Key Takeaways
- • BlackRock's Obsidian hedge fund, a $1.7 billion fixed-income strategy managed by Stuart Spodek, fell 20% as of March 20, 2020, driven by coronavirus-induced turmoil in credit and mortgage markets.
- • The fund is down more than 19% year-to-date after posting a strong 13% return in 2019, marking a sharp reversal amid ratings downgrades, liquidity evaporation, and emergency Federal Reserve interventions.
- • Fixed-income markets experienced severe dislocation in March, with municipal bond ETFs trading at steep discounts, investment-grade corporates downgraded to junk status, and margin calls hitting mortgage-backed securities funds.
- • The Federal Reserve enlisted BlackRock to manage three separate bond-buyback programs covering mortgages, ETFs, and investment-grade corporate credit, creating a structural conflict as the parent company manages both a troubled hedge fund and official market stabilization operations.
Summary
BlackRock's Obsidian hedge fund, the firm's oldest and longest-running hedge fund at 24 years old, suffered significant losses in March 2020 as the coronavirus pandemic triggered a broad credit market crisis. The $1.7 billion fund declined 20% as of March 20, according to sources cited by Business Insider. The fund's year-to-date performance deteriorated to a loss exceeding 19% by that date, a dramatic downturn from its 13% positive return in 2019.
The fund, managed by Stuart Spodek, invests across fixed-income markets including rates, mortgages, and corporate credit. Its March losses were driven by severe market dislocations including ratings downgrades of well-known companies' debt to junk status, the evaporation of market liquidity, and the Federal Reserve's emergency decision to lower its benchmark rate to near zero. The broader credit market environment deteriorated sharply, with municipal bond ETFs trading at steep discounts to net asset value and distressed investors aggressively seeking capital commitments.
The credit sector faced compounding pressures during the month. Mortgage-backed securities funds experienced margin calls from lenders, with at least one fund initiating litigation against RBC over aggressive capital demands. Credit investors across the industry grappled with ratings downgrades and severely constrained liquidity conditions as risk appetite evaporated.
BlackRock itself became deeply entangled in the market stabilization effort, with the Federal Reserve enlisting the asset manager to lead three separate bond-buyback programs covering mortgages, ETFs, and investment-grade corporate credit. BlackRock declined to comment on the Obsidian fund's performance.
The fund, managed by Stuart Spodek, invests across fixed-income markets including rates, mortgages, and corporate credit. Its March losses were driven by severe market dislocations including ratings downgrades of well-known companies' debt to junk status, the evaporation of market liquidity, and the Federal Reserve's emergency decision to lower its benchmark rate to near zero. The broader credit market environment deteriorated sharply, with municipal bond ETFs trading at steep discounts to net asset value and distressed investors aggressively seeking capital commitments.
The credit sector faced compounding pressures during the month. Mortgage-backed securities funds experienced margin calls from lenders, with at least one fund initiating litigation against RBC over aggressive capital demands. Credit investors across the industry grappled with ratings downgrades and severely constrained liquidity conditions as risk appetite evaporated.
BlackRock itself became deeply entangled in the market stabilization effort, with the Federal Reserve enlisting the asset manager to lead three separate bond-buyback programs covering mortgages, ETFs, and investment-grade corporate credit. BlackRock declined to comment on the Obsidian fund's performance.
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