One of the largest hedge fund firms in the world continues to make money quietly by focusing on beat up loans—despite the general perception that bonds have little to offer investors.
Davidson Kempner Capital Management, the $22 billion New York City-based shop run by Thomas Kempner Jr., gained 2.8 percent in the first quarter in its Institutional Partners fund largely on so-called distressed bets like Lehman Brothers bonds, Greek government debt, and U.S. and European commercial mortgage-backed securities.
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"So far, the fall in equities prices has not spread into the credit markets. However, the current market conditions are likely to create some dislocations, allowing us to put our additional cash to work at good spreads," Kempner wrote in a private letter to investors Wednesday.
Other winners in the first quarter included Signet, Kabel Deutschland and MAN.
A spokesman for Davidson Kempner declined to comment.
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The firm has been taking in investor cash after several consecutive years of positive returns. Davidson Kempner is now the 11th-largest American hedge fund shop, with assets up 16.8 percent over 2013 to $22 billion as of Jan. 1.
That growth has caused Davidson Kempner to close its Distressed Opportunities Funds to new capital, according to the letter. As of July 1, Davidson Kempner will limit new client dollars to the amount of money requested back from investors—so-called redemptions.
"This soft close is consistent with our goal of keeping each of our funds at a size that allow us to maintain our nimbleness and ability to find excellent investments," the letter said.
The recent success has also prompted several promotions and a hire, according to the letter.
Chris Krishanthan was promoted to co-chief executive officer of Davidson Kempner European Partners; Avi Friedman was promoted to co-manager of the global convertible arbitrage department; and Perry Metviner joined Davidson Kempner as chief technology officer from Barclays.
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Firms that invest in risky but high-yielding bonds have been among the best performing in the hedge fund industry recently. The Absolute Return Distressed Index, which tracks hedge funds in the strategy, is up 4.40 percent in 2014 through March, better than any other type of investment style.
