"In other words, the systemic risk inherent in Europe has been mitigated," he notes. "But the timing of that mitigation is about two years behind the U.S."
Now we are seeing corporate deleveraging, a benign credit environment and low default rates. There are also dislocations in the European periphery that have created a series of abnormalities, such as undervalued credit and companies.
"You have a variety of factors that are driving European credits spreads tighter or keeping them where they are now, which gives us great opportunity to make good returns," he adds.
Liquidity in the credit markets is one of the most important barometers that LNG monitors, he says. The team maintains a very liquid portfolio, and is able to sell 75% of the portfolio in one week and 90% in one month. They focus on a sweet spot of issuers that remain liquid and give equity-like returns.
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"When we first began running strategies in 2001, the capacity constraint was about $500 to $750 million. Given the evolution of the European credit market it is now a quarter of the U.S. market's size. The number of dealers and market makers has increased, but more importantly credit default swaps have arrived, the number of issuers and the number of issues by an issuer have increased, giving us the ability to hedge, to long and short different parts of the capital structure. We believe we can run approximately a billion dollars in this strategy with no frictional issues whatsoever."
Quick and Nimble Investment Process
LNG's investment philosophy, he says, is primarily to preserve capital, understand and exploit market directionality and find idiosyncratic opportunities. The investment process starts with a top down approach, evaluating macro economic factors. Then allocations are made to different sectors, either long or short. Then the investment team conducts a deep analysis of each company. Risk management is done through the universal risk model, which "breaks down risk into the buckets that are most likely to be able to be measured and to be able to be hedgeable."