US hedge funds are looking to take advantage of new stringent capital rules on European banks to buy discounted asset-backed securities and bad loans from European banks. Bloomberg reports that hedge funds are competing with private equities for discounted assets in Europe and are hiring staff as well as relocating executives in hopes of finding sellers of distressed assets at throw away prices. A report by UK’s Royal Bank of Scotland Group Plc shows that European lenders have sold distressed assets worth 3.5 trillion euros since 2012. The report adds that Eurozone banks need to sell a further 1.8 trillion euros by 2018 to comply with regulations on capital and leverage.
Bloomberg reports that Ellington Management Group LLC is among funds active in the European asset-backed securities market. The $5.6 billion Old Greenwich, Connecticut-based hedge fund opened an office in London two months ago and has hired Daniel Turner from Chenavari Credit Partners LLP to head its asset-backed securities business. The fund is targeting to add three more people to work on opportunities in Europe. Laurence Penn, a vice chairman of Ellington says the fund’s move into Europe is a result of the pick up in the volume of asset sales from European banks.
Other hedge funds that made similar moves include the New York-based funds MKP Capital Management LLC and GoldenTree Asset Management LP. MKP Capital sent key executive Christopher Muller to the UK to get a firsthand assessment of the opportunities. It also pouched Pritesh Solanki from HSBC Holdings Plc to lead its operations. Nilam Patel, who is a partner and money manager at the firm, says asset-backed securities in Europe offer attractive investment opportunities due to greater risk premium and improving fundamentals.
Hedge fund GoldenTree Asset Management LP, on its part, relocated fund manager Cee Sarabi from New York. Another New York hedge fund, Marathon Asset Management LP, which has roughly $11 billion under management, operates a fund focused solely on distressed assets in Europe.
Bargains for as Low as 5 Cents on the Euro
Working against a deadline issued by the European Central Bank to strengthen balance sheets by November 2014, the Eurozone lenders are disposing of bad loans at deeply discounted prices, ranging from five cents to 40 cents on the euro, according to consulting firm PricewaterhouseCoopers LLP. One such transaction was the sale by Spanish bank Banco de Sabadell SA. The bank revealed in December that it sold 632 million euros of distressed debt for a paltry 41.2 million euros representing just seven percent of face value.
The move by US hedge funds to look at opportunities across Europe is a typical example of the way hedge funds operate. When the funds see opportunities, they move in quickly and aggressively. Such a focus on generating returns and the flexible approach of hedge funds to investing in different asset classes are factors that attract top talent to the hedge fund industry.