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Credit Hedge Funds Poised for Comeback

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Credit-focused hedge fund strategies faced an extraordinarily challenging environment so far in 2022 as credit markets sold off significantly. Despite the underwhelming performance, investors plan to increase their exposure to credit strategies amid a more conducive market environment for active managers.

According to a SigTech survey of 119 institutional investors, two-thirds of respondents plan to increase their allocation to hedge funds in the next two years. Credit strategies have emerged as the most popular strategy category, with 40 percent of respondents indicating they expect to increase their exposure to this strategy group. Managed futures and multi-strategy followed in popularity, with 32 percent and 31 percent of respondents planning to increase allocations to these two strategy categories. The survey was conducted from October 28 to November 12, where half of the respondents are based in North America, 42 percent are based in Europe and the rest are from Asia.

“I’m not surprised that managed futures and multi-strategies were number two and three, because they’ve been doing well,” says Daniel Leveau, vice president of investor solutions at SigTech. “Credit, for me, is hard to explain,” he acknowledges. Credit strategies lost 8 percent on average year-to-date through the end of October, according to eVestment. Similarly, fixed-income-focused funds within the Nordic Hedge Index lost 8.9 percent year-to-date through the end of November. “There are opportunities [where]investors believe hedge funds can profit from the movements in the yield curve and credit spreads,” according to Leveau.

“There are opportunities [where]investors believe hedge funds can profit from the movements in the yield curve and credit spreads.”

A survey by Preqin in November also finds increasing investor interest in credit strategies. According to Preqin’s Global Report 2023 based on a November survey, 41 percent of hedge fund investors want to increase their allocation to credit strategies, the second-most popular strategy category after macro. Macro strategies, however, gained 4.5 percent in the first three quarters of 2022, compared to an average loss of 5.2 percent for credit strategies, according to Preqin.

“The good news for [credit strategies]is that the central bank is stepping away from the markets,” Sam Monfared, vice president of research at Preqin, tells Institutional Investor in an interview. “They are not buying bonds anymore… When prices are set by the market and are not significantly influenced by the central bank, [credit managers]can comfortably rely on [their]valuation models.”

“The good news for [credit strategies]is that the central bank is stepping away from the markets.”

According to the Preqin report, about 40 percent of investors believe the conditions for credit strategies will improve in 2023. Credit strategies represent the second most promising strategy category next year after equity strategies. “In a sense, the Fed has been moving its put further out of the money by design,” writes the Preqin report. “This presents an opportunity for active managers to take advantage of better prices and it positions credit strategies for a subsequent recovery.”


Photo by Nicholas Cappello on Unsplash

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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