by Michael Ide
Tightening monetary policy could hurt yield seeking investors who have moved too far out on the risk curve
One of the side effects of the Fed's accommodative monetary policy is that fixed income investors have had to move further and further out on the risk curve to get decent yields, causing junk bonds and covenant lite loans to grow in popularity. Apollo Global Management LLC (NYSE:APO) has decided to take the other side of that bet in a big way, fundraising for its Credit Short Opportunities Fund LP with an eye toward launching this fall, reports Rob Copeland for The Wall Street Journal.
Apollo's credit short fund has been trading since last November
The new hedge fund will be run by John Zito, Apollo Global Management LLC's head of US Opportunistic Credit, and it started trading back in November using the firm's capital, but beyond that not many details have so far come to light. It's not clear how much capital Zito had at his disposal for the last 9 months, how he did (though presumably it wouldn't be fundraising if the prospects were poor), or how much Apollo, which has $159 billion assets under management, is aiming to raise for the new fund.
Apollo is launching fund just as QE is coming to an end
It's probably no coincidence that Apollo Global Management LLC is launching its short credit fund in the fall, just as the Federal Reserve is scheduled to stop injecting cash into the market as tapering draws to a close. We probably still won't see an actual rate increase until the middle of next year, and to what extent the Fed's balance sheet will continue to prop up the market in the absence of new purchases is an open question, but if the result is market confusion Apollo will be online to take advantage of the volatility.
On the other hand, the Fed's commitment to forward guidance, so as not to spook the market with sudden rate hikes, could also benefit a short credit fund by helping it to time longer term trades (as opposed to just identifying short-term dislocations). Bond investors have benefited from an almost uninterrupted 30-year bull market as the Fed fought secular inflation, but the next couple of years could be the short traders turn to shine.