Jeremy Leach (pictured), manager of hedge fund Vita Nova, has been calling time on equities since at least 2018, believing markets such as the S&P 500 had become overheated or 'toppy' in his words. He told Fundeye how he saw the correction coming for a long time.
"We've been expecting an event driven correction for some time. The difference between now and 2008 is today we've got a unilateral economic downturn and we're in the middle of a bear run," said Mr Leach.
He's also wary of those calling the end of COVID in China especially where the virus originated from the Wuhan province. He thinks the chance of further outbreaks in China is very high and makes a comparison to outbreak of Spanish flu a century earlier when the world didn't have modern medical treatments.
"I don't think we've got to the point yet where enough people have contracted COVID to be over the downturn.”
Regarding the event that he predicted would drive the correction, Mr Leach said he thought it might be the US going to war with Iran over the killing of one of the latter's generals earlier this year. "It probably would have happened if the Iranians weren’t stupid enough to shoot down a passenger jet full of civilians," he said.
Mr Leach said that most people were expecting an event-driven correction and the scale of the sell-off perhaps goes some way to proving him correct. He was surprised by the behaviour of traditional safe haven assets such as gold. The asset class did enjoy a bull run early on but he did not foresee the price stalling as it has done.
Where to put money to work
With equities unappealing, a strange place for hedge fund managers to be, Vita Nova has turned its attention to providing liquidity to other institutional investors. He targets those investors who have taken a position in a closed-ended fund and offers to take the shares of their hands, at a large discount of course.
Large players like Apollo in the US will tend to do a large capital raise to seed their funds, which are typically 10 year closed ended, they will then issue investors with bullet to part redemption payments during the term to distribute excess liquidity but no redemptions can be initiated by shareholders until the end of the closed period. Unfortunately for some, this money is tied up for 10 years and if there's been a misalignment of investment horizons between the investors in the fund and the underlying assets held in the fund, investors may be willing to take a haircut on their initial investment. Up to $.50 in the dollar.
"We go back to the issuer and say 'we would prefer to get liquid in less than 10 years so would you consider converting our shares to debt with a very low coupon and a maturity of 2-3 years?' Many issuers agree to these terms,'" said Mr Leach.
Therefore although Vita Nova may take a haircut of 20 percent, given they've bought the shares at a large discount and now also gain income, it's a simple strategy that seems to be working given the fund is up year-to-date.