BGX: Making All The Right Moves In Today’s Market Environment (NYSE:BGX)

The Blackstone Long-Short Credit Income (NYSE:BGX) is an unusual closed-end fund that income-focused investors can purchase in order to pursue their goals. The fund certainly manages to do pretty well at providing its investors with a high level of income, as its 10.26% yield compares fairly well with most other debt-focused closed-end funds on the market. The fund has very few direct peers, at least publicly traded ones, as this is one of the few closed-end funds that claims to have the ability to use short positions. However, here is how its yield compares to that of a few credit funds offered by other alternative asset managers:

Fund Name	Current Yield
Blackstone Long-Short Credit Income Fund	10.26%
Ares Dynamic Credit Allocation Fund (ARDC)	9.99%
Apollo Senior Floating Rate Fund (AFT)	11.34%
Apollo Tactical Income Fund (AIF)	10.97%
KKR Income Opportunities Fund (KIO)	11.04%

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As we can see, the Blackstone Long-Short Credit Income Fund compares reasonably well to these other funds in terms of yield, but it is not as high as the pure floating-rate fund. This is not exactly surprising because the inverted yield curve today has resulted in long-dated bonds having substantially lower yields than leveraged loans or other floating-rate securities. The Blackstone Long-Short Credit Income Fund also may not use the same strategy as the other funds listed because it is the only one of this group that has the stated ability to take short positions in securities that the fund’s management expects will decline in price.

As regular readers may remember, we previously discussed the Blackstone Long-Stone Credit Income Fund in early December. At the time, the fund was heavily weighted to floating-rate loans and similar short-term securities in contrast to market expectations that interest rates would rapidly decline over the course of 2024. At the time, I suggested that this positioning was pretty solid if the market proved to be incorrect with respect to interest rates. Over the past three months, the market has begun to realize that it probably was wrong about the speed at which the Federal Reserve will reduce interest rates and this fund naturally managed to perform quite well. As we can see here, shares of the Blackstone Long-Short Credit Income Fund have appreciated by 6.97% since the date that my prior article on the fund was published. This was substantially better than the 0.29% gain of the Bloomberg U.S. Aggregate Bond Index:

This is almost certainly going to appeal to any investor, not only those who are focused on maximizing their income from the assets in their portfolios. We can also see that the fund’s shares really started to take off in January and February when it became more apparent that my thesis about the unlikelihood of near-term interest rate cuts could be correct. Thus, the fund’s performance seems to validate the thesis that was presented previously.

However, a simple look at the fund’s share price performance only tells part of the story. This is because the Blackstone Long-Short Credit Income Fund is a closed-end fund. One of the defining characteristics of closed-end funds is that they typically pay out most or all of their investment profits to their investors via their distributions. This is different from index exchange-traded funds that tend to rely upon share price appreciation to deliver their gains to shareholders. This is the reason why closed-end funds tend to have higher yields than most other assets in the market. The payments that the fund makes to its investors represent a real investment return and as such the fund’s investors typically do a lot better than the share price performance alone would indicate. This also means that we need to take the fund’s distributions into account in any analysis of its results. When we do that, we see that investors in the Blackstone Long-Short Credit Income Fund have gained 9.83% since the December 1, 2023, publication date of my previous article on this fund. That is substantially above the 1.17% gain of the Bloomberg U.S. Aggregate Bond Index:

The fact that the fund managed to deliver this level of total return over a period of just over three months is certainly going to be appealing to any potential investor. However, past performance is no guarantee of future results, and it is always important that we look at the fund as it is today in order to get an idea of how it may perform in the future.

As just over three months have passed since we previously discussed this fund, it would be quite logical to assume that a few things have changed. In particular, the fund released its full-year 2023 financial statements that will give us a very good idea of how well it managed to handle the somewhat turbulent credit markets that existed in the second half of 2023.

About The Fund

According to the fund’s website, the Blackstone Long-Short Credit Income Fund has the primary objective of providing its investors with a very high level of current income. This is not particularly surprising considering that this is a fund that invests in debt securities. The website explains the fund’s strategy in great detail:

Blackstone Long Short Credit Income Fund is a closed-end fund that trades on the New York Stock Exchange under the symbol “BGX”. BGX’s primary investment objective is to provide current income, with a secondary objective of capital appreciation. BGX will take long positions in investments which we believe offer the potential for attractive returns under various economic and interest rate environments. BGX may also take short positions in investments which we believe will under-perform due to a greater sensitivity to earnings growth of the issuer, default risk or the general level and direction of interest rates. BGX must hold no less than 70% of its Managed Assets in first- and second-lien floating rate loans (“Secured Loans”), but may also invest in unsecured loans and high yield bonds.

The fact that the Blackstone Long-Short Credit Income Fund invests solely in debt securities makes current income the most logical choice for an investment objective. After all, credit securities are by their very nature income securities. As I explained in my previous article on this fund:

As I have pointed out numerous times in the past, debt securities by their very nature have no net capital gains over their lifetimes. These securities are both issued and redeemed at face value, with the only investment gains over their lifetimes being the regular payments that they make to their investors. These regular payments serve as income, so it makes sense that a fund like this would have current income as its primary objective compared to something else.

The fact that credit securities deliver no net capital gains over their lifetimes does not preclude the potential of earning capital gains from these securities if the fund is willing to trade them. After all, bond prices do move inversely to interest rates, so it is possible to earn some profits by buying bonds and then selling them when interest rates go down. This fund had an 88% annual turnover for the full year 2023 period so that suggests that it is doing a great deal of trading of assets. That is, after all, a higher annual turnover than most debt funds possess. Here is how the Blackstone Long-Short Credit Income Fund compares to its peers in this respect:

Fund	Annual Turnover
Blackstone Long-Short Credit Income Fund	88.00%
Ares Dynamic Credit Allocation Fund	48.34%
Apollo Senior Floating Rate Income Fund	47.20%
Apollo Tactical Income Fund	48.40%
KKR Income Opportunities Fund	58.00%

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Clearly, the Blackstone Long-Short Credit Income Fund is attempting to exploit the fluctuations in asset prices that accompany interest rate changes to a greater extent than its peer funds. This could certainly suggest that the fund is running up higher expenses than its peers, but admittedly expenses are not necessarily the most important thing for investors.

That statement about expenses may be confusing to some readers, as I frequently see comments suggesting that high expenses are always a problem. However, the only real problem with a fund’s expenses is that they create a drag on its performance. At the end of the day, a high-expense fund that manages to deliver high performance is still much better than a low-expense fund that delivers worse performance. All that really matters is the total return that ultimately flows through to the investors. As we can see here, the Blackstone Long-Short Credit Income Fund has managed to substantially outperform the Bloomberg U.S. Aggregate Bond Index and the Bloomberg U.S. Floating Rate Note < 5 Yrs. Index (FLOT) by quite a lot:

As we can see, investors in the Blackstone Long-Short Credit Income Fund have benefited from a 25.20% total return over the past five years, significantly beating both of the low-cost index funds. In fact, it managed to beat both indices by more than 1,000 basis points over the period. The fund’s fees obviously did not hurt its performance over the period relative to the index, although its leverage did cause it to be much more volatile over time.

Unfortunately, this fund’s historical performance has not compared too well to its peers. This chart shows the Blackstone Long-Short Credit Income Fund’s total returns compared to the above funds offered by competing alternative asset managers over the same five-year period:

We can clearly see that the Blackstone Long-Short Credit Income Fund was by far the worst-performing closed-end fund of this grouping over the trailing five-year period once the distributions paid by each of the funds are taken into account. While a fund’s past performance is no guarantee of its future results, this will undoubtedly reduce the appeal of this fund relative to many of its peers.

In the quote from the fund’s website above, it is explicitly stated that at least 70% of the fund’s assets will be invested in floating-rate senior secured loans. The percentage as of the time of writing is significantly higher than this. We can see this here:

As we can clearly see, the fund currently has 87.8% of its assets invested in senior secured loans. We can also see that 5.2% of the fund’s assets are invested in collateralized loan obligations, which also tend to be floating-rate securities. Thus, 93% of the fund’s assets today are invested in securities that have variable interest rates (the 91% shown in the chart above is the result of subtracting the negative cash position as the fund needs to pay interest at variable interest rates on that position). Clearly, this fund’s management is expecting that interest rates will remain high for quite some time, as it would reduce its exposure to floating-rate securities to closer to 70% and purchase junk bonds if management believed that interest rate cuts were on the horizon. I must admit that I agree with the fund’s management in this respect. In a recent article, I made the case that the economic data is currently far too strong to justify interest rate cuts. Indeed, the two most recent inflation reports suggest that inflation is actually getting worse, and the proper course of action is for the Federal Reserve to raise rates further. While I doubt that the central bank will actually take that step, it does seem likely that interest rates will remain at fairly high levels for quite some time. The Blackstone Long-Short Credit Income Fund certainly appears to be well positioned for that scenario right now, which is something that investors in it should be able to appreciate.

Interestingly, the fund seems to be increasing its allocation to floating-rate securities. The last time that we discussed it, the fund had a 15.5% allocation to high-yield bonds and lower allocations to both secured loans and collateralized debt obligations. At the time, it also had a net of 85% of its holdings invested in floating-rate securities. When we consider the dates on the charts shown in both the previous article and above (October 31, 2023, and December 31, 2023), it appears that the fund was unloading bonds during the euphoria of the final two months of 2023. That was a very smart decision in hindsight since it allowed the fund to unload bonds in a falling long-term interest rate environment and thus earn some capital gains, depending on the price that it paid to acquire those bonds that it sold. The fund’s net asset value increased by 4.29% during the final quarter of 2023 so that suggests that it did manage to earn some capital gains as it rotated out of junk bonds and into floating-rate securities.

Leverage

As is the case with most closed-end funds, the Blackstone Long-Short Credit Income Fund employs leverage as a method of boosting the effective yield and total return of the assets in its portfolio above that of any of the underlying assets. I explained how this works in my previous article on this fund:

In short, the fund borrows money and then uses that borrowed money to purchase senior secured loans and junk bonds. As long as the yield that the fund receives from the purchased securities is higher than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the effective yield of the portfolio. As this fund is capable of borrowing money at institutional rates, which are considerably lower than retail rates, this will usually be the case.

It is important to note that the use of leverage to boost effective yields is not as effective today with rates at 6% as it was a few years ago when interest rates were effectively zero. This is because the difference between the rate at which the fund can borrow and the yield that it receives from the purchased assets is much narrower than it once was.

The use of debt in this fashion is a double-edged sword. This is because leverage boosts both gains and losses. As such, we want to ensure that a fund is not employing too much leverage because that would expose us to an excessive level of risk. I generally do not like to see a fund’s leverage exceed a third as a percentage of its assets for this reason.

As of the time of writing, the Blackstone Long-Short Credit Income Fund has leveraged assets comprising 31.23% of its overall portfolio. This is substantially less than the 37.68% leverage that the fund had the last time that we discussed it, which is not especially surprising. As already mentioned, the fund’s net asset value increased by 2.84% since the date of our previous discussion:

While that may not seem like a sufficient increase to reduce the fund’s leverage by such a sizable percentage, it is possible that the fund paid off some of the leverage that it previously had. The fund’s annual report does indeed state that the fund reduced its leverage during the year, although it does not state exactly when the reductions took place. However, the aggregate principal amount borrowed was $77.200 million at the end of 2023 compared to $82.800 million at the start of the year. Thus, the fund clearly did reduce its leverage at some point in the second half of the year, as the aggregate amount outstanding as of June 30, 2023, was $79.800 million. That figure was the number that was used to derive the fund’s leverage the last time that we discussed it as it was the most current figure available.

Thus, what we have here is that the fund both paid down some of its borrowings and increased its net asset value since the time of our previous discussion. Overall, this is quite nice to see as it brings the fund’s leverage down to a similar level as possessed by its peers. The fund’s leverage is also now under the one-third of assets level that we like to see from a closed-end fund. Overall, there seems to be little to worry about here as the Blackstone Long-Short Credit Income Fund is striking a reasonable balance between risk and reward with respect to its leverage.

Distribution Analysis

As mentioned earlier in this article, the primary objective of the Blackstone Long-Short Credit Income Fund is to provide its investors with a very high level of current income. In pursuance of this objective, the fund purchases floating-rate and fixed-rate debt securities issued primarily by below-investment-grade companies. These securities tend to pay very high coupon rates to their owners, especially in today’s high-interest rate environment. The fund collects these coupon payments and combines them with any money that it manages to obtain by exploiting the price fluctuations in some debt securities that accompany interest rate changes in the market. This fund then takes things a bit further and borrows money in order to control more securities than it could obtain simply by relying on its own equity capital. This allows the fund to collect more coupon payments and capital gains and thus boost the total return that it generates on the equity capital. The fund pays out all of the money that it earns from these various methods to its investors, net of its expenses. We might expect that this would result in the fund’s shares also having a very high yield.

This is certainly the case as the Blackstone Long-Short Credit Income Fund pays a monthly distribution of $0.1050 per share ($1.26 per share annually), which gives it a 10.26% yield at the current price. As mentioned in the introduction, this compares reasonably to many of the fund’s peers, although it is not the highest yield around. Unfortunately, the fund’s distribution tends to vary quite a bit over time as it has raised and lowered it numerous times since its inception:

This will almost certainly prove to be a turn-off for investors who are seeking to earn a safe and secure income from the assets in their portfolios. However, it is not exactly unusual for a fund such as this to have a variable distribution. Indeed, the fund’s own documentation states that the distribution will vary from time to time. From the March 2024 distribution announcement:

The Funds declare a set of monthly distributions each quarter in amounts closely tied to the respective Fund’s recent average monthly net income. As a result, the monthly distribution amounts for the Funds typically vary quarter-to-quarter, and shareholders of any Fund should not expect that Fund to continue to pay distributions in the same amounts shown above.

The reason that this is done is because the amount of income that the fund receives from its floating-rate assets varies with interest rates and the basic goal is for it to only pay out its investment profits and keep its equity principal intact. This should ensure that the fund is not paying out more than it can really afford, but we should still investigate it to be sure.

Fortunately, we have a very recent document that we can consult for the purposes of our analysis. As of the time of writing, the fund’s most recent financial report is its annual report which corresponds to the full-year period that ended on December 31, 2023. A link to this document was provided earlier in this article. This is a much newer report than the one that we had available to us the last time that we discussed this fund, which is nice as previously we only had information about the fund’s performance for the first half of 2023. There were two widely disparate markets in the second half of 2023, so it will be nice to see how the fund navigated them. The first of these markets occurred during the summer months, as bond prices declined while long-term interest rates rose because the market was trying to digest the fact that it was wrong about a near-term Federal Reserve pivot and high-interest rates being with us for a very long time. The reverse happened in the final two months of the year, as investors aggressively bid up the prices of fixed-income assets in anticipation of a rapid reduction in interest rates this year. These environments could have caused the fund to experience both gains and losses and this report will give us a good idea of how well it navigated these conditions and delivered profits to its shareholders.

For the full-year period, the Blackstone Long-Short Credit Income Fund received $24,689,003 in interest from the assets in its portfolio. Perhaps surprisingly, it had no investment income from any other source. The fund paid its expenses out of this amount, which left it with $16,070,215 available for shareholders. This was, unfortunately, not enough for the fund to fully cover its distribution, although the fund did manage to get pretty close. Over the twelve-month period, the fund paid out a total of $17,041,796 to its investors. At first glance, this could be concerning as the fund did fail to fully cover its distribution out of net investment income and we normally like to see a fund such as this only paying out its net investment income.

With that said, the fund does have other methods available through which it can obtain the money that it needs to cover the distribution. For example, it might be able to take advantage of the interest rate-driven changes in bond prices to make some capital gains profits by trading these securities. Realized capital gains are not considered to be investment income for tax or accounting purposes, but obviously, they do provide the fund with money that can be paid out to shareholders.

The fund had mixed results at earning money via these alternative sources during the period. It reported net realized losses of $7,329,703 but this was more than offset by $15,691,034 net unrealized losses. Overall, the fund’s net assets increased by $7,389,750 after accounting for all inflows and outflows during the period. Thus, the fund did overall manage to cover its distributions. This does not mean that we do not need to worry about a distribution change though as this fund does tend to change its distributions on a quarterly basis to coincide with the fund’s income.

Valuation

As of March 14, 2024 (the most recent date for which data is currently available), the Blackstone Long-Short Credit Income Fund has a net asset value of $13.38 per share but the shares trade at $12.32 each. This gives the fund’s shares a 7.92% discount on net asset value at the current price. This is a fairly large discount, although it is not as good as the 8.60% discount that the shares have traded at on average over the past month. Thus, it might be possible to get a better price by waiting a little bit, but honestly, the current discount is large enough to justify initiating a position if you want this fund.

Conclusion

In conclusion, the Blackstone Long-Short Credit Income Fund is an interesting credit fund that appears to be making the right moves considering that the current interest-rate environment is likely to persist for longer than many people are currently expecting. The fund has been increasing its allocation to floating-rate securities at the expense of fixed-rate bonds that will probably decline in price if the Federal Reserve fails to cut rates four times this year (the most likely outcome given recent inflation data). The fund’s distribution tends to vary quite a bit from quarter to quarter, but this is reasonable, and the valuation is attractive.

For now, I am maintaining my hold rating on this fund. I cannot blame anyone for buying it, but the fund’s underperformance relative to its peers reduces its desirability somewhat.