Outperforming the competition by avoiding the crowd

The Sound Point Beacon Fund outperformed its competition by avoiding the crowd, according to portfolio manager Jeff Teach. “We were up 18.3% net in 2014 and one of the reasons was our de minimis exposure to crowded trades such as government-sponsored enterprises and the troubled energy and shipping sectors. We finished 2014 with a 1% energy exposure and found a number of trades that were uncorrelated to the broader credit and equity markets.”

The Beacon Fund was launched in December 2013 after Sound Point acquired more than $400 million of UBS’s distressed credit assets. Teach, who was global head of the bank’s distressed credit and loan group at the time, moved to Sound Point – along with his team and the bulk of his portfolio – to create the Beacon Fund, which focuses on distressed and special situations in mid–market and mid-cap companies. The fund was named Best Distressed Hedge Fund at the 2015 Hedge Funds Review Americas awards.

Sound Point also hired Teach’s colleague of 12 years, Tim Alexander  – former European head of loans and distressed credit at UBS –to run a new London office. The European market has – and will continue to be – a major area of interest for the hedge fund, according to Teach. “US banks deleveraged much faster than their European counterparts after the crisis in 2008 and 2009,” he says. “There remains an estimated €1 trillion of non-performing assets on European bank balance sheets, many of which fit into our mid-market and mid-cap strategy. We invest at the top of the capital structure, so this area provides an ample opportunity set and should benefit our investors.”

However, Teach admits there is room for improvement in this area of the fund’s coverage. “There is always a lot of opportunity in financials, particularly European financials, both on the long and the short side, so that’s an area in which we can continue to increase our expertise,” he says.

A number of successful European trades in other overlooked or misunderstood industries also contributed to the fund’s success. Teach highlights the purchase of loans with attached equity in German company IMO Car Wash. “We bought IMO in the secondary market and eventually sold the company to a private equity firm, generating an almost two-times money multiple.” Equity in French company Marie Brizard Wine & Spirits (formerly Belvédère) essentially doubled in 2015 after a restructuring involving the fund, he says. Teach adds that, while “this is more of a 2015 story”, it was also a large part of last year’s performance.

In addition, 78% of the portfolio is focused on US markets, where distressed monolines were among the major drivers of the fund’s 2014 performance. “We had large investments in names such as Syncora Holdings and Ambac Financial Group, which saw improved performance last year. Increases in their statutory capital allowed them to pay out the surplus notes we owned,” Teach says. Other successful US trades included senior secured bank debt positions in telecoms company Lightsquared and the 156-mile Indiana Toll Road.

In 2015, the fund will continue to monitor major macro events such as the Greek sovereign debt crisis, recent stock-market weakness in China, as well as commodity market and interest rate movements. “We always have to be mindful of the fact that, while we are credit and distressed debt investors, clearly a lot of the drivers in the market right now are macro events.”

Hedge funds continue to face challenging liquidity conditions, an issue that has both advantages and disadvantages, according to Teach. “This is certainly more of an issue now than in the past, in the sense that dealers are not taking on as much risk and there are now more assets in exchange-traded funds than in hedge funds,” he says. “However, this also creates more volatility in the market, which provides better entry points for investment.”

Stephen Ketchum, managing partner and chief investment officer at Sound Point, believes the conditions that led to the Beacon Fund’s recent success are likely to continue over the next two to three years. “In both the US and Europe, the opportunity set in terms of attractive risk/reward profiles and strong double-digit returns is going to be concentrated in the type of mid-market, non-crowded trades that are the laser-beam focus of the fund,” he says. “Over the past year-and-a-half, that is largely what has driven the performance of the Beacon Fund.” ■

The Sound Point Beacon Fund was named Best Distressed Hedge Fund at the Hedge Funds Review Americas Awards 2015

Sponsored content