By Michelle Price
WASHINGTON (Reuters) – Prophet Capital Asset Management LP, an investor in loans and structured credit securities with $2.5 billion in assets, has restructured a hedge fund that had been rocked by March’s market turmoil, a company executive said on Friday.
Reuters reported in March that Prophet Capital, based in New York and Austin, Texas, had temporarily blocked investor withdrawals from its Prophet Opportunity Partners LP fund with a view to ultimately dissolving it, amid extreme volatility sparked by the onset of the coronavirus.
The fund primarily held high-yield collateralized loan obligations (CLO), which were hard hit amid fears over the widespread risk of corporate loan defaults stemming from pandemic lockdowns.
The CLO market has since rebounded dramatically, allowing Prophet Capital to raise new cash for the fund and let investors redeem their money, said the firm’s partner David Rosenblum.
Effective Jan. 1, the fund has allowed investors three options: to cash out at net asset value, remain invested but sell their legacy assets over time, or reinvest with a two-year lockup that would make it easier to manage the fund through times of extreme volatility, said Rosenblum.
The restructuring underscores how default rates in the leveraged loan market have been far lower than feared, thanks largely to extraordinary interventions by the U.S. Federal Reserve.
“The CLO market has had a hell of a whipsaw this year, the whipsaw to end all whipsaws,” said Rosenblum.
“When all the stimulus came into the market, the stock market rallied hard and corporate bonds tightened a ton, bank loans, even distressed bank loans, caught the wave.”
In 2020, CLOs returned 3.11%, according to data gathered by JPMorgan (NYSE:). Lower-rated tranches returned far more, with the BB-rated tranche returning 8.04%, according to the bank.
One pre-pandemic investor in the fund said his company had redeemed their capital at net asset value, “a much better outcome than we had feared.”
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