Hedge Fund Shorting Treasury Bond ETFs

July 15, 2014

'All risk and no reward' in the world of bonds ...

Fixed-income strategies, especially long-dated bonds, are currently a tough sell in today’s environment when rates look likely to be heading higher. Some investors, including hedge fund manager George Schultze, are preparing for rates to move higher by buying shorter-dated debt and value-oriented equity.

Shultze, the founder of Purchase, N.Y.-based Schultze Asset Management, markets a pair of hedge funds totaling $226 million that focus on companies in bankruptcy or near it. He recently spoke to ETF.com staff writer Hung Tran about the current state of the fixed-income market, and shared his views on the opportunities he sees in equities—on both the long and the short sides.

ETF.com: Do you invest in ETFs as a way to hedge your portfolio or hold them for the long term?

Schultze: We do invest in some ETFs from time to time, more for hedging than outright long positions. Some of our holdings have correlations to the U.S. stock market, so we’ve used the iShares Russell 2000 ETF (IWM | A-92) to hedge our long stock exposure.

In the fixed-income market, we’ve also done some shorting with some of the long-dated ETFs such as the iShares 20+ Year Treasury Bond ETF (TLT | A-80).

ETF.com: What is your current assessment of the fixed-income market?

Schultze: We think that fixed income is at or near the end of a 30-year bull market and valuations right now are at bubble levels. Interest rates can’t go much lower, and we think there’s only one way to go. that means down for the bond market and up for interest rates.

If you have to invest in fixed income, you’re better off with short-duration securities that don’t have much movement if interest rates go against you, or to hedge your portfolio by shorting interest-rate-sensitive securities or ETFs.

If you have the flexibility of trading out of fixed income and into equities, there are really interesting alternatives there in terms of cheap valuations, companies that pay dividends for lack of fixed-income yields, and even equity shorts that make a lot of sense.

ETF.com: In what sectors do you currently see opportunities in the equity space?

Schultze: We’ve found some opportunities in the auto manufacturing space, and one company is General Motors, which currently has a pretty attractive dividend yield.

We focus mostly on U.S. companies, and we’ve recently found shorting opportunities in the shipping space. That’s one industry going through a lot of distress, and we expect it to continue doing so.

Outside of that space, certain industries are seeing structural changes, so we’ve found some companies outside of shipping with negative downside earnings or even with the potential for a bankruptcy event. We’ve found some of those opportunities in the casino space as well as in health care—the Affordable Care Act and changing reimbursement rates to medical care providers.

 

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