Cash Is King as Hedge Fund Trilogy Erects Trade-War Barricades

(Bloomberg) -- Trilogy Capital Management LLC is increasing cash levels at its credit hedge fund in a defensive move to protect returns, saying a trade war between the U.S. and China will impact all markets and cause unpredictable ramifications.

The New York-based event-driven credit fund is up 20 percent this year through August after recording 15 percent annualized gains over the past three years by betting on North America’s power-generation market and a Canadian oil sands company, chief operating officer Barry Kupferberg said in an email interview.

A cash level of about 55 percent, already the highest since the firm’s inception in 2001, is likely to grow this year “as certain positions are monetized,” he said. It could approach 75 percent in the event of an extreme sell-off, or more than double the 35 percent at the end of 2017, Kupferberg added.

Heightened trade tensions between the world’s two largest economies would be a huge drag on global growth, Kupferberg said. President Donald Trump’s administration has already imposed duties on $50 billion of Chinese exports since July, which spurred immediate in-kind retaliation from Beijing. A review on an additional $200 billion of goods expired on Sept. 6 without U.S. action. The risk of a full-blown trade war has elicited bearish forecasts from Wall Street analysts and hedge fund titans alike.

Event-driven funds are the most successful hedge fund strategies this year though August with an average 3.7 percent return, Hedge Fund Research data show. Hedge funds more broadly rose 1.9 percent on average. The S&P 500 Index is up about 10 percent over the same period while emerging-market corporate bonds fell 2.1 percent and emerging-market currencies lost 5 percent.

Politics may limit the flexibility to create an “off-ramp” to trade tensions and possible market reactions are “unpredictable” given the complexity of the global supply chain, Kupferberg said.

Other Trilogy Capital Management highlights

  • Trilogy, founded in 2001 by Jonathan Rosenstein, has been bullish on oil since the first quarter of 2016; it manages $150 million of assets
  • The U.S. power generation market offers opportunities for low-cost coal producers, and Trilogy has a position in Longview Power LLC
  • Trilogy was among the largest creditors in Canadian oil sands company Connacher Oil & Gas Ltd., which is being sold to a group backed by China’s Changchun Sinoenergy Corp.

Trilogy’s fund performance has been driven by those key investments, as well as its discipline in avoiding chasing more marginal credits, Kupferberg said. He expects the fund to continue to pursue the less liquid portion of credit markets.

“We have not seen the extreme sell-off yet, although we have seen an uptick in volatility and an extreme selloff in emerging markets,” Kupferberg said. “The U.S. economy remains strong and so market contagion has not impacted the U.S. credit markets yet. As markets are linked by relative value, it’s difficult to see the U.S. credit markets not being impacted at some point by these events.”

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