Winner: Best new hedge fund

The CQS Distressed Value Opportunities Fund plays an active role to enforce creditor rights and maximise process-driven outcomes. It has a global mandate presently with a North American and European bias.

The fund has directionally long exposure to distressed corporate debt and equity securities, related instruments and their derivatives.

Lead portfolio manager Mark Unferth is confident of his team’s ability to assess these markets and to come up with investment ideas. The challenge, he admits, lies in whittling them down.

“We’re pretty plugged in to everything that’s going on in this space. It’s not an issue of sourcing ideas per se, rather doing the triage and the deep-dive due diligence to identify the names we want to invest in,” he notes.

“We’re principally rejecting business, not accepting business, so we turn over a lot of rocks to find something we like that fits the profile of returns we’re looking for,” he adds.

As the market has matured in the US, there are probably fewer deals to turn over, The distressed radar screen is increasingly less appealing than it was two years ago, notes Unferth.

Rather than investing in cheap businesses which are “bad companies with bad balance sheets”, the team at CQS Distressed Opportunities “would generally prefer to invest in good companies with bad balance sheets because the financial restructuring is a bit easier than the full-on operational turnaround of a dysfunctional company,” Unferth explains.

The companies with bad balance sheets can provide shorting opportunities, although that type of investment “is not going to make your year,” he cautions. “Our bigger focus is being a more long-biased value investor and looking at where the next opportunities are going to come from,” he says.

At present Unferth sees Europe as the primary source of investment opportunities. This he attributes to the US Federal Reserve’s relative success in inflating asset values and effectively using the $2 trillion liquidity injection to the US economy.

“There has been less for us to do in the US so we’ve been harvesting our gains here [in Europe] and turning our attention to Europe which is now about 30% of our book. We expect that will probably continue to go up as the opportunities continue to emerge in Europe over the next 12 to 18 months,” he says.

He sees the opportunity set in Europe as “a combination of banks getting into position to sell, a stack of maturities coming through that everyone is acutely aware of and the ability of collateralised loan obligations (CLOs) to get done in Europe.”

Although Unferth and his team follow a bottom-up investment approach, they also attach importance to a top-down view.

The fund has a core group of industry credit analysts in Europe covering specific sectors. Five generalists on the distressed team are split between the US and in Europe, although CQS is currently reallocating some resources from the US to Europe to better address where the opportunities are.

Unferth is humble in assessing the reasons for his fund’s success, claiming this it is mostly down to good fortune. “Not every investor has the good fortune to be in a market when that market is rich with opportunity and doing well. We are fortunate to have had the timing. There are tough days and that will test your mettle and your conviction and those are the days that we really earn our keep,” he admits.

“You have to have a little bit of a contrarian view of things because the asset class itself is one that gives people trepidation. That’s a hard test to pass and it feels uncomfortable when you have moments like 2008 and 2009 but these set you up for potentially rewarding opportunities. That’s what we’re in it for,” concludes Unferth.

Fund facts
Full name of fund: CQS Distressed Value Opportunities Fund
Name of portfolio managers: Mark Unferth, Chand Sooran and Tim McArdle
Name of investment/management company: CQS
Contact information: CQS, 5th Floor, 33 Grosvenor Place, London SW1Z 7HY (+44 (0)20 7201 6900; www.cqs.ch)
Launch date: June 1, 2010
Assets under management: $55 million (at December 31, 2010)
Net cumulative performance since inception: 10.15%
Strategy: distressed debt
Share classes: US dollar, euro, sterling, Swiss franc
Administrator: JP Morgan
Auditor: Ernst & Young
Custodian: JP Morgan
Prime broker: JP Morgan
Domicile: Ireland
Management fee: 1% (B1); 2% (B2)
Performance fee: 10% (B1); 20% (B2) both with three-year resettable high water mark
Minimum investment: $10 million (B1); $1 million (B2)
Lock-in: none
Redemption/liquidity terms: quarterly, with 90 days’ notice