Hedge Fund Picton Says Avoid Leveraged Firms With Trade Policy in Chaos

ob9kr]1[mhp64[mxl63dr{2x_media_dl_1.png Bloomberg Economics Global Trade

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(Bloomberg) — US economic data is likely to worsen, causing hedge fund Picton Mahoney Asset Management to take a more defensive view and cut exposure to companies with too much debt risk, trading strategist Geoff Phipps said. 

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“It is pretty likely that we’re going to see downward GDP revisions in Canada and the US over the coming three or four months,” he said in an interview. Corporate credit spreads have widened as yields on US Treasuries have risen, creating “a very uncomfortable environment” for highly leveraged companies or those needing to refinance in the near future, said Phipps, who’s also a portfolio manager at the Toronto-based firm.  

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President Donald Trump’s trade policy has upended markets and the global economic outlook, causing an April selloff in equities, bonds and the US dollar. Trump announced so-called reciprocal tariffs on dozens of countries on April 2, then partially reversed course while raising the tariff rate on Chinese goods to an eye-watering 145%. The White House has also imposed tariffs on foreign steel, aluminum and automobiles, and other levies against products from Mexico and Canada.

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Picton added to credit hedges before Trump’s big tariff announcement and had about C$1.8 billion ($1.3 billion) in notional value on the high-yield market going into April. 

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Until economic policy in Washington is more settled, US-dollar assets are likely to have higher risk premiums, according to Phipps, which will affect stocks too. 

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“We now have foreign investors questioning their US asset allocation,” he said. 

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“As policy continues to demonstrate to the world that these changes are probably more permanent and insular — in terms of how the United States is looking at the world — then you probably start seeing some of these massive allocations and over-allocations to US equities decline.” 

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That has the potential to put selling pressure on the Magnificent Seven group of US stocks, which has turned the S&P 500 into a top-heavy, tech-dominated index. A UBS index of those stocks has already tumbled more than 20% this year. 

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Picton Mahoney manages C$13.6 billion across several strategies, including market neutral, long-short equity, fixed income and alternative investment grade.

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