked a rally that’s lifted the credit of the riskiest companies which are foundering in an uneven stock recovery.
“We aggressively grossed up risk across all our credit strategies as the Fed embarked on its monetary policy support program,” Kevin Russell, the New York-based chief investment officer at UBS O’Connor which manages $6.1 billion overall, said in a phone interview. “Trades in credit versus equity in distressed corporates was a significant driver of performance,” he said, without detailing returns.
Read more: Hedge Funds Lost a Record 7.9% in Pandemic-Plagued First Half
The gains stand out in a first half that saw hedge funds overall plunge a record 7.9% on an asset-weighted basis, according to HFR data released Wednesday.
Despite industry losses, the likes of Morgan Stanley Wealth Management have been touting the virtues of diversifying into hedge funds as an alternative to fixed income with dwindling yields.
”We’re increasingly coming to the view that the opportunity set for us to do relative value trades tends to spike in periods of significant dislocation like this and subsequently the alpha profile of trades we’re able to put on can be very compelling,” said Russell.
O’Connor is UBS AM’s direct investing hedge fund business, and became available to outside investors in June 2000. The multi-strategy fund’s returns last year were 9%, according to the person with knowledge of the fund, outperforming peers in an HFR index.
After the market’s turbulent first half, the team is assessing risks stemming from the U.S. election. The November vote topped worries in a survey of money managers last month by RBC Capital Markets.
Russell, who ran Citigroup Inc. global equity trading desk until 2015, sees the possibility of a Democratic sweep and a regime of higher taxes knocking 10% to 15% off S&P 500 earnings.
“The U.S. election is a very obvious and large risk that’s standing out there,” he said. “That’ll be a big story, probably in September, and that’s what we’re focused on.”
More recently, Russell has been grabbing bonds going cheap on the new-issue market, where the riskiest U.S. companies have borrowed more than ever in June.
“Routinely we see individual bonds that look very attractive relative to other bonds, and usually it’s just a function of the liquidity and issuance, and it’s been a big source of our returns,” he said.
(Previous version of the story corrected the strategy’s assets under management in second paragraph.)
(Adds color on investing style in seventh paragraph. A previous version of the story corrected the strategy’s assets under management.)
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