- Advertisement -
- Advertisement -

Related

An oasis of yield in the NIRP desert

Industry Report

- Advertisement -

Stockholm (HedgeNordic) – We incessantly hear about the trillions of sovereign and corporate debt with negative yields, but this relates to sovereign, and some investment grade corporate, credit, mainly in Europe and Japan. We hear much less about the trillions of dollars of corporate and asset backed securities, and associated structured credit, that still offer positive yields of roughly between 1% and 7% (or possibly much more for the junior tranches of structured credit vehicles, naturally with commensurately higher risk).

Additionally, there is plenty of emerging market sovereign debt paying yields comparable to developed market corporate and asset backed debt. Headline yields can be enhanced by capital appreciation from spread compression, which, all else being equal, happens automatically as investors ‘roll down’ upwards sloping yield curves. Leverage can also be used to augment returns.

For long-biased, long-only, or buy and hold investors, providing default losses can be contained, unleveraged returns from alternative credit are respectable while inflation and risk free interest rates remain subdued. Some credit assets offer a floating rate yield that should track increased interest rates. Hence many of the largest family offices, and tier one institutions, are actively allocating to – and increasing allocations to – a range of alternative credit asset classes and strategies, according to surveys by Prequin.

Investment consultants Willis Towers Watson define ‘alternative credit’ to be high yield corporate debt, bank loans, emerging market debt and structured credit. A chart showing the relative sizes of different parts of the credit market appears below.

screen-shot-2016-09-26-at-11-42-23

Willis Towers Watson claims that “alternative credit represents over 25% of the global credit universe; yet Towers Watson clients have only invested 8% of their total credit portfolios into alternative credit and less than 1% into illiquid credit”. It seems that many allocators are still very much “underweight” of alternative credit.

Institutional investors can access credit, and alternative credit, in various ways: ETFs, index funds, long only funds, absolute return funds, UCITS hedge funds, and offshore hedge funds. Passive, or index tracking, investing approaches have become very popular in equity markets but remain less so in credit. When credit indices can contain thousands, or tens of thousands, of issues, replicating index performance is not a straightforward task. Indeed, some high yield ETFs (exchange traded funds) seem to have lagged behind high yield credit indices by a massive margin over the past few years. Part of the problem is that offering intra-day liquidity is not well aligned with the widely documented, and deteriorating, liquidity conditions in many parts of the credit markets. This problem may be exacerbated for the largest ETFs. By contrast active funds with disciplined capacity ceilings, and fund liquidity terms appropriately aligned with portfolio liquidity, are better equipped to navigate liquidity conditions. UCITS funds are widely used for more liquid credit strategies, but do not always have enough flexibility in terms of instrument types for all types of hedge fund strategies.

This article was written for the HedgeNordic Special Report on Fixed Income Strategies.  You can view the the full article on pages 16-19, here: https://hedgenordic.com/wp-content/uploads/2016/09/FI.pdf

 

Picture: (c) Saida-Shigapova—shutterstock.com

Subscribe to HedgeBrev, HedgeNordic’s weekly newsletter, and never miss the latest news!

Our newsletter is sent once a week, every Friday.

HedgeNordic Editorial Team
HedgeNordic Editorial Team
This article was written, or published, by the HedgeNordic editorial team.

Latest Articles

Rising Adoption of Quantitative Investment Strategies Among Nordic Investors

From a high-level perspective, there is a clear trend of increasing adoption of quantitative investment strategies (QIS) among Nordic institutional investors, either through the...

EU Plans Stress Test for Hedge Funds and Non-Bank Firms

European regulators are planning a stress test to identify vulnerabilities beyond the traditional banking sector, focusing on less regulated entities such as hedge funds,...

ALCUR Fonder Continues Hiring Spree

Following two earlier additions this year, ALCUR Fonder continues to expand its portfolio management team at a notable pace. The Stockholm-based hedge fund boutique...

Nordic Private Markets Modernize with Data-Centric Trade Lifecycle Automation

By Anders Stengaard Jensen at Indus Valley Partner: In recent years, asset managers in Nordic countries have accelerated efforts to modernize trade operations, particularly...

Norwegian Hedge Fund Industry Sees Major Boost with New Launch

The Swedish and Danish hedge fund industries remain closely matched in size, with Denmark recently edging ahead of Sweden. While still less than half...

Atlant Funds Hold Up in May Despite Mistimed Market Call

Macroeconomic and market forecasts are notoriously difficult, even for experienced hedge fund managers. What matters more than being right, however, is ensuring that incorrect...

Allocator Interviews

In-Depth: High Yield

Voices

Request for Proposal

- Advertisement -
HedgeNordic
Privacy Overview

This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.