Hedge funds have lost billions of dollars as coronavirus has stalled the economy and sent Wall Street into a tailspin. But the financial institutions favored by the world's richest investors are plotting a recovery by betting on the markets' slump.
US-based hedge funds are aiming to persuade clients that the current economic crisis and the uncertainties in fact present a unique investment opportunity, according to letters sent to clients viewed by AFP.
In their discussions with current investors and potential new clients, some of these funds are emphasizing that stocks, corporate bonds and commodities have not been as cheap since the 2008 global financial crisis, according to sources close to the institutions.
"We only take new capital when we see opportunity on the markets," a source at The Baupost Group hedge fund said in an interview, speaking on condition of anonymity.
For the first time since 2011, Baupost is asking clients for more money to buy aggressively and recently put $1.5 billion into depressed assets.
A spokesperson for the fund declined to comment.
Hedge funds are eyeing both publicly traded firms and unlisted companies short on cash, with the assumption that massive government stimulus packages, like the $2.2 trillion approved Friday, will revive markets and the economy at large.
King Street Capital said in its pitch that it is looking for "high-quality companies that have seen their bonds or loans caught up in the sell-off."
Billionaire Kenneth Griffin was one of the first to warn of the COVID-19 outbreak's dangers, and his hedge fund Citadel has gone so as far as to create a specific investment vehicle for assets battered by the virus fallout.
Named the Citadel Relative Value Fixed Income Fund, the vehicle is positioned to allow Citadel to take advantage of the current volatility, according to a stock market filing, a change from the financial crisis in 2008 when the fund's flagship investments posted losses of 55 percent.
"It's not a Chinese health crisis; it is a global health crisis," Griffin said of the new coronavirus in an early February speech to The Economic Club of New York.
The virus, he warned, is "probably the most concrete short-run risk we see in the financial markets globally."
Economists now expect the pandemic, which has killed upwards of 25,000 people worldwide, to lead to a global recession. In fact, the International Monetary Fund said it is already happening.
Some of the most vital sectors of the economy are now in dire straits: airlines are on their knees and will get a bailout, though perhaps not as large as they wanted, while hotels and restaurants have laid-off workers in droves and shale oil companies are in agony.
The S&P Global Ratings agency now expects the rate of defaults among US companies in financial difficulty to more than triple in the next 12 months to 10 percent from 3.1 percent last December.
Saba Capital Management views this as a welcome development.
The hedge fund's founder Boaz Weinstein announced in a letter to clients that he is betting on defaults and bankruptcies among companies the ratings agencies see as financially fragile.
However, it is not certain the funds' bets will pay off since it is unclear how many investors are interested in taking risks amid all the uncertainty as many instead are putting their money into safe assets.
Bridgewater Associates became famous for making money amidst the carnage of the global financial crisis, but in a letter to clients, they indicated they had lost money this month, due to failed bets on the stock market's continued rise.
New York, United States | AFP