The BoLe Chronicle | February 2021
Asian High Yield: more than just a yield play
How many times have we heard stories of HNW investors or 'Family Office' piling into Asian High Yield (HYs) 'cos they 'know the issuer in person' and their friendly private bankers happily offer them some 2-3x leverage. You run the math and easily they can extract a theoretic 20-plus yield with 'minimal' downside, or so they reckon.
Extracting consistent alpha in the Asian HY market, however, takes much more than just an 'information edge', or should I say, a self-perceived one. As one veteran investor puts it bluntly, the 'edge' you think you possess can come back to haunt you one day, just exactly when you thought you have your back well covered. Only through continuous hard work and keeping a conscious mind can one sail through the choppy waters, with some much needed humility as well along the way.
HY in Asia is probably the segment that moves the closest with equity and thus at times it is purely a momentum play. As such, the perceived volatility and more importantly, liquidity, are very often being mispriced. While one can always fall back to hold till maturity in concept, very few actually managed to rightly position themselves that way.
Indeed gauging both volatility and liquidity diligently is where one can distinguish the pros from the amateurs and where alphas are eventually extracted. One may even further argue that it is nothing else but liquidity that is actually making the world goes round, with the resulting volatility merely the noises produced.
Gauging liquidity risk right
This is the part that is probably more an art than science, yet in yours truly humble opinion the one single most important skill for a Credit manager. While one can't go too wrong by limiting one's holding to a conservative level of the total issue, it is the dynamic changes in liquidity in the marketplace that is a killer to the less experienced. Counting on market makers to bail you out during times of trouble is always a bad idea to start with, adding on top some well documented post-GFC disintermediation of the banks, one is most certainly a sitting duck if merely praying for liquidity providers to emerge in times of stress, they just simply don't exist.
I hear you, what's wrong with some short term mark to market volatility if one ensures that the liquidity terms of the fund is rightly structured. Given luck and some dry powder (read leverage), one may even be able to pile in on weakness, taking advantage of the 'weak holders'. Haven't we see this just recently last March and 'smart' managers exploiting it 'in style'?
While it is certainly a game of 'winner takes all' in hedge fund land, skillfully executed trades with the risk taken being well calculated and compensated are still very different from sheer guts and blind 'conviction', going all in believing in one's 'information edge'. It is here and from the details of the trades that one can differentiates the true investment talents from the rest of the field.
Shorting in Credit
Another quality alpha source yet not always well understood and explained in Credit is the short side of the trade. While the recent GME saga is still vividly in everybody's mind, one may want to note the risk and return profile by shorting Credit is ACTUALLY quite the OPPOSITE of equity's. Yes, one's downside is actually LIMITED. So if one managed to short a name in the 80s, the payout ratio is potentially as good as 4 to 1!! This also give rooms for more concentrated short bets without running the same level of risks like the Melvins of this world. Hence discussion of short alphas with a Credit manager is extremely relevant, and those that can show consistency here are truly the gems.
While equity has seemingly been catching all the limelight in these days of negative yield, HY credit long/short being an alpha engine is probably still one of the best kept secrets out here in Asia. Finding the right manager, as always, takes much more than just looking at their pedigree and track records. Quoting the famous disclaimer, past performance is no guarantee of future results.
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