Algebris Investments, Davide Serra’s multi-asset class hedge fund firm, says markets are “ripe with opportunities”, and is now preparing to deploy its “dry powder” liquidity in a range of asset classes it sees as benefiting from future fiscal stimulus and persistent low interest rates.
Alberto Gallo, portfolio manager of the firm’s macro credit-focused Algebris Macro Credit fund, believes current dislocations offer value for investors taking a long-term view.
“Even though the virus spread may lead to a recession, price discounts across most asset classes provide a large cushion for negative scenarios,” Gallo said, adding markets “are now ripe with opportunities.”
Algebris has remained cautious on macro developments and markets since the start of the year, warning of market complacency and high valuations while cutting risk and raising liquidity across all its strategies.
“Across all our Algebris funds including Macro Credit in particular, we have accumulated ample liquidity. Over the coming months, we will gradually deploy this dry powder and lock-in selective opportunities in high quality assets, which may benefit from future fiscal stimulus and persistent low interest rates,” Gallo explained in a recent market commentary.
Gallo’s EUR520 million Macro Credit Fund, which gained more than 20 per cent in 2019, has reduced its long positions and raised cash to over half of its portfolio, while adding systemic protection in credit and equity indices. At the same time, the strategy recently increased short positions in certain single names at risk from the coronavirus-driven slowdown – such as airlines, shipping and hotel companies.
“While the outlook for the virus spread remains uncertain, risk assets have already priced in a severe economic downturn. In some areas like credit, the economic shock has been compounded by unwinding of leverage and a liquidity shock, also evident from stress in short term funding markets,” Gallo said.
“The good news is valuations reflect the sharp deterioration in global growth and have overshot in many areas, as shown below. The bad news is the size and duration of the unwinds may be take longer, given the proliferation of leveraged strategies and carry trades over the past ten years of QE.”
The fund – which takes a multi-strategy long/short approach to global credit markets, trading corporate and bank on a both a directional and relative value basis, while hedging macro risks – was flat in February, and down in March, squeezed by the Covid-19-fuelled market collapse and the OPEC-Russia oil split, which hurt some of its EM and corporate trades.
“The good news is economic shocks caused by external catastrophes tend to last less and are followed by a quicker recovery, compared to financial crises, where debt overhangs remain in the system for years,” he noted.
“The base case is therefore of a deep but short recession, with Q2 experiencing -8 per cent/-10 per cent year-on-year growth, followed by a V or more likely a U-shaped recovery, depending on the size of fiscal stimulus at play.”
Observing the emergency fiscal proposals unveiled by central banks across the globe, Gallo added: “We estimate that the impact to global Q2 GDP from Covid-19 could be almost -8 per cent for the quarter, or around -2 per cent for FY2020, implying that a package needs to be at least of the same magnitude to be relevant.”
Algebris Investments was launched in 2006 by founder and CEO Davide Serra, an Italian-born former UBS and Morgan Stanley analyst, and focuses on a range of credit, equity and non-performing loan. markets.
