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Erik Schatzker
Steve Tananbaum has a playbook for markets roiled by inflation, rising rates and geopolitical volatility -- and crypto is a centerpiece.
The veteran credit investor and founding partner of GoldenTree Asset Management is broadening his flagship hedge fund to include trading in digital-assets and financing deals in exchange for tokens. He sees opportunities to earn outsize returns and doesn’t want to forgo them by sticking to traditional strategies.
“We’re adding more resources to it,” Tananbaum said in a “Front Row” interview. “We believe that by being early in the space we’ll be overcompensated for what we perceive the downside to be.”
Embracing the new explains how GoldenTree has generated returns of almost 10% a year in its main fund, one of the industry’s best track records, and amassed $47 billion of assets. Since founding the firm in 2000, Tananbaum, who’s also chief investment officer, has expanded from three strategies to more than 10, extending from distressed debt to emerging markets.
His crypto plans include taking a “modest” amount of risk on relative-value trades between coins or equity-like structures that hold digital assets, such as Ripple, as well as arbitraging the Bitcoin cash and futures markets.
Separately, New York-based GoldenTree is also developing a more opportunistic, crypto-only strategy to make directional bets on tokens and finance startups. Tananbaum said he hopes to raise at least $100 million for a new fund and manage more in dedicated accounts.
Macro investors and multistrategy hedge fund managers have charged into crypto over the past few years. Now, others including Tananbaum are following as the era of central bank stimulus and narrow credit spreads ends. High-yield bonds, for example, are losing money for the first time in eight quarters after gaining almost 30% during the pandemic.
Uncharted Territory
The threat of persistent inflation, the speed of monetary tightening and Russia’s invasion of Ukraine will likely produce more volatility and confuse investors used to long, predictable credit cycles, Tananbaum said.
“We’re in uncharted territory,” he said. “Even now, the market is not necessarily pricing in the probability of materially slower growth or deteriorating credit.”
Wider spreads may result in bargains for nimble buyers like GoldenTree. They also herald new financing opportunities as borrowers who benefited from rock-bottom yields and rich valuations lose access to cheaper money.
Tananbaum pointed to recent leveraged buyouts as susceptible because they were priced aggressively and largely financed with floating-rate debt, resulting in a “low margin of safety.”
GoldenTree also wants to become more of a force in direct lending and eventually manage as much as $5 billion in private credit. But unlike the foray into crypto, the firm will face established rivals such as Apollo Global Management Inc.Ares Management Corp.
In contrast to most hedge fund managers of his generation, Tananbaum, 56, didn’t start out in proprietary trading or capital markets at a Wall Street investment bank. He ran high-yield investing at MacKay Shields, a unit of New York Life Insurance.
Tananbaum said he learned to look at markets differently there, disciplined by daily mutual fund inflows and outflows and intrigued by trades he wasn’t allowed to make. Success came quickly. In its first full year, in 2001, GoldenTree’s hedge fund returned 18.3%, and by 2006 Tananbaum was overseeing more than $7 billion.
Distressed-debt investments, one of the GoldenTree’s strengths, accounted for most its hedge fund gains in 2021. With big positions in oilfield-services companies, largely the product of debt-for-equity restructurings, the firm prospered as crude jumped 55%.
There’s still “a lot of juice left” in that trade as one of the few pandemic rebounds that hasn’t stalled, Tananbaum said.
As for crypto, Tananbaum said GoldenTree’s head of structured products, Joe Naggar, was instrumental in helping him make the leap. Together, they backed Algorand, a blockchain protocol based on proof of stake, considered a more efficient approach than Bitcoin’s proof of work.
Now, he has come to see crypto as another instrument where “we can measure the downside and participate in the upside. That’s really what credit is.”
