Ben Bernanke got plenty of love in Washington today, where Congressional representatives mostly lauded the Federal Reserve Board chairman for steering the economy back onto a growth track. But, ironically, some of the biggest beneficiaries of the Fed’s monetary largesse — leading hedge fund managers — were highly critical of Bernanke and full of warnings about the road ahead.
“Central banks are still distorting the market,” Michael Hintze, the CEO of CQS and longtime critic of the Fed’s quantitative easing policies, told the audience at Delivering Alpha, the third annual hedge fund conference sponsored by Institutional Investor and CNBC. The yield on ten-year U.S. Treasuries should be trading at around 4 percent, based on historical averages, but “it won’t get there” because of the Fed’s bond buying, he contended. “And that’s the problem.”
Still, Hintze welcomed the recent spike in U.S. yields, which Bernanke triggered in May and June by hinting that the Fed could start tapering back its bond purchases later this year. “It’s very healthy because people thought it could go on forever,” he said.
For Greg Fleming, president of Morgan Stanley Wealth Management, the recent bond market selloff was just a hint of what could come over the next 12 to 18 months. Rates could rise higher, and faster, that most market participants are expecting, he said, suggesting that ten-year yields could hit 3.5 to 4 percent. “I think the genie’s out of the bottle,” he said, referring to the prospect of a reduction in the Fed’s bond buying. “You may have a faster move in bond prices with the genie out of the bottle.”
In Washington, Bernanke appeared to offer a slightly dovish version of the same basic message he has been delivering for the past two months. The Fed will base its policy moves on economic data. It could decrease, or increase, bond purchases depending on whether the economy stays on track or loses steam. Now that the Fed has restored a two-way market in U.S. Treasuries, the chairman seemed more concerned to avoid the risk of a sharp spike in yields short-circuiting the recovery. If higher mortgage rates threaten the recovery in housing, “we would have to take additional action in the monetary sphere,” he told the House Financial Services Committee.
Bernanke’s shadow loomed large at Delivering Alpha. Hedge fund managers hate QE for driving a search for yield that has reduced yields across the bond and equity universe, but they worry at least as much about its unwinding.
Andrew Spokes, managing partner of Farallon Capital Management, said Treasury yields were 100 to 150 basis points below where they should be. Getting there implies double-digit losses on existing bond portfolios. “That doesn’t seem that great to me,” he deadpanned. At the same time, the “obsession” with safe yields has driven up prices of dividend stocks; “I wouldn’t consider them necessarily safe,” he added.
Leon Cooperman, the Omega Advisers chairman whose top ten stock picks at last year’s Delivering Alpha delivered big gains, admitted to “struggling” this year. He said his funds were up about 17 percent so far, which lagged the S&P 500 index (up 19.17 percent). But masters of the universe are never short of ideas, and Cooperman didn’t disappoint. Among his latest top ten picks were Qualicorp, a Brazilian health services administrator, and SandRidge Energy, an independent U.S. producer of shale oil and gas. Each could score outsized gains even though the overall market outlook is modest, with U.S. stocks currently trading “in a zone of fair value,” he said.
Chris Hohn, founder and managing partner of London-based the Children’s Investment Fund, touted EADS, the European aircraft and defense giant, and Porsche, the German sports car maker that he sees carrying out a full merger with Volkswagen.
Several managers cited credit plays in Europe, if you can execute them. Joshua Friedman, co-chairman and co-CEO of Canyon Partners, said recent moves to bolster capital at many European banks should begin to generate deals in the distressed credit space.
But it fell to John Paulson, the man who made his fame and fortune by shorting subprime mortgages ahead of the financial crisis, to bring the investment debate full circle.
In a rare interview with CNBC’s Carl Quintanilla during the conference luncheon, the Paulson & Co. president said U.S. housing was just entering a biblical-style seven fat years after the lean years of the crisis and its aftermath. The firm has bought 30,000 lots of vacant land in Arizona, California, Colorado, Florida and Nevada, and the biggest exposure of its credit fund is to the triple-A tranches of mortgage-backed securities, many of whose lower-rated tranches Paulson shorted years ago.
With supply down and housing affordability at a near all-time high, Paulson said, “I still think buying a home is the best investment any individual can make.” And if that ever proves not to be the case, he’ll no doubt stand ready to take the short side of the trade.