Global institutional investors are increasingly turning to fixed income hedge funds and are bullish about returns, with 63% anticipating annual returns of 10% or more, according to a new report commissioned by RBC BlueBay Asset Management.

The study found that while optimism is high despite market uncertainties, there is a disconnect between expectations and past performance. Fewer than half (47%) of surveyed investors actually achieved double-digit returns, while 52% reported gains of 5-9%. This disparity highlights the challenge of balancing return ambitions with market realities.

The research, based on responses from 450 senior investment decisionmakers managing assets ranging from $5bn to over $100bn, found that fixed income hedge funds are now a core part of institutional portfolios. Some 60% of respondents are currently invested in hedge funds, while 84% of those have allocations in fixed income strategies.

The report found several factors underpinning the demand for fixed income hedge fund strategies, including historically strong financial performance (65%) – rising to 84% in Asia and 70% in the US – evolving fee structures (48%) and greater levels of market liquidity (45%). Primary concerns shaping investment strategies meanwhile, include geopolitical tensions (60%), and interest rate policies (58%).

Polina Kurdyavko, Head of BlueBay Emerging Market Debt at RBC Global Asset Management, sees this as a prime opportunity for hedge funds.

“We believe we are in the golden age for fixed income hedge funds. Geopolitical tensions and interest rate policies are creating volatility, but this also presents opportunities for funds that can capitalise on market mispricings,” she said.

As institutions adjust their allocations, the report found that 36% plan to fund hedge fund investments through new inflows, 25% expect to reduce allocations to other alternative strategies, and 42% are considering higher-yielding assets due to macroeconomic trends. Some 61%, meanwhile, plan to evolve their exposure to hedge funds over the next year.