Solus Alternative Asset Management, one of the best known hedge funds specialising in distressed investments, has suffered heavy redemptions and poor performance after making a raft of ill-fated bets on companies including satellite operator Intelsat and power utility Pacific Gas & Electric.
The firm’s flagship fund is down as much as 9 per cent so far this year, depending on the share class, according to people familiar with estimates sent to investors in the past week. That is on top of a 15 per cent drop in 2018.
The New York-based firm, which is part-owned by private equity powerhouse Blackstone, has shed $1.5bn in assets since November 2018, cutting the total managed to $4.3bn.
Solus is a casualty of the string of corporate collapses that have tripped up US distressed investment funds, which look to profit from buying the stocks and bonds of struggling companies.
The hedge fund was a shareholder in both PG&E and Intelsat, both popular hedge fund trades. The Californian utility went bankrupt after wildfires caused by its power lines and its stock is now widely expected to be wiped out in a restructuring. The heavily indebted satellite firm’s shares fell as much as 75 per cent last month after a US regulator rejected its plans to raise money by selling off its airwaves.
Solus declined to comment.
Several investors said the disastrous performance across many US distressed specialist hedge funds has stoked fears that prominent firms could “gate” their funds, meaning investors are blocked from withdrawing their money in the normal timeframe.
The unravelling of PG&E contributed heavily to BlueMountain’s decision in October to shutter its $2.5bn flagship credit fund after it haemorrhaged half its assets in three years.
Bonds issued by one Intelsat entity also cratered last month, with $1bn of debt maturing in 2023 now trading at less than half of face value, down from 85 cents on the dollar at the start of November. The high yields these bonds offered made them a popular trade for hedge funds betting that US regulators would wave through the company’s spectrum plans.
“All the consensus trades have blown up,” said one rival distressed fund manager. “PG&E was the first domino — then Intelsat hit.”
Filings show that Solus more than doubled the size of its position in PG&E’s shares in the second quarter of 2019 before dumping the stock entirely by September 30. The San Francisco-based utility’s market value halved in the third quarter of this year.
Solus has emerged as one of the most high-profile distressed investment firms after its skirmish with Toys R Us employees last year and a legal battle with another Blackstone-owned hedge fund, GSO Capital Partners.
Solus sued GSO and US homebuilder Hovnanian over an alleged “fraudulent scheme” that would allow GSO to cash in on credit derivatives tied to the company. Solus stood to lose millions of dollars, having bet that Hovnanian would not default on its debt. GSO backed away from the scheme after US regulators voiced concerns about the so-called “manufactured default” it had planned.
Shares in two of Solus’s other equity investments, US coalminer Contura Energy and offshore drilling services firm Hornbeck, have fallen around 90 per cent over the past year.
Renewed difficulties at energy and natural resources-related companies this year have caused pain for many prominent US hedge funds, which placed big bets that these businesses would recover. Among the disasters, the stock and bond prices of oilfield services firm Weatherford and shale-gas specialist Chesapeake have collapsed this year.
Additional reporting by Joe Rennison and Miles Kruppa