The extreme volatility and unprecedented uncertainty precipitated by the past year’s events have seen investors focus shift from yield hunting to one of capital preservation. Though the current situation could morph into one which is even more challenging, the widening of credit spreads is creating opportunity in the investment grade credit space.
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The extreme volatility and unprecedented uncertainty precipitated by the past year’s events have seen investors focus shift from yield hunting to one of capital preservation. Though the current situation could morph into one which is even more challenging, the widening of credit spreads is creating opportunity in the investment grade credit space.
“The volatility could increase and the geopolitical conflict in Ukraine could escalate to an unprecedented crisis,” warns Ygal Cohen at ASG Capital, “The inflation could not slow down as quickly as expected and be elevated for a longer period of time. The supply chain disruption could persist and pose challenges if it lasts.”
Although these potential scenarios have mainly been priced, ASG Capital observed the widening in credit spreads, which creates opportunities in an investment grade environment with a potential absolute yield and capital gains going forward.
Should the market environment be calmer than expected, with interest rates and spreads more settled, investor visibility would return and the liquidity that comes with it would do so to. “There is a lot of investable cash waiting on the sidelines and looking to benefit from extremely high yield returns in the fixed income market,” says Ygal Cohen.
ASG Capital’s investment style has been focused on risk management. Ygal Cohen outlines: “For us, it has been a ‘tale’ of caution, having navigated through numerous challenging fixed income conditions in the past. Our risk/reward model has always been balanced. We look at assets based on the absolute return potential weighed against the macro and microenvironment which could impact them.”
Further, it is critical to keep all options open, to adjust the investment positioning to a changing financial context.
“We believe investors will be increasingly sensitive to this defensive, nimble, and opportunist approach,” notes Ygal Cohen, “This is likely to encourage a move towards more ‘actively managed’ and balanced investment solutions rather than passive ones which are not necessarily very easily adapted to a changing world and new financial paradigm.”
In this volatile and tumultuous environment, the quality of the individual hedge fund will be crucial when making investment decisions. Ygal Cohen identifies the importance of risk management being placed at the forefront of any investment allocation, particularly in the current environment: “Hedge funds can create a great deal of value in uncertain times. This assumes a careful use of leverage. It also presumes a liquid asset environment to roll out an investment strategy and materialise the value being created from it.”
