Drexel Vets Launch L/S, Long-Only Credit Funds

Jul 22 2008 | 1:17pm ET

Boca Raton, Fla.-based Hegemony Capital Management has launched a long/short credit hedge fund and a long-only vehicle to exploit opportunities in the credit markets.

The firm’s Credit Opportunity Fund debuted last month to invest in long-only senior secured first-lien bank debt and triple-C and B-rated bonds that are overpriced in industries that the firm does not invest in, such as retail, transportation and food, according to Gabriel Gengler, executive vice president.

Hegemony’s Pathfinder Fund, which will invest in the long book of its long/short sister fund, is gearing up for its first close within the next few months.

“Senior secured bank debts are trading at historical lows because of the subprime contagion, destruction of the structured investment vehicle market and balance sheets need to repair themselves at major investment banks. And because of these inventories, we’re able to capture these lows,” said Gengler.

Gengler said the funds are focusing on large, publicly-traded multinational companies with significant collateral base because “these are companies that generate free cash flow with covenants that will pay down at par far in advance of the loan’s maturity.”

He believes that the perfect storm that has whipped up in the credit markets will last for several years and is bullish on the funds’ potential returns in the neighborhood of 18% to 25%.

“Through our research we’re going to keep finding these companies that are going to come out and redeem early and then reinvest at discount, and keep this portfolio velocity at a high rate,” he said.

Both funds charge a 1% management fee and a 20% incentive fee over a 10-year Treasury hurdle rate. 

Hegemony Capital was founded in 1991 by Joseph Harch, the former high-yield sales manager at Drexel Burnham Lambert, and Michael Lewitt, an ex-Drexel investment banker. The firm manages some $800 million in total assets.

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