LONDON (Reuters) - CQS founder Michael Hintze, one of Europe’s most influential hedge fund managers, believes European loans and some corporate debt are “totally mispriced”, and says stocks look attractive.
Hintze, ranked sixth in this year’s Sunday Times Hedge Fund Rich List with a 580 million pound ($929 million) fortune, told the Reuters Global Investment 2013 Outlook Summit that next year offers plenty of opportunities for his CQS Directional Opportunities fund, which was up 29 percent in the first 10 months of 2012.
“There are massive distortions out there,” Hintze, whose London-based firm manages $11.9 billion in assets, told the summit on Tuesday.
“BB, B debt is totally mispriced because of ... Basel III (regulations). The European loan market is totally mispriced. I’d even suggest equities might be cheap because of the lack of (bank) prop trading.”
Hintze, who is also CQS’s chief investment officer and CEO, profited from a net long position in equities earlier this year but recently cut this back to a more neutral position because he was cautious about valuations.
However, he said that stocks looked “attractive” and he was “tending towards” increasing his position, although it was still “a little early”.
He believes the United States will be able to work through its so-called “fiscal cliff” - $600 billion of automatic tax hikes and spending cuts scheduled to come into effect next year - while China will be able to cope with its slowing economy.
And while Monday’s deal to reduce Greece’s debt mountain has only “kicked ... the can ... down the road”, Hintze said the “immense” political will to find a solution to Europe’s debt woes means the “short-term politics are very compelling”.
“Remember you can have very good markets and a pretty lackluster fundamental economy,” he said
“I‘m very happy to have investments (in Europe), especially with Mario Draghi’s work. On a three-year investment cycle it’s a very good thing to do. The reality is that German companies are able to, with the euro still being effectively much lower than the Deutschmark would be, earn very good returns.”
He said he owned European stocks as well as bank debt maturing in two-to-three years’ time.
Hedge fund managers are notoriously secretive about their investment ideas, sometimes hiding their best trades even from clients.
Hintze, a former captain in the Australian army, said European rules that try to make lenders hold a slice of their securitization deals had led to mispricings of European loans.
“The loans sector here is way cheaper than it should be because of the skin in the game legislation ... They’ve destroyed the CLO (collateralized loan obligation) industry,” he said at the summit, held at the Reuters office in London.
He also said Basel III global banking standards, a response to the financial crisis requiring banks to hold roughly three times more capital than under prior rules, was distorting debt pricing as banks dump holdings of BB and B-rated corporate debt.
Hintze said that 2013 looked like a “target-rich environment” for his fund, with opportunities for instance shorting - betting on a lower price - bonds using CDS (credit default swaps).
“I‘m trying to make 20-30 percent per annum. I haven’t given any money back so I still feel I‘m going to have a bloody good go at it.”
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Editing by Susan Fenton