The Impact of Puerto Rico on Hedge Funds

July 27, 2018

With the first half of 2018 behind us, our chart of the week touches on one of the more profitable positions for distressed credit hedge funds. Funds invested in Puerto Rican debt due to its misunderstood fiscal story, bondholder protections and a better credit situation than many stressed sovereigns. Following the devastation left from Hurricane Maria and President Trump’s comments on wiping out Puerto Rico’s debt, bondholders saw prices plunge in the latter half of 2017. That late year sell-off led to those bond positions contributing the most significant losses to many distressed strategies.

Thus far, 2018 has seen a recovery of Puerto Rican bond prices for hedge funds. The chart above highlights Puerto Rico General Obligation 2035 bonds. Many hedge funds believe the bonds were oversold last year following the hurricane, and recent revisions to Puerto Rico’s fiscal plan now projects greater primary surpluses, which has caused bond prices to rise. Also, Puerto Rico’s recovery from Hurricane Maria is now making progress which has also given comfort to bondholders. Negotiations for other Puerto Rican bonds will continue throughout 2018, with managers expecting to see more volatility during the remainder of the year.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.