Hedge Fund Manager Who Made 175% in 2020: Has Seen A 'Breathtaking Rally' In CDS And Bonds, But There Are Concerns

BY Benzinga | CORPORATE | 08/11/22 07:22 PM EDT

Saba Capital, is a New York-based hedge fund run by Boaz Weinstein, who is known for betting against junk-rated corporate credit.

What Happened: That philosophy proved to work during the bond sell-off triggered by the COVID-19 pandemic. As a result, Saba Capital made 175% gains in 2020, while everyone else was losing millions. 

The pandemic shut down many industries in Asia, Europe and the U.S., causing waves of corporate defaults and pushing down the price of lower-rated corporate bonds. As a result, hedge funds that held bearish positions on debt were thriving during the height of the pandemic. 

Now, Weinstein is tweeting about the rally in credit default swaps (CDS) and bonds as the credit spread moved 60% from January to June.

"Breathtaking rally in CDS and bonds. Credit has retraced over 60% of the January to end of June widening in spreads. While some risk factors have gotten better, and earnings weren't a disaster, some risk factors are worse such as China. Spreads feel way too low and asymmetric," Weinstein tweeted.

In a follow-up to his previous tweet, Weinstein shared: "CDS pricing probability of a real recession near zero."

The idea of a CDS was founded by bear investor Michael Burry during the 2008 financial crisis as a bet against the big banks. Weinstein believes that one can use the pricing of a CDS as an indicator to see if the nation is once again heading towards a recession.

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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.