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"I’m The First To Say: I Can’t Do It" - The Energy Junk-Bond Implosion Just Claimed Its First Victim

The universe of entities who have blown up in the past year trading oil and commodities is getting increasingly more crowded and includes among them such former luminaries as one-time oil trading god (if mostly in the eyes of Citigroup) Andy Hall. However, until now there not been any prominent casualties among the group of indirect investors in the energy space, those investing in the stocks or debt of energy names, and especially those most at risk from the oil price collapse: junk bond investors.

That changed today when as WSJ reported earlier, Kamunting Street, which managed about $1 billion at its peak, announced it was returning capital to investors, as a result of plunging oil prices and wrong way junk bond bets tied to hard-hit energy companies which had gone sour over the past nine months.

Allan Teh, Kamunting Street's founder and a former Citigroup trading star, said "I’m the first to say: I can’t do it. I just don’t think in this environment I can have a portfolio that mirrors what was done in the past.

And with that he joins another list of illustrious hedge fund managers who applied such Old Normal concepts as fundamentals, logic and reason to a broken and manipulated "market", which due to the Federal Reserve's central planning, has become merely a policy tool designed to "restore confidence" and which does precisely the opposite with every passing day.

More from the WSJ:

Kamunting, named after Mr. Teh’s childhood street in Malaysia, is far from alone in its struggles to navigate the unpredictable market moves of recent months. Few hedge funds were able to capitalize on an unexpected oil bust that has sent prices down 50% since last summer, and most haven’t come close to matching the largely giddy ride for U.S. stocks and government bonds.

 

Mr. Teh, 49 years old, had a profitable decadelong run with Kamunting, which he founded in 2004 after serving as chief investment officer of Citigroup’s now-defunct Tribeca Global Investments hedge-fund unit. A convertible bond specialist for much of his career, Mr. Teh grew Kamunting to manage about $1 billion at the end of 2007. The firm lost money during the crisis, and then roared back to an 88% gain in 2009 by buying up fixed-income assets that rebounded along with the financial recovery.

 

More recently, however, his strategy of placing offsetting bets to keep from moving lock step with the broader market turned into a drag. Kamunting lost money last year on positions designed to protect against losses in its overall portfolio, including wagers against U.S. Treasurys and stocks.

 

That came as the riskier part of the noninvestment grade, or junk-bond, universe crumbled late last year on the heels of a sharp decline in oil-even for borrowers with few obvious connections to energy.

Most surprising is that K-Street did not have any major blow ups, at least not on paper: "Kamunting was up 7% at midyear 2014, but skidded in the back half during what Mr. Teh described as a “bad swing,” and ended the year down 4%. It was down an additional 2% in 2015." Unless of course, the vast majority of assets were simply market-to-myth in hopes of an imminent oil price rebound which never came, and the result was the fund's shuttering and total liquidation at firesale prices. 

Kamunting’s total assets dropped to less than $300 million recently, and when its largest outside investor asked for its cash back at the start of the year, Mr. Teh said he was bound to sell some positions at inopportune prices to pay back the request. He soon decided he would be better off managing only his own money, which represented the lion’s share of what was left in the fund.

His words of parting were taken directly from Steve Cohen's SAC Capital farewell letter:

“I feel pretty proud of what I’ve done,” he said, noting that he had made his investors more than $1 billion over the firm’s lifetime. He added that he felt free of the pressure to trade amid low volatility to satisfy jittery potential backers who were worried about avoiding even the remote possibility of short-term losses. “I can enjoy things more now that I don’t have investor issues to deal with,” he said.

Well, at least he didn't have a criminal investigation hanging over his head that would cost him at least two Kandinskis and three Picassos to put to rest. He will, however, continue running his own money as a family office.

And now that the spigot has been opened, expect to see many more junk-bond hedge funds throw in the towel on what continues to be the biggest oil rout since Lehman.