Hedge funds continue to enter credit, but there are signs of slowing

Credit continues to be a lure for hedge funds.

Credit accounted for 14% of all hedge fund strategies in 2020, up from 12% in 2019, the highest growth rate on record, according to Preqin. Pension funds and private sector foundations are among the largest recipients of these funds.

Sam Monfared, who oversees the research analysis team at Preqin, explained that low interest rates make investors look to alternative credit because these assets and strategies offer potentially higher returns than investment in ordinary corporate and government bonds.

“It was a losing trade,” Monfared said. “Credit hedge fund managers are closing this gap and generating higher returns for portfolios. ”

Credit hedge funds have $ 309 billion in assets under management as of June of this year, according to the Preqin report. The number of such funds reached 2,636 worldwide in August, most of which are headquartered in North America and Europe. Only 5% are based in Asia.

“APAC is a difficult region,” said Monfared. “You may have less return opportunities in Europe or North America compared to Asia, but it’s safer. “

The top ten credit hedge funds with the highest returns include long-short credit, asset-based lending, and other specialized credit funds.

Among the top ten is a specialized credit fund managed by Silverback Asset Management, which generated a net return of 20.97% in the first half of the year. Good Hill Partners Fund, based in the United States, generated a net return of 34.79%.

“If you’re in an environment where there are pockets of opportunity in the market, you want to look to managers who can capture that,” Montared said. “Specialized managers and opportunistic managers are the type of managers who are able to see these inefficiencies in the market and add value to their clients. “

Although credit strategies account for 25% of all hedge fund launches in 2020, Montared said the proportion has been declining since the third quarter of last year. Much of this is because the Federal Reserve and other central banks around the world are pumping liquidity into the market, making it difficult for fixed income managers, even those in alternative credit, to generate excess returns.

“When everything is supported by the market and no one goes bankrupt, it obviously becomes more difficult for these managers to operate in the environment,” said Montared.

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