A Hedge Fund Veteran Makes Contrarian Call on Credit

Mariner Investment Group chief investment officer Bill Michaelcheck says its multistrategy hedge fund has moved out of credit and into rates.

The Federal Reserve building in Washington, D.C. (Andrew Harrer/Bloomberg).

The Federal Reserve building in Washington, D.C.

(Andrew Harrer/Bloomberg).

With central banks around the world starting to put the brakes on monetary policies that have kept interest rates at historic lows for years, Mariner Investment Group, a $6.2 billion alternative asset manager, has been selling the majority of credit instruments in its flagship multistrategy fund, which invests across a variety of traditional liquid hedge fund strategies.

The fund has pivoted from credit to rates, namely government bonds and sovereign debt. Mariner continues to hold significant credit assets in its illiquid credit vehicles, including a regulatory capital relief strategy focused on infrastructure and its collateralized loan obligation (CLO) business. It also has niche liquid credit assets in some of its residential mortgage funds.

Bill Michaelcheck, chief investment officer who founded Mariner in 1992 after running fixed income trading at Bear Stearns for 15 years, is expecting upheaval in the fixed income markets now that the Federal Reserve and other central banks are starting to sell the $14 trillion in securities that they’ve bought as part of quantitative easing policies since the financial crisis.

“We’ve been buyers of credit since the financial crisis,” he says. “Now it’s time to go home.”

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The multistrategy fund once held approximately 60 percent in credit instruments and about 10 percent in rates. Now those statistics have essentially reversed.

“The only things we have now are short-term, event driven, catalyst driven,” he says. “I’ve significantly reduced/hedged all credit in the multi-strategy fund.”

Since the 1980s, rates have gradually been drifting lower and lower, with a few temporary blips up.

“You can make a good case that we’re heading toward a regime change that we haven’t seen since 1979, when then-Fed Chair Paul Volcker raised rates,” says Michaelcheck. “Of course, we don’t know precisely when it will happen.”

But the Fed’s unwinding of quantitative easing policies is happening at a time when central banks around the world are also changing course after years of bond buying, Michaelcheck says.

“Will we go back to 10 to 12 percent rates? We don’t know, but we do think that volatility will increase,” he adds.

Michaelcheck’s call is in contrast to other firms that have talked about markets that are due for a correction, but have been continuing to buy assets.