The WSJ reports that hedge funds and private equity firms are currently gearing up to profit from potential panic selling within “alternative” mutual funds and bond ETFs, an interesting thought since “alternative” mutual funds – who’ve been snapping up junk bonds right and left lately – have come very much en vogue with both Main Street and Wall Street over the past few years.
Among the funds currently prepping for the play is Apollo, who’s been raising cash for a fund intending to buy CDS protection against junk bonds because “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit.”
Reef Road Capital meanwhile has been shorting junk-bond laden ETFs and have snapped up puts against the bonds these “alternative” funds hold.
As for the funds, Maglan Capital’s David Tawil had this to say:
“They are going to be toast… …It will be one of our first levels of shorting the moment we start to see cracks, because it’s ripe with retail, emotional investors.”
The catalyst behind the panic however was not made entirely clear, though the WSJ does allude to the coming rate hike as a possible driver.
Given how large they’ve become and how crowded the space these funds and ETFs are playing in, the risk to reward ratio here seems very slanted in favor of the hedge funds. Let’s see how it goes.
Photo credit: Andy Maguire via Flickr