Michael Hintze, the billionaire hedge fund manager specializing in credit investing, is having a terrific year while most hedge fund managers continue to struggle.
Hintze’s main hedge fund, the $2.7 billion CQS Directional Opportunities Fund, is up 30.2% in the first eleven months of 2016, making Hintze one of the year’s big hedge fund winners.
Based in London, Hintze’s CQS hedge fund firm is a multi-strategy operation overseeing about $12 billion, but the firm is best known for its debt-related investments. His Diversified Fund, a multi-strategy credit fund, is up 12% in 2016 and Hintze’s long only Credit Multi-Asset Fund is up 6.15% this year.
Hintze is rebounding from a down year in 2015, when his main hedge fund fell by 8%. But the roots of Hintze’s strong 2016 performance can be found in his 2015 returns.
After oil prices crashed well below $40 a barrel in 2015, Hintze came to believe investors speculating that oil would plunge as low as the teens were going too far. Hintze started in late 2015 to bet on oil and commodities rebounding, investing in the debt of oil and coal producers. Hintze particularly didn’t believe in the idea that a Chinese slowdown was set to decimate commodities prices further.
Hintze went long on commodities producers a little early, hurting his 2015 returns as the commodities sector kept hurting at the end of 2015. But the move has paid off in 2016 as oil recovered and recently traded above $55 a barrel.
Hintze also didn’t become too defensive going into the U.S. election, figuring the U.S. economy was strong enough to deal with either Donald Trump or Hillary Clinton.
"The key thing to understand, whether in the U.S., Europe or Japan is that unconventional monetary policy is not going to unwind anytime soon," Hinze said in a recent interview. "I think there is enough liquidity in the world to support real assets."
In a letter sent to clients on Tuesday, Hintze said he believes markets will trend upwards because of President-elect Donald Trump's stimulus from fiscal and tax policies, but warned the opportunity for "air pockets" is high and "they could appear scary." Hintze added that due to the liquidity in the system "I do not subscribe to the view that markets will see a collapse."
"I think there is potential upside to markets as a result of the proposed lower corporate tax rate and the potential boost from repatriation of foreign cash held at many multinationals’ international subsidiaries," Hintze told clients on Tuesday.
Hintze wrote that the big macro focus in 2017 and 2018 will be rising global inflation and that he expects the Federal Reserve to raise rates progressively amid a steady U.S. expansion. He believes, however, European economic growth is likely to be lower-than-consensus, the Japanese expansion is likely to remain muted, and that China will have a tough time meeting its official 6.5% to 7% official economic growth target over the longer term.
"Corporate credit should benefit from fiscal stimulus and default rates, while likely to rise, should remain relatively low, especially if we have some inflation which would be positive for corporate credit," Hintze wrote. "I believe the risk lies in the risk-free rate. Consequently, floating rate and short duration assets are attractive including convertibles, loans, ABS and high yield."
