Viewing investment opportunities through a credit lens while adopting both a special situations approach, often involving equities, and a macro approach approach, using a variety of macro instruments, Westfield Investment employs a highly-differentiated strategy to capture idiosyncratic alpha. Founder, Ren Gao explains all…
Former Goldman MD Gao (pictured) founded the credit hedge fund in 2015 and has enjoyed strong performance since then – 50 per cent in 2016; 10.8 per cent in 2017 and 20.37 per cent in 2018 so far.
He has recently hired ex-Saba COO Ken Weiller, and has built a new infrastructure, with the aim of increasing his USD175 million in assets.
Gao says: “My background was in heading mortgage credit at Goldman Sachs for nine years before I had the Westfield idea to try and capture idiosyncratic alpha in the credit space. Our view was that optimal portfolios are best constructed and managed by looking at the entire investment universe through the lens of credit, both at macro level and more granular levels,” Gao says.
“Our core portfolio uses credit instruments such as bonds, loans and derivatives but we also do trades outside of credit but related to our views. Capital structure trades in the equity of companies and also commodity futures and options to express our views in the commodity sector.”
Last year, the fund performed well in different market environments in different parts of the credit cycle.
“We are late in the cycle and it’s very important to maintain flexibility and go long and short and generate alpha through idiosyncratic trades,” Gao says.
Westfield started with a seed investor, a Hong Kong family office, as well as their own money and has recently started taking outside investment.
“We have very recently started seriously thinking about expanding our investor base now that we have accumulated the approach over three years and have an excellent track record and built out the infrastructure,” Gao says. “At this point we are ready to take on more institutional investors.”
Weiller explains that Gao has brought him in to institutionalise the infrastructure.
“Our view is that the fund has the potential to provide portable alpha to fixed income investors,” he says.
The firm is utilising its prime broker and other sources to go out and speak to a variety of investors.
“We are pounding the pavements and talking to all types of investor,” Weiller says.
“What is interesting and what we bring to bear is a flexible style not bound by a particular sector or class. We can search out the best opportunities we can find. We have a well-formed view of what we feel the macro environment is.
“We are an interesting combination of research and analysis and a world view coupled with more standard company analysis.”
Gao explains that when he looks at a particular company, he looks at the macro environment as well as the sector environment.
“The last couple of years we studied heavily in the energy sector and identified a number of investment opportunities in oil and gas sectors. We are at a low point of a commodity cycle and because of that the bonds are at a depressed level and we took a view that the commodity price would go up along with supply and demand and forward projections.
“We felt that energy companies were trading below the liquidation prices of their assets,” he says.
“Going forward, there are a number of sectors that are very interesting based on the macro picture, some of the mining companies in the lithium space, for instance.”
Oil tankers also appeal. “We have been studying the cycle and it takes a couple of years to build and, based on future demand, it looks like the tanker market will go from over supply to under supply in next couple of years – this industry is in a cycle of either too many or too few, which cycles back and forth continuously.”
Longer term secular trends such as the new industry in the telecommunications space with its 5g internet have opened up a lot of opportunities and dynamics in this space.
“For instance, we recently invested in a telecoms company trading at a depressed level because of the oversupply of satellite telecoms bandwidth but demand will increase.
“These are interesting things we study to identify the potential of things that have not been widely known.”
Gao comments on copper, that demand will grow as it is used in many of the energy saving devices. “There is a renewable energy revolution which will continue to grow because of heightened environmental concerns around the world,” he says.
“Because of that, copper demand will grow. An electric car uses more copper than a gasoline car.”
The shorting part of the Westfield book is done through shorting the CDX credit indices.
“We are in the longest market cycle for a couple of decades and facing headwinds of monetary tightening starting from the US,” Gao says. “Overall this will result in a higher rate environment with refinancing increasingly difficult. Right now, we need to play with cautions because of the downside potential and we like to have as little exposure as possible to market beta. We are monitoring the market environment very closely to identify the next market downturn in the credit space.”
