Scaramucci’s SkyBridge Plunges 22% After Structured Credit Fiasco

One of the best performing hedge fund investments in recent years was structured credit, or highly-levered claims on streams of cash flows, such as mortgages, credit cards and corporate loans, which printed outsized returns for much of the past decade as rates were low, volatility was lower and investors could use up to 10x leverage (via repo) to extract generous returns from such products. And, inversely, structured credit was also one of the hardest hit strategies in March when stocks and credit plunged and when cash flow across the economy ground to a halt as a result of the economic paralysis resulting from the coronavirus pandemic.

That was especially bad news for Anthony Scaramucci, whose SkyBridge Fund of Funds (or FoF) just happened to have handed most of its $5.9 billion in capital to hedge funds that has invested in such highly leveraged products. Worse, not only did the performance of SkyBridge’s clients plunge, but many of them gated Saramucci, who would find himself unable to pull out his clients’ capital – an especially precarious situation if he were to suffer a surge in redemptions. In effect, SkyBridge was not only a second-degree bet on structured credit – arguably the worst hit space in capital markets in March – but it was stuck holding all the downside without even having access to its funds.

As the WSJ reports, Scaramucci’s SkyBridge – a FoF which invests billions of dollars in hedge funds for wealthy clients, which was prominently featured in that disaster of a movie, Wall Street 2, and which is best known for organizing the annual SALT Las Vegas boondoggle where shitty investors hang out with even shittier capital allocators but because they are surrounded by strippers, everyone feels really important – lost 22.5% in March in its flagship fund, and down 21.9% YTD. Amusingly, some of SkyBridge’s hedge funds “have blocked SkyBridge and other investors from withdrawing money as they grapple with redemption pressures or less liquid markets.”

The pressure, according to the WSJ, “is among the most imposing Mr. Scaramucci and SkyBridge have faced.”

A former Goldman Sachs Group Inc. broker, “The Mooch” has long been a prominent voice in the hedge-fund industry. In 2017, he gained a national platform as the White House’s director of communications. That ended after only 10 days on the job, after the New Yorker magazine published an expletive-filled interview with him in which he attacked other top staffers in the White House. Scaramucci subsequently returned to SkyBridge, which managed $5.9 billion at the end of January. A managing partner at SkyBridge, he regularly makes media appearances to discuss markets, the economy and his critique of the Trump administration.

SkyBridge’s infatuation with structured credit began in 2016, when its main product called Series G made a big bet on hedge funds that invest in structured credit. And, as noted above, the move proved profitable, helping SkyBridge grow in size over the past few years.

But that party ended with a bang in March when the firm’s Series G structured credit vehicle – which had invested more than $4.8 billion at the end of February – suffered dramatic losses after being positive for the year for the first two months of 2020.

The value of credit-related investments collapsed as investors fled low-rated debt amid worries the new coronavirus pandemic would crush consumers and other borrowers. Some of those markets suffered from limited trading. The troubles caused steep losses for a wide swath of funds in SkyBridge’s portfolio, partly because a number of them used leverage, or borrowed money, to juice their returns. That forced many of the funds to scramble to meet margin calls from lenders.

Angelo Gordon’s AG Mortgage Value Partners fund, one of Series G’s biggest investments, was down 31% for the month. Another SkyBridge investment, Metacapital Management LP, lost more than 50% in March in one fund SkyBridge is invested in and was selling assets in recent weeks to meet margin calls, according to people familiar with the firm.

Adding insult to injury, some of the funds SkyBridge had invested in including the EJF Debt Opportunities fund, Medalist Partners Harvest Fund and Metacapital Mortgage Opportunities Fund, recently told SkyBridge and other clients they wouldn’t be able to withdraw their money.

Another firm with SkyBridge money, Hildene Capital Management, is restructuring two funds into different share classes, letting clients choose how quickly to get their cash back.

But wait, there’s more: SkyBridge also was hit by the returns of some funds that don’t invest in credit. JD Capital Management’s Tempo Volatility Fund, a relative-value volatility fund, lost 75% or more for the month.

“It’s a battle for all of us,” a hedge-fund manager who invests in structured credit told the WSJ.

And indeed it is: a furious battle to the death for billionaires to stay in the tres comas club, or else suffer the indignity of being only multi-millionaires if not bailed out by the Fed.

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That said, the full magnitude of losses for many funds SkyBridge invested in is unclear because the funds are awaiting administrator valuations for their fund assets, but the funds generally have provided clients with estimates of losses, according to the WSJ.

Amusingly, some of SkyBridge’s funds told their investors they believe technical issues have led to dysfunctional credit markets and that asset prices will recover in the long term. Hildene and Axonic Capital, another fund SkyBridge is invested with, are seeking to raise or have raised new money to invest.

Because what better way to not prove to the world you are a Ponzi scheme than to demand new capital even as you gate old capital from being withdrawn.

Meanwhile, the next time Scott Wapner defends the Fed’s intervention in capital markets by purchasing junk bonds or claiming the bailout of Wall Street is for the benefit of everyone, what he really means is that it is the Fed’s sworn duty to make sure that millionaires such as Anthony Scaramucci are made whole. Everyone else can just wait for their $1,200 “stimulus” paycheck from the Treasury.