Investors Are Betting on a Comeback for This Hedge Fund Strategy

Credit strategies were down for most of this year, but the central bank’s recent moves are expected to lead to a rebound in 2023.

Illustration by II

Illustration by II

Credit strategies haven’t had a good run in 2022, but investors are optimistic about its recovery next year.

Forty-one percent of hedge fund investors want to increase their exposure to credit strategies, according to the latest hedge fund report by Preqin. That makes credit the second-most popular strategy after macro, which had 50 percent of investors saying they want to allocate more to the category.

But in contrast to macro strategies, which recorded an annualized return of 6.2 percent, based on data through September, credit strategies were down 6.9 percent annualized over the same period. In fact, 2022 could be the first year after the 2008 financial crisis when the average credit strategy yields negative returns, according to the Preqin report.

One reason why investors have shown increasing interest in credit strategies despite their recent bad performance could be due to the recent moves by the U.S. Federal Reserve. “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, told II 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.”

A recent survey conducted by SigTech also shows that credit has emerged as the most popular hedge fund strategy in the next two years, beating managed futures and multi-strategy, two of this year’s best-performing categories. Daniel Leveau, vice president of investor solutions at SigTech, said the recent movements in the yield curve and credit spreads may have led investors to bet on the outperformance of credit funds in the near future.

According to the Preqin report, close to 40 percent of investors believe the conditions for credit strategies will improve in 2023, making it the second most promising strategy next year. Equity strategies — which lost 18 percent annualized based on September data — topped the list, with just under 50 percent of investors confident that equity conditions would get better.


“In a sense, the Fed has been moving its put further out of the money by design,” the Preqin report said. ”This presents an opportunity for active managers to take advantage of better prices and it positions credit strategies for a subsequent recovery.”