Credit-focused hedge fund strategies spanning corporate credit, structured credit and convertible arbitrage made hay amidst a sustained positive investment backdrop last month.
Credit-focused hedge fund strategies spanning corporate credit, structured credit and convertible arbitrage made hay amidst a sustained positive investment backdrop last month.
US investment grade credit outflanked high yield and leveraged loans, as volatility derailed global stock markets following the coronavirus outbreak towards the end of January, Man FRM analysts said in a research note this week.
FRM, the funds-of-funds unit of Man Group – the publicly-listed London-based global hedge fund group which runs a range of quantitative, discretionary and fund of funds strategies – observed how corporate credit managers made money on the strength of stronger bank earnings and primary market opportunities.
At the same time, convertible arbitrage strategies also benefited from the renewed equity market volatility.
“Reorg and value gaming equities and commodity-related credits/reorg equities were detractors – driven by the potential impacts from the spread of the coronavirus,” analysts noted.
Most structured credit-focused portfolios – which trade a range of asset- and mortgage-backed securities and collateralised loan obligations – also notched up gains, as securitised products posted stable-to-tighter spreads. Lower-rated CLO tranches in particular continued to outperform other instruments in this sector.
Looking ahead, FRM suggested that some less-liquid areas – such as consumer structured credit – could prove particularly resilient in any forthcoming economic downturn.
“Markets have seen a continued trend of credit curing and improving delinquencies across this sector, as the consumer balance sheets have been supported by home price appreciation, continued low unemployment and low interest rates,” analysts observed, noting that the US consumer is in much better economic health than most US corporates.
“Given the relatively limited supply of new securitised mortgage products, it is tempting to conclude there is possibly more upside for the asset class than in other areas of the credit complex. However, given the scars remain from the global financial crisis, it is likely that structured credit gets caught up in a risk-off move as well, similar to 2015/early-2016, even if the fundamentals remain strong.”
