In Depth

Leveraged-Credit Expert Cautiously Optimistic On 2006

Dec 15 2005 | 5:32pm ET

By Deirdre Brennan

Roger Gordon, one of the managing members and founders of Chicago-based hedge fund Quarry Point Partners, which launched two multi-strategy, leveraged-credit funds in May of this year, is cautiously optimistic for 2006. The former head of global high-yield research at Goldman Sachs believes that it will be a tough year to make money in the leveraged loan and bond markets, but that there is, in fact, money to be made.

Quarry Point Funds—which focus on capital structure opportunities, principally among leveraged credits and investing in high-yield bonds, leveraged loans and credit default swaps—have produced returns of 3.63% over the seven months since their inception. Gordon and his partners generally run their net exposure between 40-60%. They have been trending toward the higher end over the last few months and will likely stay there over the near term. Gordon said that they have especially found value in the more senior end of capital structures, specifically senior floating rate notes and secured debt.

“Generally speaking, we have been trending in that direction [increasing net exposure] over the course of the summer,” he said. “We think that market technicals are intact. We think that there is sufficient cash in the market to support the very large new issue calendar, not only in high-yield bonds but also in the leveraged loan area, which should provide a pretty supportive environment for secondary trading levels.”

Gordon emphasized that his firm doesn’t run its funds—an onshore and an offshore vehicle—based solely on market spreads and performance, rather they make money by focusing on individual credits. He said they have shown they can make money independent of whatever the market is doing, and that the funds’ performance is generally uncorrelated to overall equity or debt market performance.

“We are credit pickers,” he said, but added, “We think that if you look at the overall market, the market is not cheaply valued. We think that 2006 is again going to be an environment in which to generate alpha you’re going to have to be good at picking specific opportunities, which is our strength.”

“I can’t tell you that I truly believe that we are in a period of robust economic growth, after all, energy prices remain quite high. We’ve had pretty good corporate earning so far, we don’t know to what extent high energy prices will impact overall consumer wealth and consumer spending, which could affect a lot of companies out there.”

Despite Gordon’s tempered optimism, he believes that if managers are conscientious and do their homework, there is money to be made in the leveraged credit markets.

“We are somewhat sanguine about the outlook for early 2006. What we are really going to be doing is pay very strict attention to credit performance, the credit outlook and the cash flow generation of companies and see if our fundamental outlook for these companies is in sync with where we see valuations in the market,” said Gordon.


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