Radcliffe Capital Management has always pursued strategies that identify meaningful mispricing where the Principals of the firm invest alongside its clients. Steve Katznelson, the firm’s CIO, chats to Hedgeweek about the success of its Ultra Short Duration strategy which benefits from the firm’s internally developed credit models, risk management systems, and extensive operational controls…
Radcliffe is a first-time Hedgeweek winner that is under the radar of most allocators, so can you tell us a little about the firm?
Since 1996, Radcliffe has managed niche credit and opportunistic strategies that seek to capitalize on structural market inefficiencies where we have edge and where we want to invest heavily ourselves. We’re mostly off the radar but manage ~$3.5bn AUM on behalf of very large institutions and family offices.
You won the best Credit Multi-Strat Hedge Fund award for 2023 with your Ultra Short Duration strategy. How does that strategy help clients solve an asset allocation problem especially given the uncertainty that lies ahead?
Many Radcliffe clients share our view that risk is insufficiently priced into most asset classes. We’re a bond manager that dislikes 98% of bonds and loans. Duration still presents meaningful risk, and spreads have rallied to near one-year tights despite numerous red flags that suggest defaults will rise, perhaps meaningfully.
We think our Ultra Short Duration strategy has been so successful for the last 14 years because it seeks to capitalize on persistent market inefficiencies and outperform with positive excess returns through all market cycles, and actually benefit from market turmoil by reinvesting its rapidly self-liquidating portfolio into higher prevailing yields.
We’re grateful for the Hedgeweek award, and proud of the strategy ranking consistently at or near the top of the universe of 400+ short duration funds, for both Net Returns and Sharpe Ratio since inception in 2009. In fact, through November 2023 the strategy has 14 consecutive months of positive returns despite the continued rise in rates.
Our clients use this strategy in many buckets where they seek alpha including Cash-Plus, Investment Grade, High Yield, Absolute Return, and Portable Alpha.
The bond market is generally considered to be very efficient. How have you been able to outperform so consistently?
Most of the bond market is efficient. What we’ve found, however, is that there is a small minority of the massive universe of corporate bonds that meet our triple criteria for this strategy: short maturities, excess yields, and our internal assessment of IG default risk regardless of ratings that often become stale. It’s a lot of work to continuously find new bonds that meet our criteria, and the bar we set for our internal IG default risk is exceptionally high.
The inefficiencies that create this opportunity include the fact that none of the rating agencies re-rate bonds as they approach their maturity, and there are both natural and forced sellers of the shortest dated bonds for a variety of reasons. Another source of inefficiency in which we have significant expertise are BDC bonds, which are almost all IG-rated but generally have single-B yields and have helped our Ultra Short Duration strategy returns over the years.
BDC bonds as part of a short duration bond fund? That’s a surprise. Can you explain?
About a decade ago we discovered that BDC bonds are often dramatically mispriced, so in 2014 we launched what was, and may still be the only dedicated BDC bond fund. Today, we are one of the largest owners of BDC bonds, and they have been key components of our three short duration strategies and our Multi-Strategy fund.
BDCs have become an increasingly important part of the enormous growth of private credit. Just like direct loan funds and CLOs, BDCs use their capital to build diversified portfolios that are primarily invested in secured loans to profitable companies. Yet, despite regulated downside equity cushion, BDC bonds are generally overlooked in our opinion, mostly because the universe is small, complex and misunderstood.
We believe the mispricing of BDC bonds, along with the other structural market inefficiencies at the short end of the curve, will persist and enable us to continue to outperform.
Steve Katznelson, CFA, Chief Investment Officer – Radcliffe Capital Management – Steve was the majority founder of the Radcliffe Group, which was founded in 1996. He is currently a principal and the Chief Investment Officer of the Investment Manager. Steve has invested in and managed large portfolios of fixed income securities since 1988. Prior to founding the Radcliffe Group, he was hired by Susquehanna Investment Group in 1991 to develop and manage a convertible arbitrage department that became a significant profit center and was widely respected for its trading and modeling acumen. Steve became an Associate Director of Susquehanna and President of both Susquehanna Capital Group and Susquehanna Financial Group (two of Susquehanna’s five broker dealers). From 1989 to 1990, he was a convertible securities trader and Director of Convertibles Research at Drexel Burnham Lambert in New York. In 1987, Steve was an associate in the corporate finance department of Levesque Beaubien in Toronto and, in 1988, he started modeling, trading and investing in convertible bonds for Levesque. Steve received a BA from Queen’s University in Kingston, Ontario in 1984 and an MBA from the Johnson Graduate School of Management at Cornell University in 1987 where he co-received the Hemmeter Prize for Best Entrepreneurial Business Plan. He is a CFA Charterholder, and a member of both the CFA Institute and the Financial Analysts Society of Philadelphia. Steve currently serves on the Advisory Board of Afrika Tikkun USA after serving as a board member from 2015 to 2021. He was previously a Trustee at The Agnes Irwin School from 2006 to 2014, where he served as Chairman of the Finance Committee and Treasurer. He also served as a Trustee on the board of the Friends’ Central School from 2015 to 2019.
