U.S. funds ready to invest in Europe
U.S. fund managers who successfully called the bottom of their home credit market in 2008 are starting to put money back into Europe in a sign of returning confidence in the euro zone.
These investors say distance is making it easier to price risk and estimate the recovery value of European assets. Their European counterparts, bruised by the region's two-year-old debt crisis, are proving far more reticent.
"Americans are much more sanguine about the future than perhaps Europeans are, and much more willing to put a bit of risk back on the table," Bob Marquardt, founder of fixed income fund of hedge funds Signet, told Reuters.
"Hedge fund investors in Europe have been very shy - they run if you cannot sell up in a minute and a half but far more money is being raised in the U.S. for this type of investment, it's in their blood," he said.
Previously many U.S. funds were steering clear of Europe, perplexed by months of political wrangling and doubts that the European banking system had enough liquidity to stay alive.
But the launch of the European Central Bank Longer-Term Refinancing Operations (LTRO), a Federal Reserve commitment to cheap credit and positive U.S. economic numbers have cut the opportunities for domestic bets and encouraged them to look to Europe.
The U.S. funds are particularly dominant at the riskier end of credit, such as high yield and distressed debt investing.
Investors like Avenue Capital, Anchorage Advisors, King Street Capital Management and Och-Ziff Capital Management (OZM-N) are among those to have raised billions to invest in Europe, and are now starting to put that cash to work.
"One of the biggest changes we've seen at the start of this year is that U.S. investors are starting to look at Europe once again," said one prime broking head at a major European bank.
It's not just hedge funds looking to take advantage of the inertia of European funds in their home markets; institutional money managers are also gunning for euro zone bargains.
Ratings agency Fitch said on Thursday U.S. prime money market funds have upped exposure to euro zone banks by 15 percent on a dollar basis since December 31, indicating a turn in sentiment. Exposure to euro zone banks is now about 11 percent of U.S. money market fund assets, compared with 31 percent as of May 31.
Boston-based Kathleen Gaffney, co-manager of the $19 billion US Loomis Sayles Bond Fund, said a rally in U.S. markets had encouraged funds like hers to cast their nets wider for returns. Sovereign and European corporate issuers are starting to find strong support for their funding needs among U.S. investors.
EUROPEANS STILL FEAR WORST
U.S. funds can call on a much larger pool of capital than European funds, particularly for distressed debt where investors are more inclined to lock away money for longer periods of time.
"The simple fact of the matter is there is a lot more money in U.S. distressed credit funds," said Jeff Majit, head of European hedge fund investments at Neuberger Berman in London.
Los Angeles-based Oaktree Capital Management, one of the biggest distressed debt investors in the world, is among those to have raised money to invest in credit-strapped companies they hope to re-capitalise and exit later at a profit.
Avenue, which has raised $2 billion for its Avenue Europe Special Situations Fund II, recently hired ex-Morgan Stanley (MS-N) banker Stephen Trevor to work in this area.
U.S. investors have driven the busy start to the year for high yield bonds.
Legg Mason (LM-N), First Eagle and Armored Wolf are among U.S. institutional investors launching new high-yield "junk" bond funds this month.
These launches come as some of the biggest European investment houses continue to make chilling forecasts about the outlook for the euro zone's weakest members, such as Greece, turning all but the bravest of investors off euro zone sovereign debt and additional exposure to banks.
Almost 60 percent of a $2 billion issue of contingent convertible bonds by Swiss bank UBS this month were snapped up by Asian buyers, analysts said, outbidding UK and Swiss investors who took just 17 percent and 11 percent of the book respectively.
"The 21 February deal will avoid a disorderly default of Greece ... however, we fear that this is not the last episode of the Greek crisis. In our view, an exit from the euro area and a further default are likely in the medium term," Eric Chaney, head of research at Paris-based AXA Investment Managers said.
A Greek exit from the euro would trigger fresh losses of 300 million euros, on top of those already inflicted by the Private Sector Involvement burden-sharing initiative, AXA IM said.
DOING YOUR HOMEWORK
U.S. funds have not always turned bigger firepower into an investing advantage, with some failing to grasp the complexity of investing across Europe's multiple jurisdictions, each with its own set of bankruptcy laws and regulatory arrangements.
But Neuberger's Majit believes most of the bigger U.S. names have done their homework this time.
Memories of costly mistakes made by high-profile U.S. investors who failed to get it right in their home markets in recent years remain fresh.
Hedge fund boss John Paulson saw one of his main funds lose half its value in 2011 after betting on an economic recovery that never materialised, while Bill Gross, who runs the world's largest bond fund, placed big bets against U.S. treasuries that backfired.
"The bigger (U.S.) funds, even the mid-sized funds that come over here aren't naive," Majit said.
U.S. funds with a presence in London are also hiring expertise on the continent to aid their efforts, opening second European offices in places like Munich and Barcelona.
Signet's Marquardt said he felt U.S. investors were more agile traders of distressed debt and thus bigger experts on creditor rights compared with their European cousins, who largely buy and hold bonds to maturity.
"These are crucial (skills) in this type of environment because you are often more concerned about what your recovery value might be and over what period of time," he said.
"What you need here are credit specialists who do forensic balance sheet work, who understand debentures, really crackerjack credit stuff. And that is an American industry."