Credit Strategies Hedge Funds Attract Investors Looking for Strong Risk-Adjusted Performance

by Michael Brown

  • 23 Apr 2015
  • HF

Q1 2015 saw the proportion of hedge fund managers launching hedge funds employing a core credit strategy increase from 8% and 6% in Q3 and Q4 2014 respectively, to 20% of all new hedge funds launched in the first quarter of 2015. This demonstrates the increase in opportunities hedge fund managers have experienced through this strategy. This blog looks at investors with a preference for allocating to credit strategies hedge funds using Preqin’s Hedge Fund Investor Profiles online service.

Fund of hedge funds managers represent the largest proportion (22%) of investors with a preference for credit strategies hedge funds, as illustrated in the chart below, closely followed by foundations (21%). Other investors with an appetite for credit strategies hedge funds are private sector pension funds (17%) and endowment plans (11%). Public pension funds (8%), wealth managers (4%) and insurance companies (4%) together with all other investors (13%) make up the 2,003 institutional investors in credit strategies tracked by Preqin.

One reason for the appeal of credit strategies hedge funds could be their proven ability to deliver consistent returns and risk-adjusted performance over the longer term. As noted in a previous blog, Preqin saw that hedge funds employing credit strategies posted a favourable three-year Sharpe ratio compared to all other top-level strategies. Moreover, as of 31 March 2015, the Preqin All-Credit Strategies Hedge Fund benchmark generated +9.14% over three years compared with +7.86% for the overall hedge fund industry for the same period.  

These investors seek opportunities for credit strategies hedge funds worldwide: 77% seek exposure to North America, 50% to Europe, 42% to emerging markets and 39% to Asia. However, only 6% seek any specific exposure to South America, and only 3% to greater China.

Texas County & District Retirement System, for example, allocated $300mn to Och-Ziff’s Credit Opportunities Domestic Partners Fund. This hire consolidated the US public pension fund’s $6.5bn hedge fund allocation, or 25% of its total assets.

An investor survey undertaken at the end of 2014 for the 2015 Preqin Global Hedge Fund Report revealed that 27% of investors expect to increase their exposure to credit strategies hedge funds and 64% plan to maintain their current exposure to the strategy over the course of 2015. This suggests that there is a significant demand for credit strategies among investors, one that hedge fund managers are inclined to meet. Given credit strategies hedge funds’ stable, consistent performance over the long term, it will be interesting to see how investors will continue to target the strategy in the future.

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