Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

On average, it has been a terrific year to invest in the riskiest debt. But there's a catch: It has been difficult for some managers to be average.

BlueMountain, one of the biggest credit hedge fund firms, is a good example. Its flagship $6.8 billion BlueMountain Credit Alternatives fund was down 2.25 percent this year as of July 8, even as the Bloomberg U.S. High Yield Corporate Bond Index gained 11 percent. Its head of distressed-debt strategies, Ethan Auerbach, just left in the wake of the disappointing performance, Bloomberg News reporter Sridhar Natarajan wrote.

Performance has diverged widely in high-yield mutual funds as well, with Avenue Credit Strategies gaining 0.3 percent while the Catalyst/SMH High Income fund gained 27 percent, according to data compiled by Morningstar.

Big Split
There's a wide gap between this year's best- and worst-performing junk-debt mutual funds
Source: Morningstar, Bloomberg

While it seems as if it should be an easy year to win big based on index returns, it's far more complicated when peeling back the surface and looking at the specific bonds underpinning the market.

Lagging Behind
Distressed hedge funds have failed to keep up with this year's returns on broad indexes
Source: Bank of America Merrill Lynch index data, HFR

Most of the biggest gains have been driven by a huge rebound in oil prices, so investors would have had to time the energy recovery perfectly to fully capitalize on this year's gains. Some non-energy wagers have also performed well. For example, Sprint bonds have gained 26 percent on a total return basis in 2016, in part because it reported better-than-expected financial results.

While stimulus efforts by Japanese and European central bankers have put traders in a risk-on mood, the positive sentiment hasn't lifted all credits. There have been some huge sinkholes out there. Take, for example, speculative-grade bonds of Intelsat, which have lost 19.6 percent this year on a total return basis, or notes of Endo International, which have fallen 6.4 percent, according to Bank of America Merrill Lynch index data.

The gap between this year's best- and worst-performing junk bonds is 86.7 percentage points, the widest such gap since the same period in 2009.

Big Difference
While the U.S. high-yield bond index has performed well, some bonds did much better than others
Source: Bank of America Merrill Lynch index data
Total returns are from Jan. 1 through July 26

There are several interpretations for the disparity. One is that it highlights how regulations on Wall Street are making markets less liquid. The flip side of that is that the rules may have actually helped curb volatility because the biggest banks haven't used as much of their own money to bet on the direction of markets. This year's moves would have been exacerbated if banks were writing down bigger trading losses, potentially leading to financial stability concerns.

Another view is that fundamental credit analysis has finally returned. And yet a third contends the disparity is just further evidence that it's better to invest in an index rather than a certain fund manager.

But those readings are too simplistic. The volatility in some bonds goes well beyond fundamental shifts in specific companies. Instead, it stems largely from the usual recent culprits -- central banks, whose policies are becoming more and more creative and disruptive. And those are compounded by a fundamental lack of confidence in the true state of the global economy. Even the European Central Bank doesn't seem to understand the economy it's trying to stimulate. 

This will continue to be an unforgiving market for short-term traders, especially those who try to fight the willingness of central banks to continue to dominate markets. It won't take too much for investors to collectively lose faith in an entire group of companies, either briefly or for a longer period. It will be a whole lot tougher just to stay average.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net