A new London-based hedge fund has its eyes on rising rates as its “biggest opportunity” after launching last week.
Andromeda Capital Management was looking to gain from big bets on credit markets even before the European Central Bank hiked interest rates by 75 basis points on 27 October to counter rising inflation.
Andromeda’s chief investment officer Alberto Gallo says the firm, which has $200m in assets under management, is aiming to drive that figure to $500m over the next 12 months.
“Central banks are not in the driver’s seat anymore,” he told Financial News, highlighting the negative impact of rising inflation and supply chain disruptions.
Andromeda, which was co-founded by Gallo and Aditya Aney, both formerly of Algebris Investments, started operations last week.
Western economies relied heavily for years on cheap energy from Russia and cheap goods from China, leading to lower interest rates, high corporate profits, and low inflation, according to Gallo.
“The music has changed now, and people are still dancing,” he said.
In September, UK inflation topped 10.1% for the first time in 40 years. European Union inflation came in at 10.9% last month. Amid the plunging pound and euro, pressure has been mounting on the ECB and the Bank of England to raise rates.
“We see interest rates a little higher from here, especially in the Eurozone and the UK, where the ECB and the Bank remain miles behind the Federal Reserve,” Gallo added.
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Andromeda’s chief investment officer said that the current environment makes credit markets attractive.
“The biggest opportunity is in credit markets and here’s why: The world is becoming a more dangerous place, and governments are stepping in to help strategic firms and sectors. In an environment of state capitalism, higher taxes and inflation reduce equity upside,” Gallo explained.
But public support reduces the downside, too, he said.
“This means investors should focus on credit — on corporate survival, rather than upside.”
Rising volatility and dispersion make the current environment “great” for alpha, Gallo said.
So far, 2022 has been a bumpy ride for global credit markets. Government bonds racked up losses of 20% up to 22 September, according to a report from MarketWatch last month citing Bank of America research.
However, some funds have been able to capitalise on the latest negative sentiment across the bond markets. UK-based Odey Asset Management, which manages £4bn in assets, made significant returns by betting against British government bonds, Reutersreported.
According to the Financial Times, in 2022, hedge funds built their biggest bets against Italian debt since 2008. While most of the headwinds, including rising inflation and a potential global recession, remain in play for the next few quarters, funds are optimistic that high yields could bring in buyers.
“Policy normalisation is not over and will be painful over the coming quarters,” Gallo said. “But great opportunities will arise for investors with patience and dry powder.”
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