London-based hedge fund manager CQS wants to strengthen its 16-strong team in Hong Kong as it eyes investment opportunities in the region. Credit is an increasing focus, following the hire of a head of Asian credit in February.
“We’re looking to build out our research, operations and execution capabilities, across equities, fixed income and to a degree macro,” CQS founder and chief executive Michael Hintze tells AsianInvestor*. “We’ll do so opportunistically.”
The new head of Asian credit, Fawaz Habel, previously managed credit long/short and long-only strategies at Value Partners in Hong Kong. He will be supported by Tan Yi-Kai, who also joined CQS from Value Partners, where he was an investment analyst.
Hintze, who is also senior investment officer at multi-strategy firm CQS, points to liquid credit markets as a particularly fertile area these days. “It goes back to regulations like Basel III, the EU’s Capital Requirements Directive IV, Dodd-Frank and the Volcker rule.
“Capital has been constrained due to new capital requirements, so to assume banks will be there to provide you the liquidity – the bid to allow you to close your position – is a bit naïve to say the least.”
As a result of such rules, “we find much greater value in certain securities”, he says, citing senior secured or leveraged loans – mainly in Europe, but also in the US – as one example, as well as certain structured products.
“We also have the ability to work with the CVA [credit value adjustment] desks of banks, and we are doing more of that now,” adds Hintze.
“What’s interesting is that banks will often structure loans, since they have those relationships, and they pass them onto the market. We’re not doing direct lending, though we’re not averse to it. It’s a business line that has some merit, but it needs a different infrastructure, a different investor base.”
Hintze says would expect to see double-digit returns “and then some” from private debt. “And that is very significant when the risk-free rate is about 25 basis points.”
Asked if he would consider less liquid fixed income assets, Hintze says: “It’s not out of the question that we would look at the more illiquid markets in Asia and also less liquid assets such as private debt.
“We did so prior to the global financial crisis, but nowadays it doesn’t make much sense – firstly, because there are a lot of opportunities anyway in listed assets and in liquid markets. There is a focus on matching liquidity of funds to client requirements now.
Hintze says that while Asian markets have been more volatile, he expects to see a return to volatility in asset prices more broadly and in the West in particular.
“This return to more volatile market conditions should favour asset classes such as convertibles, credit long/short and equity/long short as well as short-duration assets such as ABS [asset-backed securities] and loans.”
He adds that downside protection has grown cheaper as a result of forward guidance from monetary authorities. “I see a lot of opportunity from the distortions created by regulation and central bank actions. We are in a fascinating market environment.”
*A full interview with Michael Hintze will appear in the forthcoming (June) issue of AsianInvestor magazine.