CQS: Economy, Housing Market Not Out Of The Woods Yet

Jan 29 2010 | 9:52am ET

Leave it to the hedge funds to rain on everybody’s parade. This time, the role of black raincloud is being played by quantitative hedge fund firm CQS, which argues that the growing economic optimism is misplaced.

The firm told clients this week that both the U.S. and U.K. housing markets are primed for another dip, and warned of a distressed cycle this year that will “dwarf” that seen over the past year, the Financial Times reports.

With the world’s governments and central banks planning to pull back from the markets this year after propping up the financial system with billions in bailout money, CQS founder Michael Hintze said “the easy liquidity trade has gone.”

And with its exit, according to CQS, will come market dislocations.

“We have serious concerns about the level of adjustment we have seen in the U.K. housing market,” Alistair Lumsden, who manages the firm’s asset-backed securities hedge fund, said. “Affordability is very challenged in the U.K. For the moment, we think the U.K. is quite stretched.” Lumsden said the U.S. housing market is in for some trouble, as well.

Trouble for the economy, of course, doesn’t necessarily mean trouble for a hedge fund. CQS is aiming to profit from its pessimism: Mark Unferth, who manages CQS’s distressed-debt strategies, said the firm has begun “harvesting capital” from its current investments as it prepares for market declines and widening credit spreads later this year.


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