Marc Lasry, co-founder of investment firm Avenue Capital Group LLC, said hedge funds are getting “massively” overpaid for lending to lower-rated companies as banks scale back risky loans.
Banks are lending less because of tighter capital rules, and regulatory changes forcing them to exit proprietary trading have created opportunities for hedge funds, Lasry said in a panel discussion at the Bloomberg Markets 50 Summit in New York today.
“We’re the only game in town” for borrowers that aren’t considered investment grade, said Lasry, whose New York-based firm managed about $12.2 billion as of the end of June.
Under a set of rules known as Basel III, banks are required to raise the amount of capital relative to risky assets, prompting them to reduce less-sound loans and sell holdings. The Basel Committee on Banking Supervision setting the rules estimates that 75 of the world’s biggest banks collectively will need to find an additional $300 billion in core capital to meet the new requirements.
In that environment, Lasry said he wouldn’t want to run a bank. While there are still talented people at banks, they haven’t left because they have “lock-ups” in their employment contracts, said Lasry.
In Europe, “bank after bank” is coming to Avenue to offer assets for sale to meet the new requirements, Lasry said during the discussion.
Bruce Richards, who runs New York-based Marathon Asset Management LP, said on the same panel that asset sales by European banks are accelerating this year as the region emerges from its sovereign-debt crisis and companies realize losses on their holdings.
Glenn Dubin, co-founder of New York-based Highbridge Capital Management LLC, said rules limiting proprietary trading by banks have also provided opportunities for hedge funds, though competition among hedge funds has made starting a new firm more challenging.
Hedge funds on average have underperformed U.S. stocks in the last five years. The Standard & Poor’s 500 Index returned an average annual 7.3 percent in the period ended Aug. 31, compared with 6.3 percent a year for hedge funds, according to the Bloomberg Active Indices for Funds.
Asked if funds are coming under pressure to lower their fees because of the performance, Dubin called it an “odd issue” and said negotiating the charges is a “ridiculous” discussion. Investors should only look at returns after fees to decide if they want to commit money to a manager, Lasry said.
Richards said he offers discounted fees to clients who commit large amounts or are willing to have capital locked up for longer periods.