(Bloomberg) -- The main fund at asset management firm LibreMax Capital gained about 4% in the first half of the year after cutting exposure to riskier collateralized loan obligations and selling longer-duration asset-backed securities, according to a note to investors seen by Bloomberg. 

The $1.1 billion LibreMax Partners Fund, which invests in both corporate and structured products, generated returns of about 10% in 2021. But across markets, gains were harder to come by for investors in the first half of the year, as inflation raged and the Federal Reserve hiked rates. The Bloomberg US Corporate High Yield index dropped 14.2% in the first six months of 2021, and the Bloomberg US Aggregate ABS index fell 3.8%, on a total return basis. 

A LibreMax spokesperson declined to comment. 

Loose money policies have helped fuel outsized financial market gains for 12 years, with the S&P 500 index rising 16% annually from 2009 through 2021, LibreMax co-founder Greg Lippmann wrote in his latest note to investors. That far outpaced overall economic growth, which averaged about 3.6% a year, and it will take time for this mismatch to fix itself. 

“Inflation has upended this easy money dynamic,” Lippmann wrote. “We do not think 12 years of plenty can be offset by six months of lean.”  

Now, the market environment could resemble the early 2000s or even the 1970s, said the note, when risk assets plunged while the impact on the real economy was limited. 

“We believe that should either situation arise, securitized products will outperform,” Lippmann wrote.

To generate returns, LibreMax cut its gross exposure and rebalanced hedges in the second quarter. It cut total exposure to CLOs, and rotated investments in the securities into investment-grade portions. In commercial mortgage bonds, it bought short duration, older debt that didn’t have top ratings. 

LibreMax is ready to scoop up CLOs when they become cheap enough, Lippmann wrote.  

“If CLOs begin to meaningfully underperform the rest of the credit universe, we are prepared to step in as a liquidity provider and increase our allocation, likely alongside an overall increase in gross exposure,” Lippmann said in the note.

LibreMax was co-founded in 2010 by Lippmann, a former Deutsche Bank AG trader known for his bet against subprime mortgages before the 2008 financial crisis. He appears in the book “The Big Short.” 

The New York-based firm manages about $8.6 billion with a focus on structured and corporate credit. It also owns CLO manager Trimaran Advisors.

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