16Rock launches new muni hedge fund

16Rock Asset Management LLC has launched a new hedge fund aimed at using a multi-strategy approach to capture the $4 trillion municipal markets’ recurring opportunities.

The new fund, which launched Saturday and is open to trade, is called the 16Rock Municipal Opportunities Fund LP and will compete in the small universe of municipal hedge funds.

With a primary focus on investment-grade securities, the fund has lower leverage, aims to provide capital preservation, and also uses hedging strategies designed to minimize interest rate, event and directional risk, according to James Pruskowski, chief investment officer.

The firm, established with $4 million of seed capital, is a full-service asset management firm, specializing in U.S. municipal bonds, with a global perspective.

The fund, which will be actively managed, unconstrained, and absolute return driven in all market environments, will benefit from “recurring real return opportunities resulting from the size and complexity of the municipal market,” he said.

It has a target allocation of up to 50% taxable municipal bonds, 25% high-yield municipals, and managed within a duration band of zero to 10 years. 

Agnostic to U.S. tax-exempt income, the fund benefits from operating across all municipal bond structure opportunities, according to Pruskowski.

He believes the fund will benefit from the fragmentation and complexity of the $4 trillion regional-based municipal bond market with many thousands of issuers.

“It will also prosper from the technical dislocation and legislative events routinely driven by supply and demand, and public policy,” he said.

Pruskowski said the fund will use hedging strategies designed to protect principal, and will also have a specialty manager acutely focused on municipal bonds for clients around the world.

Investors, according to Pruskowski, will be attracted to the fund for its favorable fee and liquidity limited partner fund structure, a diversified portfolio of over 100 obligors, with a gross exposure that may be up to 400%, and 300% average portfolio turnover expected. It also has a 475 (f) mark to market election, which permits certain active traders to treat all investment transactions as generating ordinary income or loss. This can offer substantial tax advantages and can streamline accounting for fund managers with an investment strategy centered on high-trade-frequency.

The time is right to launch the new fund based on “generational opportunity in fixed income and municipal bonds, as well as elevated volatility and a peak rating cycle that creates opportunity,” according to Pruskowski.. 

“In addition, the timing is right based on the long-only, mostly buy-and-hold mutual fund industry landscape that routinely creates market dislocation events,” Pruskowski said.

The fund’s timing will also benefit from multiple use cases for municipal bonds around the world, which creates opportunity, Pruskowski said. In addition, he listed the shifting landscape in terms of skilled labor in the industry and a greater focus on low-cost beta products as other timing advantages.

But, the launch is not without challenges, some of which include a low new-issue supply environment, pockets of market liquidity challenges, policy and political shock, and opportunity leading into the next U.S. presidential election, as well as poor performance by traditional industry providers.

However, he said the firm is prepared to overcome those challenges with “a strict focus on risk management, credit, legal, and compliance, as well as having deep experience and relationships across the industry with a differentiated approach.”

“We have a strict selling discipline with a relative value assessment of fundamentals and technicals,” he said, noting that they also boast transparency and constant contact with clients.

Pruskowski will be at the helm of the fund, bringing his experience from years at BlackRock as global chief investment officer for municipal bonds, institutional and wealth management, and his team will include industry experts with a track record over multiple investment cycles.

The short- and long-term investment approach designed around fundamental and technical insight and analysis will also give the fund an edge, according to Pruskowski.

In addition, a multi-strategy approach provides sources of absolute return, he noted.

As far as competing in the industry, Pruskowski said there is a small competitive universe in the hedge fund world, which is advantageous for a new fund.

“It’s a new category for the municipal bond industry targeting old recurring opportunities,” he said.

It will also be technology-efficient and maintain the proper infrastructure to adapt quickly to rapidly changing investment environments, he added.

“The fund also has the added benefit of impact investing, concession opportunities, and a regional-based approach to investing in the U.S.,” Pruskowski said.