Hedge Funds Continue Their Move Into Credit, But There Are Signs of a Slow Down

The number of hedge funds with active credit strategies has been on a steady rise for the past six years, according to data from Preqin.

Nathan Laine/Bloomberg

Nathan Laine/Bloomberg

Credit continues to be a lure for hedge funds.

Credit represented 14 percent of all hedge fund strategies in 2020, up from 12 percent in 2019, the highest growth rate ever, according to Preqin. Private sector pension funds and foundations are among the biggest allocators to these funds.

Sam Monfared, hedge fund and private debt specialist at Preqin’s Research Insights, explained that low interest rates are driving investors to alternative credit because these assets and strategies offer potentially higher returns than investing in plain-vanilla corporate and government bonds.

“It’s been a losing trade,” Monfared said. “Credit hedge fund managers fill that gap and generate higher returns for portfolios.”

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

“APAC is a challenging region,” Monfared said. “You might have fewer opportunities in terms of returns in Europe or in North America versus Asia, but it’s more secure.”

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

Among the top ten is a specialist credit fund managed by Silverback Asset Management, which generated a 20.97 percent net return in the first half of the year. U.S.-based Good Hill Partners Fund generated a 34.79 percent net return.

“If you are in an environment where there are pockets of opportunities in the market, you want to go to managers that are able to capture that,” Monfared said. “Specialist managers and opportunistic managers are the type of managers that are able to see these inefficiencies in the market and add value to their clients.”

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

“When everything is supported by the market and nobody is going bankrupt, obviously it becomes harder for these managers to operate in the environment,” Monfared said.