Preqin’s Hedge Fund Analyst online service currently tracks 564 single-manager hedge fund managers managing credit strategies hedge funds. The start of 2015 saw Preqin’s restructured strategy classification on Hedge Fund Analyst online service; long/short credit, fixed income, mortgage-backed securities, asset-backed lending strategies and specialist credit have been categorized into a new top-level credit strategies bracket to better reflect the industry and allow users to better benchmark funds.
Long/short credit represents the largest proportion of credit hedge funds (47%), as shown in the chart below, with such managers taking advantage of credit-sensitive securities to produce risk-adjusted, absolute returns for investors. The second largest proportion of credit funds employ a fixed income strategy (25%), followed by mortgage-backed strategies and asset-backed lending strategies, making up 16% and 8% respectively. Specialist credit only constitutes 4% of credit strategies funds; however, the strategy did see its largest ever proportion of overall credit strategies fund launches in 2014 at 10%.
Preqin Investor Outlook: Alternative Assets H1 2015 reports that investors felt that fees (management and performance) are an area of the industry that needs improvement in 2015. It could be argued that credit strategies would be more appealing to investors as they offer the second lowest fees of all top level strategies, with mean management and performance fees of 1.54% and 18.32% respectively. However, credit strategies are not generally suited to short-term investors, imposing an average lock-up period of 11.5 months.
In 2014, credit strategies exceeded the expectations of institutional investors and ranked third among the top-level strategies for institutional investors seeking to increase their allocations in 2015. In line with investor demand, launches for credit strategies funds in Q1 2015 represented 20% of overall fund launches, the highest since Q2 2012. In recent history, this is also the first quarter that credit strategies as a proportion of overall hedge fund launches have exceeded macro strategies, following macro funds falling short of institutional investors’ expectations in 2014.
The Preqin All Credit Strategies benchmark reported 1.41% for the month of February 2015, the highest return for the top-level strategy since January 2013. Credit strategies also show their value as a strategy that can deliver risk-adjusted returns over the longer term, boasting the highest three-year Sharpe ratio (3.6) of all top-level strategies, over twice that of the three-year Sharpe ratio of the Preqin All-Strategies Hedge Fund benchmark (1.6). Credit strategies have also consistently produced positive returns since July 2013, with only two down periods reported in October 2014 (-0.04%) and December 2014 (-0.27%). During this period, 80% of the constituent funds in the Preqin All-Credit Strategies benchmark saw monthly returns between 0% and 1%, demonstrating the consistent gains funds employing this strategy can deliver.
Despite credit strategies offering benefits to investors such as lower fees and risk-adjusted returns, survey results detailed in Preqin Investor Outlook: Alternative Assets H1 2015 reveal that 30% of investors expect the strategy to be the worst performing top-level strategy in 2015. It will be interesting to see if credit strategies can continue to improve on their strong start to the year and overcome poor investor expectations.