Longer-term investors like Pimco and TCW are seizing opportunities to acquire bonds hastily sold off by multistrategy hedge funds facing pressure from risk limits and market volatility.
Longer-term investors, including Pimco and TCW, are strategically acquiring bonds hastily shed by multistrategy hedge funds in recent weeks. These hedge funds, constrained by tight risk management and increased market volatility, were forced to unwind positions at a rapid pace, creating buying opportunities for firms with longer investment horizons.
Some of these bonds, issued by companies such as New Fortress Energy Inc., Hertz Global Holdings Inc., and Outbrain Inc., have already begun to recover after experiencing sharp price declines.
Hertz’s near-dated bonds have rebounded from their lows after falling more than 10 cents on the dollar earlier this month. Outbrain’s bond has similarly bounced back almost eight cents from its recent low point.
Multistrategy hedge funds (multistrats), which allocate capital to specialized teams (pods) in different asset classes, exacerbated the downward swings. Credit-focused pods, bound by tight risk limits, were compelled to unwind their positions quickly, according to sources familiar with the matter. This selling pressure contributed to the decline in bond prices, triggering a cascade effect as other similarly positioned hedge funds were forced to sell as well.
“Negative feedback loops sparked by selloffs ‘can resemble a wildfire,’ said Grant Nachman, founder and chief investment officer at credit investor Shorecliff Asset Management, speaking generally. ‘It keeps burning until it’s exhausted all available sources of fuel.'”
This account is based on interviews with over 20 market participants familiar with corporate bond trading in recent weeks, who requested anonymity due to the confidential nature of the information. Specific multistrats unwinding the bonds were not identified by these sources.
Due to their shorter investment time horizons, credit-focused pods often concentrate on the same high-yielding, riskier, and liquid bonds, which have become known as “hedge fund hotels.” Bonds issued by companies such as Staples Inc., Saks Inc., Europe’s largest debt collector Intrum AB, and British carmaker Aston Martin are among those considered vulnerable to forced unwinds. Staples and Aston Martin have been among the worst performers in high yield over the past 50 days, according to Bloomberg data.
Representatives from Staples, New Fortress, Intrum, Aston Martin, Outbrain, Hertz, and Saks have not yet responded to requests for comment.
Increased volatility and geopolitical uncertainty following the election of U.S. President Donald Trump have amplified swings in asset prices this year.
Recent unrest in select high-yield bonds has raised concerns that fire sales triggered by hedge fund overcrowding are spreading into the credit world. Bouts of market turmoil, which have occurred this year in U.S. stocks and with popular hedge fund strategies like index rebalancing, can lead to significant losses, even for portfolio managers with accurate security selection.
Forced Sellers
The core risk buildup is attributed to highly leveraged multistrategy portfolios and their stringent risk management practices. A trader losing 5% at some places, including Millennium, might face a partial withdrawal of capital, while a 7% decline could result in termination. At some hedge funds, positions may be automatically closed or trimmed for even smaller losses.
Ken Griffin’s Citadel, Millennium Management, Point72 Asset Management, and Balyasny Asset Management—the four largest multistrat firms by regulatory assets—all experienced losses during the first week of March. Some multistrat teams have already been stopped out, forced to liquidate or reduce their positions.
This bond exodus created buying opportunities for long-term investors like Capital Group and opportunistic hedge funds that tend to buy assets after others have fled. Capital Group declined to comment.
“If you have forced sellers, that can lead to violent price action that has nothing to do with the underlying fundamental profile of the business or credit,” said Brian Gelfand, co-head of global credit and head of credit trading at TCW, speaking broadly. “We want to be positioned to capitalize on these inefficiencies.”
Uncomfortable Risk
Multistrats, which rely on specialized pods rather than the expertise of a single star portfolio manager, have seen considerable growth in recent years due to their ability to deliver consistent returns.
However, crowded trades by multistrats are just one of several factors contributing to market volatility. For example, UK carmaker Aston Martin faces potential risks from U.S. tariffs on foreign-made automobiles. Furthermore, firms issuing high-yield bonds, especially those with lower credit ratings, can be inherently less stable than their higher-rated counterparts.
Pinpointing a single catalyst for price shifts is often difficult, and the rise of credit exchange-traded funds (ETFs) and systematic strategies has also contributed to market swings.
Despite these other factors, multistrats have increasingly invested in high-yield credit in recent years, often recruiting portfolio managers from banks’ sell-side credit desks. Because pod shops employ leveraged bets, they are highly sensitive to price movements and can quickly breach risk limits as losses accumulate.
“Once volatility moves up, risk measures start to get uncomfortable,” said Will Smith, director of US high yield credit at AllianceBernstein. “Risk managers tap people on their shoulder to reduce their gross risk.”
Billionaire investor Wes Edens’ New Fortress Energy bonds maturing in 2029 with a 12% coupon fell as low as 82 cents on the dollar in mid-March. The bonds have since rallied as the company progressed with plans to sell assets and use the proceeds to pay down debt.
Outbrain bonds, which were priced with a 10% coupon in early February in a deal led by Goldman Sachs Group Inc., fell from roughly 90 cents on the dollar to as low as 80 cents. Goldman declined to comment on the bond. The notes rebounded to around 87 cents by Friday.
The bonds drew significant support from long-term investors during pricing, but every deal that attracts pod shops is susceptible to these types of swings, according to sources familiar with the matter who are not authorized to speak publicly.