(Bloomberg) -- Greg Lippmann, the trader who was immortalized in Michael Lewis’s book “The Big Short,” sees a soft landing by the Federal Reserve as unlikely and is focusing on investments that would perform well in a tougher economic environment or if rates were to rise further.
“We’ve tried to create portfolios that are resilient to either a harder landing or the persistence of higher interest rates, which would surprise a lot of people,” said Lippmann, who is LibreMax Capital LLC’s chief investment officer and managing founding partner, during a Bloomberg TV interview on Wednesday.
Investments poised to do well include partially paid down collateralized loan obligations, which are backed by loans taken out by highly indebted corporations, called leveraged loans, according to Lippmann.
Lippmann also sees value in selectively investing in commercial mortgage-backed securities. The whole sector is “priced for horrible,” creating an opportunity to spot hidden value if you can parse the bonds poised to perform merely decently from those that will perform horribly, Lippmann said.
In “The Big Short,” Lippmann was early to spot a looming crash in the market for residential mortgage bonds during the financial crisis, which cratered when consumer debt tied to houses became unsustainable.
This time around, Lippmann says consumers are in strong shape thanks to government reforms and that it’s corporations that are going to be vulnerable. While consumers have delevered, corporations have taken on more debt, he said, noting that there are more “covenant light” instruments and floating-rate debt in the high-yield corporate bond market than ever before.
“In our view going into the next recession, whenever it may be, on a relative basis consumers are in a better shape relative to corporates than they were in 2008. It’s almost the mirror image of that,” Lippmann said.
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. LibreMax and its CLO platform Trimaran Advisors, which it acquired in 2018, collectively had about $9.5 billion of assets under management as of the end of August.
--With assistance from Charles Williams, Carmen Arroyo, Alix Steel and Dani Burger.
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