Michael Hintze's Main Fund Faces at Least 30% Drop in Quarter
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(Bloomberg) — A $3 billion hedge fund overseen by Michael Hintze suffered its worst-ever start to a year after structured-credit wagers soured with the broader market.
Preliminary estimates for CQS’s flagship Directional Opportunities Fund, personally managed by Hintze, show that the fund was heading for a decline of at least 30% in the first three months of the year, according to people familiar with the figures. The majority of the losses were sustained in March. DOF, as the fund is known, had lost just 2.5% through February, investor documents show.
One of the fund’s main strategies is to sell short-dated protection to investment banks on hundreds of investment-grade and high-yield bonds. The initial outlay for the fund is only a fraction of the total outstanding notional value of the bonds, and if the bonds don’t default by the time the protection expires, CQS comes out on top. But the bet can be undone by defaults among the underlying credits.
As the risk of insuring credits, such as oil and gas producer Chesapeake Energy Corp. and airline Deutsche Lufthansa AG, started to spike amid the market turmoil, CQS was forced to sell other assets in the portfolio to put up more collateral against the swaps, said the people. One of the names it sold protection on, Whiting Petroleum Corp., filed for bankruptcy Wednesday.
A separate CQS fund that focuses on asset-backed securities also plunged in the quarter, according to preliminary estimates, the people said. It was heading for a decline of at least 40%, they said, asking not to be identified because the figures aren’t public. The performance numbers were still being finalized on Wednesday and could change.
Meanwhile, the CQS Global Relative Value Fund, which began trading in January with about $100 million in initial capital, gained more than 40% during the first quarter, while the firm’s Asian Macro fund returned about 11%, according to a person with knowledge of the matter, who asked not to be identified because the details are private.
A representative for the firm declined to comment.
CQS, which is one of the largest credit-focused hedge fund firms in Europe, managed $19.3 billion at the end of February, according to an investor letter.
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