Patience has its rewards, as hedge fund manager Krishnamurthy (Nandu) Narayanan has found out. He endured losses for two years before seeing positive results from his call on U.S. credit markets.
Through a mix of short selling of sub-prime mortgage lenders as well as long positions in selective stocks, exchange-traded funds and sovereign bonds, Narayanan has been vindicated. The $24.6-millionCI Global Opportunities returned 47.9% for the three months ended Aug. 31, compared with a 2.2% loss for the median fund in the Alternative Strategies category. However, the fund lost 3% in 2006 and returned only 0.9% in 2005. The $78.8-millionCI Trident Global Opportunities, which is more flexible in its exposure to credit markets, returned 43.5% for the past three months. It gained 0.1% in 2006 and 5.7% in 2005. Both funds are sold to sophisticated investors, requiring minimum investments of $25,000 to $150,000, depending on the province.
"The fact that we did not make money last year did not change our view," says Narayanan, 43, founder and chief investment officer of New York-based Trident Investment Management LLC. "So we kept these trades on, and finally it's beginning to pay off."
Identifying himself neither as a bear nor a bull, but as an opportunist, Narayanan has long believed that credit markets were ripe for a fall, and hence offered lots of opportunities. But he was also prepared to take some small losses, positioning the funds to take advantage of the turmoil that eventually occurred last summer.
"Our thinking is that credit markets are in serious trouble," Narayanan says. "The commercial paper market is locked up. We're in the third inning of what could be a very long baseball game."
An economist by training, Narayanan is a top-down manager who has a solid academic background. Born in Madras, India, he graduated in 1985 from Yale University with a BSc, summa cum laude, in economics/mathematics and computer science.
Afterwards, he worked for two years in Smith Barney's new mortgage-backed securities division. In 1991, he earned a PhD in international economics and quantitative finance from the Massachusetts Institute of Technology.
Narayanan began his investment management career as an analyst at Tiger Management, a New York-based hedge fund firm. Before founding Trident in 1998, he was chief equity and emerging markets strategist at hedge fund manager Caxton Corp., and then an independent consultant on emerging markets for Credit Suisse Asset Management.
Some of his thinking was shaped by his thesis advisors at MIT: economist Paul Krugman and Franco Modigliani, winner of the 1985 Nobel Prize in economics. Krugman led Narayanan to develop his own views without paying much attention to the consensus. Modigliani taught him to look at financial markets as serving a valuable purpose in allocating capital.
Narayanan has previously managed about $1 billion in assets, including several funds for CI Investments Inc., such asCI Emerging Markets, andCI Pacific. He has also managed the CI Trident hedge fund since its inception in February 2001.
But in January 2005 he returned to his roots as a hedge fund manager when he dropped most of the mutual funds and assumed CI Global Opportunities. However, he also continued to offer his best stock ideas for the $70-millionCI Global Managers Corporate Class.
By running a leaner operation that manages about $100 million, Narayanan can concentrate on money management. "Philosophically, we're not about trying to run lots of money, with relative performance being the main driver," he says. "We are opportunistically running one strategy so we can make money for our investors."
The bulk of his strategy is comprised of short positions in the subprime credit market and lenders that focus on housing. There are about 70 holdings in each fund, but Narayanan is not merely in the business of shorting expensive stocks.
"If we have lenders focused on housing, we try to pick a lot [of names] of that group, and are not attempting to find the ones that are most exposed," says Narayanan. "We're trying to get exposure to the overall macro idea, by making sure we have a position in almost all the players through some sort of ETF or index that we created."
At the same time, he has also taken long positions on Japanese equity index futures, consumer staples exchange-traded funds, and individual stocks such as Anheuser-Busch Companies Inc. ( BUD/NYSE).
The latter may be "boring, but it has great businesses and brands. They are not really affected by the credit crunch," says Narayanan. "These are the kind of companies we'd like to capitalize on."
The credit bubble, he points out, was five years in the making. "It won't end in a few months," Narayanan says, adding that the liquidity crunch emanating from the subprime market is likely to spread further as the housing market deteriorates. "It's the canary in the coal mine."
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