CQS founder Hintze says credit market 'challenging' - note

LONDON, Aug 10 (Reuters) - Michael Hintze, founder of $12 billion hedge fund firm CQS, has told investors the macroeconomic backdrop for credit markets is "more concerning" than he's seen for some time, despite his funds posting a strong showing in the first half of 2016, according to a note seen by Reuters.

The former banker who founded CQS in 1999, said in his mid-year review that while he still remained "constructive" on credit markets, he was taking a cautious approach to the rest of the year given the potential geopolitical "pot holes" that might lie ahead.

His flagship $3 billion Directional Opportunities Fund was up 13.2 percent in the year to end-July after falling 8 percent during 2015.

Meanwhile the firm's Diversifed Fund was up 5.2 percent, after a 2.6 percent slide last year.

"There is significant volatility and markets are buffeted almost weekly by geopolitical events, and these dynamics are further complicated both by central bank and government intervention," he said.

Hintze said he expected default rates to rise and was focused on investing in credit products with a maturity of less than two years.

He said he favoured U.S (Other OTC: UBGXF - news) . credit over European, preferred high-yield to investment grade and also liked non-conforming residential mortgage-backed securities in Britain.

Looking ahead, Hintze reiterated that there were a broad range of risks to the investment outlook, including the impact of quantitative easing, tensions in the South and East China Seas, Russia and Islamic terrorism.

In addition, he said structural challenges in Europe needed to be addressed in the light of Britain's vote to leave the European Union. Specifically, within the euro zone, he flagged troubles in Italian banking as particularly concerning.

"If a sensible solution (to Italian banks) is not found, I believe there is a risk that contagion could spread far beyond the EU and it could have a material effect on the global banking system. The transmission mechanism here is clear." (Reporting by Simon Jessop and Maiya Keidan; Editing by Greg Mahlich)