Mudrick Said to Gain 27% Beating Distressed Hedge Fund Rivals

  • Firm benefits from energy bets on Fieldwood, Hycroft
  • Distressed managers rose 3.5% this year through June

In a disappointing year for hedge funds that invest in the riskiest debt, one distressed firm -- Mudrick Capital Management -- is flying high.

Mudrick Capital’s flagship hedge fund handed investors a 26.8 percent return in the first seven months of the year, according to a person with knowledge of the matter. U.S. corporate debt yielding 10 percentage points over Treasuries gained 31 percent over that period, Bank of America Corp. indexes show, while distressed hedge funds rose 3.5 percent through June, according to the latest data from Hedge Fund Research Inc.

Mudrick Capital, which oversees about $1.3 billion, got a boost from several energy-related positions after bets in the sector contributed to losses of about 26 percent last year, according to a July 15 investor letter obtained by Bloomberg. The firm’s holdings of Fieldwood Energy term loans benefited from a swap into new securities, and convertible bonds of Hycroft Mining Corp. rallied with precious metals prices. Mudrick’s first-lien loans of coal producer Alpha Natural Resources Inc. surged as the company moved toward an exit from bankruptcy.

“We are only investing in value with a hard catalyst, and are not relying on rising markets or expanding multiples to generate returns,” Jason Mudrick, who founded his firm in 2009, said in the letter. “We expect more positive catalysts in many of our top holdings to occur over the remainder of the year, which we believe will drive prices higher and ultimately result in a number of realizations.”

Janet Arzt, director of investor relations at Mudrick Capital, declined to comment.

The recovery of distressed debt has been fueled by energy bonds, which rose with the price of oil, after risky credit posted its worst return since the financial crisis last year. Several hedge funds haven’t kept up with the gains, in part because many shunned investments in oil, gas and commodities producers after getting burned in 2015. They’re opting instead for more liquid investments in healthier high-yield companies, according to investors and analysts who specialize in troubled borrowers.

BlueMountain Capital Management’s flagship $6.8 billion Credit Alternatives fund was down 2.3 percent this year as of July 8. Ethan Auerbach, the firm’s head of distressed-debt strategies, left in the wake of the disappointing performance, Bloomberg reported last month.

Candlewood Investment Group’s Special Situations Fund pared its losses in the second half of July, bringing them to 2.5 percent for the first seven months of the year, according to a person with knowledge of the returns. Janet Miller, Candlewood’s general counsel and chief operating officer, declined to comment.