With global financial markets erupting in a panic that rekindles memories of the financial crisis era, some traders who were on the frontlines of the credit bust are now enjoying a renaissance.
Take Loïc Féry, 45, head of a London-based credit investment firm Chenavari Investment Managers, which oversees $5.5 billion in assets. Over a dozen years ago, as the crisis hit, Féry’s career was upended due a large rogue trade that occurred under his watch. Now, he’s well-positioned to capitalize on the current unwinding of global financial markets.
In 2007, just before the financial crisis pummeled global markets, Féry was one of the rising stars in the trading world in Europe. At 33, he’d become global head of credit markets for Calyon, the investment banking arm of the largest bank in France, Credit Agricole, and oversaw a team of 200 traders who were trying to compete with the biggest firms in New York and London. Féry’s quick rise hit an abrupt end in the early innings of the crisis turmoil. In the fall of 2007, a rogue trader in his group was found to have placed an unauthorized $350 million trade, which eventually hit the over $1 trillion in assets banking group’s earnings.
Féry and many of his colleagues were let go. Later, he was publicly cleared by the bank of any involvement in the trade. Calyon wound up as one of the investment banks that fared the worst when the crisis hit. It lost billions on an alphabet soup of derivative bets gone awry, costing its parent company dearly.
At the depths of the crisis, in the fall of 2008, Féry restarted his career from the ground floor. With less than $50 million in capital, he and a team of colleagues and former counterparts such as a trader named Frédéric Couderc, also 45, co-founded Chenavari as a credit-focused investment firm initially aiming to make money betting on a recovery in credit markets, particularly on their home turf in Europe. Chenavari’s inaugural Toro fund bought a portfolio of bombed out credits and returned ten times their money playing a recovery, according to two sources. Then, in 2015, it converted into a public vehicle called the Chenavari Toro Income Fund, which has offered consistent 10% yields, but trades at a discount to its stated net asset value.
Féry, a native of Nancy, France, a small city on the western side of the country, also made a notable recovery bet on its big sport soccer. Fery bought Ligue 2 team Lorient FC out of a financial restructuring in 2009. After a turnaround, the soccer club is now poised to be promoted to France’s top league.
When credit markets across the Eurozone recovered, Féry and Couderc began to see fewer distressed opportunities to pick over, so they started to build private credit vehicles to buy loan portfolios off of restructuring Greek and Italian banks, and to invest in collateralized loan obligations. They brought in about a $4 billion in private credit assets and, in 2015, an arm of Neuberger Berman called Dyal Capital Partners took a minority stake in the firm.
By 2018, however, Féry and his partners decided credit markets in Europe were increasingly priced to perfection and they launched a hedge fund called the Chenavari Dynamic Credit Cycle Fund, which aimed to profit off of an unraveling of markets and a widening of spreads. With Couderc at the helm, the fund has surged in the wake of the coronavirus outbreak. A source tells Forbes the $400 million fund is up 62% net of fees as of this week. The performance is a stark contrast to plunging equity and bond prices globally and more than makes up for its 15% loss last year as credit spreads narrowed.
The fund strategy is to bet on convexity, or the notion that bond prices will fall as spreads and interest rates rise. Chenavari has played the idea using credit default swaps, bets against some credit indices, and specific structured security tranches, as well as simply betting against bonds it believes are poised for a drop. Eventually, when credit markets reach a crescendo of turmoil, the Dynamic Credit Cycle fund plans to go back long, as Féry and Couderc did in the post-crisis days when they played a recovery.
In February 2018, Chenavari told its investors, “our view is that the market will expericence a “systematic de-risking period”... A downturn is likely to be triggered by weak market technicals such as poor liquidity, unsuitable investment vehicles with asset/liability imbalances (e.g. ETFs), and excessive leverage being applied to fully priced assets. For example, we think there is a possibility that we could experience a similar pattern as the 1987 crash: following a 5-year period of equity market appreciation, first an interim period of some volatility with 5% up and down movements, followed by a 30% market correction.”
Though the outbreak of the coronavirus pandemic was an impossible to predict Black Swan event, it has proven out Chenavari’s views on credit markets and made the firm a ton of money. But don’t take much confidence that the firm sees a quick recovery from the current panic gripping financial markets.
In a public March 2020 investor update, at the beginning of the coronavirus-fueled market tumble, Chenavari told its investors, “[The] market dislocation echoes unprecedented uncertainty, with a significant risk of a global recession. Beyond the actual mortality rate of Covid-19, the potential shutdown of world trade has become a tangible outcome for market participants and the impact on the global economy could be devastating (and a real rest for states and health systems across the globe).”
“That said, most central banks have not yet come to the rescue and this environment will be another test of their ability to enact fiscal and monetary easing. Also at this stage, the central scenario remains that the world will learn to cope with the pandemics after a few quarters of severe disruption (and most probably, a very large toll on human lives).”
Féry and Chenavari declined to comment.