Key Takeaways
- • The Barclay Hedge Fund Index returned 11.79% in 2013 while the Fund of Funds index gained 8.78%, significantly underperforming the S&P 500's 27% return, signaling alternative strategies faced headwinds in a strong equity market year.
- • Contrarian Capital's flagship Capital Fund I delivered 17% returns in 2013 by focusing on distressed debt opportunities including bank debt, real estate-backed debt, senior bonds, and direct rescue financing—a strategy less correlated with equity market performance.
- • Distressed debt investing demonstrated resilience through manager skill in security selection rather than broad market exposure; Contrarian Capital's approach involves acquiring bankruptcy claims from creditors seeking immediate liquidity at discounts to perceived value.
- • Alternative hedge fund strategies are positioned to capture potential opportunities in a less predictable 2014 equity market environment following the exceptional performance of 2013.
Summary
Alternative hedge fund strategies finished 2013 with modest gains relative to equities, but managers and analysts suggest certain strategies are well-positioned for a potentially more volatile market in 2014. While the S&P 500 closed the year above 27%, broad hedge fund indices significantly trailed this performance. The Barclay Hedge Fund Index returned 11.79% for 2013, while the Fund of Funds index gained 8.78%, underscoring the challenge alternative strategies faced in capitalizing on what was an exceptionally strong year for traditional equity markets.
Among alternative strategies that performed well, distressed debt investing emerged as a notable outperformer. Contrarian Capital's flagship Capital Fund I delivered just over 17% in 2013 by targeting investments in distressed opportunities spanning bank debt, real estate-backed debt, senior bonds, trade claims, and direct rescue financing. This strategy's success reflects manager skill in identifying and evaluating individual securities rather than reliance on broad market appreciation. Unlike equity-focused hedge funds, distressed debt strategies generate returns based on fundamental credit analysis and restructuring expertise, providing a different return driver in varying market environments.
The mechanics of distressed investing illustrate why this strategy can succeed independent of broader equity performance. Contrarian Capital purchases bankruptcy claims from creditors seeking immediate capital access and certainty over extended wait times. Sellers of these claims typically accept discounts to the claims' perceived market value in exchange for liquidity and removal of collection uncertainty. A historical case study cited in the article involves Refco, a commodities broker-dealer that declared bankruptcy in late 2005 after its CEO concealed $430 million in bad debt. Contrarian's ability to systematically acquire, evaluate, and ultimately collect on such claims generated outperformance. The fund's strong 2013 results earned recognition in both Absolute Return's 2013 Awards and Institutional Investor's hedge fund awards.
As equity markets enter 2014 following an exceptional 2013, alternative strategies emphasizing manager selection and fundamental analysis rather than market beta are gaining attention from investors anticipating a less predictable environment.
Among alternative strategies that performed well, distressed debt investing emerged as a notable outperformer. Contrarian Capital's flagship Capital Fund I delivered just over 17% in 2013 by targeting investments in distressed opportunities spanning bank debt, real estate-backed debt, senior bonds, trade claims, and direct rescue financing. This strategy's success reflects manager skill in identifying and evaluating individual securities rather than reliance on broad market appreciation. Unlike equity-focused hedge funds, distressed debt strategies generate returns based on fundamental credit analysis and restructuring expertise, providing a different return driver in varying market environments.
The mechanics of distressed investing illustrate why this strategy can succeed independent of broader equity performance. Contrarian Capital purchases bankruptcy claims from creditors seeking immediate capital access and certainty over extended wait times. Sellers of these claims typically accept discounts to the claims' perceived market value in exchange for liquidity and removal of collection uncertainty. A historical case study cited in the article involves Refco, a commodities broker-dealer that declared bankruptcy in late 2005 after its CEO concealed $430 million in bad debt. Contrarian's ability to systematically acquire, evaluate, and ultimately collect on such claims generated outperformance. The fund's strong 2013 results earned recognition in both Absolute Return's 2013 Awards and Institutional Investor's hedge fund awards.
As equity markets enter 2014 following an exceptional 2013, alternative strategies emphasizing manager selection and fundamental analysis rather than market beta are gaining attention from investors anticipating a less predictable environment.
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