Evening Brief – 03.18.24
Credit Demand
Credit-investing hedge funds continue to be the most sought-after strategy by allocators for the second consecutive year, according to the 2024 Hedge Fund Industry Outlook from the prime services hedge funds insights and analytics team at Goldman Sachs.
Credit strategies, including investments in company debt, structured credit, and certain sovereign instruments, remain at the top of the list for capital allocators, despite a rally in both bonds and equities last year, with 44% indicating they intend to increase their exposure and only 3% of respondents intending to reduce it.
“If you had to point to one strategy that’s definitely in favor at this point in time, it’s credit,” Freddie Parker, co-head of prime insights and analytics in global banking & markets, said in an episode of Goldman Sachs’, The Markets podcast.
Long-short credit and distressed credit were the preferred sub-strategies of the previous year. Additionally, between January and November 2023, allocators of hedge fund portfolios experienced an average gain of 6.4%, while the corresponding period in 2022 witnessed a loss of 0.9%.
Hedge funds have typically performed better at times of higher interest rates because they provide lower correlations between stocks and bonds and a broader range of potential investment outcomes, according to the report. This gives fund managers greater opportunities to achieve above-average returns.
The report also highlights a change in the kind of investors who invest in hedge funds. Pension and insurance companies, who were bullish on hedge funds last year, have backed off. Only 17% intend to expand exposure in 2024, down from nearly 66% in 2023.
“The principal driver of this shift is the rise in rates pushing many corporate pensions towards fully funded status — which encourages them to [reduce] risk and move toward liability matching — coupled with the increased viability of fixed income,” authors of the report explained.
“Overall, I think hedge fund sentiment remains very constructive,” Parker said. “The problem is that there is a shortage of liquidity right now. What we’re hearing from investors is they’d like to do more in hedge funds, but there’s not a lot of available cash in portfolios to deploy.”
The survey sought the perspectives of 358 global allocator firms, which oversee over $1 trillion in assets allocated to hedge funds, in addition to 302 prime services hedge fund manager clients of Goldman Sachs, who collectively manage over $1 trillion.