After a series of down years, the pandemic, and a bankruptcy, a hedge fund manager says he’s back to what he’s good at: “plowing into places everyone else is running from.”
by Gary Stern, Institutional Investor
Illustration by Joel Kimmel
On a typically humid day in July, Hans Humes rode his bicycle from Brooklyn to the West Village, where we met at the quintessential Village diner, the Bus Stop Café.
The 57-year-old hedge fund manager, with his salt-and-pepper beard and cycling shirt, looked like anyone you might find having a beer at Farrell’s, a no-frills bar not far from where he lives. He sounds like a trader, too, with his profanity-endowed lexicon.
Greylock Capital Management and its founder have faced hard times, and not because they specialize in distressed debt.
After three consecutive years of losses, the fund saw some of its positions devastated in markets whipsawed in 2020 by the Covid-19 pandemic. Investors began withdrawing money from it. It’s now managing about a third of its $1.1 billion peak.
“Argentina became a crowded trade, and we ended up being a lemming, following the herd instead of setting our own way,” Humes says.
He admits that a partner at Greylock swayed him to diversify. The “style shift” turned into a drift too far from the debt restructuring that had historically driven performance.
“We got destroyed the last two years,” Humes says.
He also admits to mismanaging the press. In February, Bloomberg reported that Greylock had filed for bankruptcy in an effort to get out of the $100,000-a-month lease on its Manhattan office. That’s not exactly what happened, according to Humes. When he tried to restructure the pricey Manhattan lease with his landlord, the partnership that owned the building balked and refused to negotiate. A Bloomberg reporter got a whiff of what was going on and blindsided Humes, he said. “We didn’t go through bankruptcy; they agreed to our terms but had to make it look like they had no choice,” Humes explained to Institutional Investor.
The Bloomberg story tarnished Greylock’s and Humes’s reputation. After the story was published, “it was all damage control,” Humes says.
But none of that has deterred him. Greylock is bouncing back, he says.
The fund has reduced its staff from 21 to ten employees and settled into a less expensive space in Stamford, Connecticut (although Humes is satisfied with working from home in Brooklyn). And it’s back to doing what it did best: It’s up 11 percent so far this year.
“If we can manage countries in distress,” Humes says, “we should be able to manage a company under stress.”
Risk-taking has always been the name of the game for Hans Humes, the president and chief investment officer of Greylock Capital. Why else would the firm handle the restructuring of debt in third-world countries such as Mozambique, Argentina, and the Republic of Congo? Most hedge funds wouldn’t get enmeshed in such restructuring deals — too risky, too messy, and too many traps. But for Humes, it was all in a day’s work, and for many years, he and his firm showed an uncanny ability to turn a profit.
Humes has been a frequent CNBC and MSNBC commentator on buying distressed debt from countries like Argentina and Greece. He’s also restructured the debt of Ivory Coast and is currently investing in Venezuelan debt, considered one of the riskiest investments there is.
Though Humes was raised in Bethesda, Maryland, he ended up living all over the world. His dad, Samuel Humes, a Williams College alumnus, started out managing Baltimore County when Spiro Agnew was governor, before splitting with him. He then secured a job designing governmental systems in Nigeria, beginning his son’s globe-hopping upbringing. He worked in Morocco and Chile before becoming a professor at Queens University in Kingston, Canada, imbuing the younger Humes with an ability to adapt to different cultures.
Those skills have been essential to the hedge fund manager’s success. Indeed, his travels taught Humes a kind of cultural humility. As he sees it, most American finance people doing business in other countries think they have all the answers and end up vexing the local staff. Humes has learned to “look around, listen, and take time. It makes sense to be more culturally attuned and listen more than you talk.”
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After majoring in literature at Williams College and spending some time waiting tables and working in construction, Humes came to New York in the mid-1980s and landed a job at Manufacturers Hanover Corp. Having lived in Mexico and learned Spanish, he gravitated toward debt restructuring. He started working on the Chile restructuring team, then the Philippines, then on to Yugoslavia, and he was on his way.
In 1996, Humes founded Greylock with seed funding from the Catholic church in Ecuador, after having done several debt-for-development conversions with them. Given his cultural understanding, knowledge of finance, and experience overseas, he had a knack for knowing when to invest in distressed debt, much of which was based on timing and entering at the right, often rock-bottom, price.
As Humes describes it, “Country gets in trouble. Everyone panics. They sell, sell, sell. It’s hard to pick a bottom.” He says it’s trickier when debt is being sold for 70 or 80 cents on the dollar, where there’s more to lose. After debt hits 20 cents on the dollar, it’s easier to swoop in when it strikes a natural bottom.
For example, he indicates that he invested in Ivory Coast debt at 11 cents on the dollar and Venezuelan debt at 5 cents.
Covid-19 intensified the difficulties of distressed investing. It “put into stark relief how much work needs to be done to improve public health infrastructure in developing economics,” Humes notes. Moreover, he argues, “structural inequities, such as [with] vaccine distribution, mean that Covid will hold back GDP growth in emerging economies relative to G7 economies through no fault of their own.”
He says that the biggest driver of returns “has been convergence — how countries that are in distress return to stability.” He points out Russia’s return post-1998, Ivory Coast’s comeback in 2009, and Mozambique’s 2019 resurgence.
Humes says success now is all about returning to basics, or, as he puts it: “Buy low and sell high. You can make it sound more complicated, but it’s not.”
Asked to explore what it takes to make money investing in distressed debt, Humes explains that it depends on “experience and anticipation.” And often on relationships. “Distressed investing in emerging markets cannot be done in a black box, solely from a desk in New York or London,” he says.
And distressed investors need to stay one step ahead of the curve. Greylock has been developing an environmental, social, and governance restructuring process, through which it works with countries to restructure their debt to improve governance.
Debt in developing countries has gotten more volatile of late, according to Edward Altman, professor emeritus of finance at NYU’s Leonard N. Stern School of Business. He says that a confluence of factors including economic and political upheaval in several countries, coupled with the devastating effects of Covid-19, have made distressed debt a riskier proposition of late.
Most distressed investors aren’t the primary investor in a country’s bonds but enter the fray later, looking to turn a profit. If they buy the distressed debt for 30 cents on the dollar and flip it for 40 cents, they’ve managed a healthy profit.
Investing in Venezuelan debt is an especially risky bet, Altman says. Venezuela is facing a “humanitarian crisis, where people starve to death, and it has a long history of being in a distressed situation,” he notes.
About Greylock’s financial woes, Altman notes, “Any firm that goes bankrupt, whether it’s a hedge fund or not, has a major blemish on their ability to manage their business.” To extricate itself from its travails, the firm will “have to come up with a new story about what happened and assure investors that it is likely not to happen again.”
Despite the woes that many hedge funds investing in distressed debt have been encountering, Altman insists that “there are winners and losers in any market. Sometimes firms drop out of the market, and the firms that are more diversified prosper.”
Humes is dedicated to ensuring that these distressed debts pay off. Though Venezuela is strewn with dangers for foreigners, Humes has traveled there five times in the past six months and is undeterred by personal fears of kidnappings and other dangers. He says the key is to map out the situation, minimize risk, meet with the right people, and convey that you know exactly where you’re going, and nothing will stop you.
Having boots on the ground is critical in distressed debt investing, he asserts. “You have to go to the country and see how they’re managing everything. Are they clueless or being advised by people with other agendas?” He adds, “I’m going to Venezuela because no one else is there.”
Humes envisions his smaller team as being more focused and nimble than his previous one.
“We had a brief period of drifting, but we learned that following the herd is clearly not for us. So if we stick to what we are good at — plowing into places everyone else is running from — Greylock will do just fine.”