Algebris Investments, a London-based multi-strategy credit and equities-focused hedge fund manager, is staking out alpha opportunities across a range of stressed credits which stand to gain from a resumption in activity post-lockdown.
Algebris Investments, a London-based multi-strategy credit and equities-focused hedge fund manager, is staking out alpha opportunities across a range of stressed credits which stand to gain from a resumption in activity post-lockdown.
While government support has sent indices and investment grade assets soaring, high yield and off-benchmark assets remain dislocated, underpricing the potential for a recovery, said portfolio manager Alberto Gallo, Algebris’ head of macro strategies.
In a note this week, Gallo – who runs the Algebris Macro Credit Fund – pointed to a wealth of credit opportunities across financials and non-financials.
“We still believe this is the right time to invest, and that strategies with an active and selective approach across sectors and special situations should outperform passive beta,” he wrote.
Gallo’s credit-focused hedge fund, which launched in 2016, trades a wide range of corporate and bank debt long and short, on a both a directional and relative value basis, while also hedging macro risks.
Gallo’s strategy is positioned long major core and periphery banks, with upside potential seen in Deutsche Bank and Monte Paschi LT2, which are expected to see potential sovereign support, and UniCredit’s CASHES notes, based on a substantial mispricing vs AT1.
Elsewhere, consumer spending data in countries emerging from lockdown points to recoveries in autos, and certain consumer sectors such as cosmetics and gaming.
Here, names with upside potential include car-seat manufacturer Adient and Codere, a gaming company active in Europe and South America.
As countries reopen, the speed of the global recovery will likely be slower than the speed of decline when the lockdown began, Gallo warned.
He pointed to key bets in issuers which are fundamentally strong companies within strong countries, which could expect to receive government support in the event of a worsening virus.
Algebris has maintained about half of its original exposure in such names, which include Volkswagen and Ford in autos, Vodafone and Telecom Italia in telecoms, EDP and ENEL in utilities, and GE and Vinci within the manufacturing and construction sector.
“These bonds still pay an average yield of 5%, which remains attractive,” he said.
“We have also switched risk from credit to convertibles in investment grade, which offer higher spreads, being outside the ECB’s eligible universe, and additional upside convexity through equity optionality,” he adding, pointing to names such as Deutsche Post, Siemens, Alibaba, and BP.
New data suggests the recovery varies markedly by sector and country, Gallo said.
While electricity consumption is back to 90 per cent of last year’s levels, air travel remains around 30 per cent. Similarly, while less-disrupted countries such as Germany and Sweden are “leading in the race to normal”, Italy, Spain and the UK – each hard-hit by the coronavirus outbreak – remain behind.
As a result, Algebris is staying cautious on sectors caught in a secular downturn, such as retail and energy, or use high operating leverage, such as commercial airlines, where the macro credit strategy has bought short-dated credit and offloaded longer-dated credit.
“Even with state-aid which has helped kick-the-can, long-term solvency concerns persist,” he said of the airline sector.
Algebris Investments was established 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.
