(Bloomberg) — Losses at Arini Capital Management’s main hedge fund deepened in the final days of October, taking declines to 32% for the year, according to a letter to investors seen by Bloomberg.
The high-yield debt specialist suffered a 19.7% loss in October alone as credit markets remained persistently weak, the letter said. Against that backdrop, the master fund run by Hamza Lemssouguer re-underwrote each of its five largest positions, representing about two-thirds of its net asset value. It also saw $389 million of inflows over the past week, part of its $1.5 billion raise.
The fund “underestimated” the dislocation in CCC rated debt, which makes up the majority of the fund’s exposure, leading to a highly correlated portfolio, the letter said. It trimmed some positions and cut gross leverage to the lowest level since early 2022, while planning to build in more diversification.
“As for our core positions, let us be clear: Our conviction remains firm,” Arini’s letter said. “Mark-to-market volatility of this kind is inherent in a concentrated, contrarian mandate. The fund has the structural duration of capital to see these investments through to their catalysts.”
A representative for the London-based firm had no immediate comment.
Lemssouguer, a former star trader at Credit Suisse, has seen his hedge fund caught in the middle of major credit market turbulence after years of stellar returns. Year-to-date losses had stood at around 26% as of Oct. 23, meaning the firm’s positions continued to weaken in days that followed.
Arini, in the letter, blamed recent challenges on technical factors, rather than fundamental data. That includes collateralized loan obligations near their limits in buying CCC rated debt, as well as “targeted shorting at uneconomic levels.”
The deepening declines mark a dramatic turn for the firm, which has been one of the fastest-growing hedge funds in Europe. Starting out with $1 billion at its 2022 debut, it swelled into a $21.7 billion credit-trading giant.
Arini’s losses arise in part from its wagers on some of the weakest-rated corporate debt as rising global interest rates, higher energy prices and threats posed by the rise of artificial intelligence weigh on those securities. The firm’s credit bets include telecommunications firm Altice International, internet provider Brightspeed and luxury carmaker Aston Martin, which have all faced financial stress and a drop in their bond prices.
The fund already sold some of its positions in large speculative-grade companies, and dealers are holding talks with prospective buyers about offloading more, Bloomberg News reported previously. The sales have been primarily focused on some of its most liquid and performing assets so far, with bidders including Pacific Investment Management Co. and Oaktree Capital Management.
For each of its five largest positions, Arini said it reaffirmed asset coverage, liquidity, recovery scenarios and investor protections.
“The core theses remain unchanged, with some catalyst timelines accelerating and some extended,” the letter said.
–With assistance from David Scheer.
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