Episode summary
The Golden Age of Absolute Returns? With Davidson Kempner’s Managing Partner and CIO, Tony Yosel...
Money Maze Podcast
· · Guests: Tony Yosel
Summary
Tony Yosel argues that the environment now favors absolute return strategies because higher rates create more dispersion, more idiosyncratic risk, and less crowded competition than the zero-rate years. He says a 10-year rate in the mid-4s is not historically extreme, and that many hedge fund styles should benefit as capital no longer chases every return stream as aggressively.
He is much more cautious on private credit, which he says is really mostly direct corporate lending. In his view, the problem is not the asset class itself but the scale of money flowing into it, the weakening of covenants, and the fact that the market may now be larger than the borrower universe that can absorb it. He thinks the resulting blockages in private equity and private debt could take years to clear because incentives, fund-raising cycles, and sponsor behavior all slow the adjustment.
Yosel also thinks AI has delayed some of the damage that would normally show up in a late-cycle slowdown, especially by supporting U.S. growth and capital spending. At the same time, he warns that this can mask underlying stress in software and leveraged capital structures. Outside the U.S., he sees attractive opportunities in Europe and India, and says global allocators should be realistic about return expectations as private markets mature.
Key takeaways
- Tony Yosel thinks higher-rate markets create a better backdrop for absolute return because dispersion and idiosyncratic risk are higher.
- He says private credit headlines mainly refer to direct corporate lending, where too much capital has chased too few borrowers.
- Yosel warns the unwinding of private equity and private debt blockages may take several years, not months.
- He believes AI capex has propped up the U.S. economy and delayed a more normal late-cycle clearing process.
- He sees opportunity in Europe and India, where pricing, regulation, and market structure can still reward selective capital.
Notable quotes
“I think we're in a golden age of absolute return strategies”
“Just because the cost of capital today is higher doesn't mean the cost of capital is high”
“If everyone's in the same asset class and your asset class ultimately outgrows the size of borrowers that are available to lend to, that's where you can start to have real issues”
“I think it could take a lot longer than people think to work this through because you have to worry about what incentives are, right”
“I do think people are underestimating the duration risk today”
How the episode opens
I think we're in a golden age of absolute return strategies. We discovered fundamentally is that there's much higher dispersion and much higher idiosyncratic risk in higher interest rate markets than lower interest rate markets. Just because the cost of capital today is higher doesn't mean the cost of capital is high.
Having a 10-year rate in the mid fours isn't extraordinary. It's just extraordinary based upon where things were. When you read in the papers about private credit, what you're really reading about is direct corporate lending market.
If everyone's in the same asset class and your asset class ultimately outgrows the size of borrowers that are available to lend to, that's where you can start to have real issues. You've had 10ear cycles in venture capital. You didn't make any money in venture capital in the 1980s and you made very little to no money in the 2000s.
You missed the great funds at the end of the decade that would had Uber or Airbnb in them and stuff along those lines. And so I I think again if you really like your vocation and you like what you're doing, you're going to stick with it even when the times are a little tougher. In the world of global credit and invent driven investing, there are few firms that have been both quietly competitive while simultaneously successful and longstanding.
Davidson Kempner may not be a household name, but they've navigated cycles by identifying opportunities which typically emerge from dislocations and complexity when the power between borrowers and lenders shifts. It's been said of Tony that he prefers discipline over drama. And given emerging crosscurrens, it seemed a good time to hear the perspective of where the next phase of the global credit cycle may be headed and where capital may be rewarded or punished.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- global credit
- private credit
- economic cycle assessment
- private equity and private debt
- absolute returns
Companies and tickers mentioned
- Davidson Kempner
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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