In this episode of Strategic Investor Radio, host Charlie Wright interviews Guy Benstead of Cedar Ridge Partners, a Registered Investment Advisor (“RIA”) based in Greenwich, Connecticut. “We’re bond guys,” says Mr. Benstead, in reference to his firm.
Cedar Ridge specializes in unconstrained credit strategies. It operates private funds, separately managed accounts (“SMAs”), and one alternative mutual fund: the Cedar Ridge Unconstrained Credit Fund (MUTF:CRUMX) that make investment decisions based on the firm’s top-down macroeconomic analysis combined with its “deep dive credit work” on individual securities.
If Cedar Ridge’s funds were long only, then much of this in-depth research would be for naught, since research can turn up bad bonds just as easily as good ones. Therefore, Cedar Ridge’s funds operate with a long/short mandate, and with positions spread across about 100 securities, or so. Benstead points out, however, that this doesn’t mean the funds own bonds from up to 100 different issuers – the positions include several bonds from some of the same issuers (at different maturities).
The funds’ long portfolios consist primarily of corporate and municipal bonds, along with preferred stock. Their short portfolios are made up of corporate bonds thought to be “overpriced,” along with a “core Treasury ballast” to hedge against interest-rate sensitivity.
One thing that separates the Cedar Ridge long/short credit funds with others in the space is that Cedar Ridge doesn’t use derivatives. Benstead says that Cedar Ridge tends to own the same securities as typical bond investors, but the firm operates like a great chef, arranging the ingredients in a different way.
Although long/short equity funds have been around for close to 70 years, long/short credit funds are newer and rarer. When asked why, Mr. Benstead provides several insightful answers:
Bonds have less liquidity than equities, so it’s more difficult to short them;
Bonds have traditionally been looked at purely as yield instruments; and
Fewer managers have the required skill set to short bonds.
When host Charlie Wright asks his guest what keeps him awake at night, Mr. Benstead says “How disconnected so many investors are from real investment fundamentals.” To that, Charlie responds by saying “Benjamin Graham is probably turning over in his grave.”