Puerto Rican Bonds Power Hedge Fund Whitebox Advisors’ 2018 Gains

The bonds were a bright spot for Whitebox and other hedge funds in an otherwise dismal year.

San Juan, Puerto Rico. (Xavier Garcia/Bloomberg)

San Juan, Puerto Rico.

(Xavier Garcia/Bloomberg)

A bet on Puerto Rico bonds that doubled last year helped Minneapolis-based Whitebox Advisors gain 2.64 percent in 2018, according to an individual familiar with the results.

In a year when most hedge funds lost money, the $6 billion multistrategy fund made money across all of its strategies, which include municipal bonds, corporate credit, and merger arbitrage.

Whitebox also outperformed its peers: Hedge Fund Research’s event-driven multistrategy index was down 3.26 percent for the year.

Whitebox, whose co-chief investment officers are Robert Vogel and Paul Twitchell, declined to comment.

The hedge fund firm had several winners last year, including a $191.67 million investment in Tesla convertible bonds that it disclosed in its latest 13F filing. The multistrategy fund also did well with the distressed bonds of bankrupt Alpha Resources, which agreed to be bought by Contura in September.


Another driver behind its positive returns was Whitebox’s investment in Puerto Rico’s Cofina bonds. These bonds are secured by a slice of the island’s sales taxes, which rallied last year. They had tanked in 2017 following Hurricane Maria, amid calls for the debt to be canceled.

As of the latest court filing, Whitebox owned $168 million of those bonds, up from $100 million in 2017.

[II Deep Dive: Hedge Funds Are Winning in Puerto Rico]

Last summer, the commonwealth of Puerto Rico reached a deal with Cofina bondholders that would allow the debt holders to claim 53.65 percent of the island’s pledged sales tax revenue, or about 12 percent of the sales tax initially. That would pay for 93 percent of the value of the senior Cofinas, while the subordinated securities would get 56 cents on the dollar. Those bonds had traded in the teens in the throes of the crisis. The senior Cofinas had traded in the low 40s, but doubled last year to about 80 cents on the dollar.

The Cofina deal, which has also won the support of the board overseeing Puerto Rico’s bankruptcy, is expected to be approved by the court this week.

The Puerto Rico bonds turned out to be one the few bright spots for hedge funds in an otherwise pretty dismal 2018. Those with bigger positions did even better: Tilden Park, which has a $757 million Cofina stake, gained 10 percent through November, according to HSBC.

Investors in Puerto Rico’s general obligation bonds also outperformed, including Autonomy Capital, which has the biggest stake in Puerto Rico debt of all the hedge funds – around $1 billion in general obligation bonds. It gained 16.7 percent for the year.

Meanwhile, Monarch Capital’s debt recovery fund gained 5.5 percent, according to HSBC. It held $375 million in general obligation bonds and $396 million in Cofinas, according to the latest court filings.

Autonomy and Tilden Park declined to comment. Monarch did not respond to a request for comment.