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Our Strategic Consulting team’s conversations with managers and investors indicate a consistent sentiment that the Credit cycle is heading into extra innings, as the latest study dives deep into the landscape for Credit hedge funds.

The team’s analysis of performance data on more than 5,000 funds determined that Credit hedge funds have posted attractive absolute and risk-adjusted returns since 2010.

Since the end of the last Credit cycle, culminating with the global financial crisis, Credit hedge funds have steadily gained share of assets under management (AUM) in the overall hedge fund industry. The study examines the evolution and performance of Credit hedge funds in order to understand the key factors that impact performance, as well as the opportunities for hedge fund managers and investors as the credit cycle comes to an end.

A growing share of the pie

Credit hedge funds’ AUM grew at about a 9% compound annual growth rate (CAGR) since 2010. This growth has outpaced the total hedge fund industry and increased Credit’s share of the industry from 12% to 15% since the financial crisis.

Credit Assets, Flows and Returns
Credit Assets, Flows and Returns

Source: HFR, Strategic Consulting analysis

The study also found that Credit hedge funds delivered 5.5% annualized returns versus 4.3% for Multi-Strategy, 4.2% for Equity, and 1.3% for Macro hedge funds since 2010. Credit also outperformed other strategies on a risk-adjusted basis, posting the highest Sharpe ratio since 2000 (0.9) and since 2010 (1.2). Sharpe ratios measure performance of an investable asset compared to a risk-free asset, after adjusting for its risk.

Returns and Sharpe1 by Strategy
Return and Sharpe by Strategy

Source: HFR, Barclays Strategic Consulting Analysis 

Calculated against the 3M LIBOR

The investable Credit universe has also expanded substantially post-crisis, growing from about $10 trillion in 2011 to $13 trillion in 2019. Most of the growth has been driven by the BBB-rated bond market, which saw 10% CAGR over the last decade versus 3% CAGR for the A-, AA-, and AAA-rated securities.

Investable Credit Universe ($tn)
Investable Credit Universe

Source: Bloomberg, Barclays Credit Research, Strategic Consulting analysis

Part of the explanation for Credit hedge funds’ strong performance is their exposure to the High Yield (HY) index, which has consistently outperformed the MSCI World index on a risk-adjusted basis.

Another driver of performance has been the trade-off between returns and liquidity. Of the four major strategies, Macro hedge funds are the most liquid – measured by average time for investors to fully liquidate their investment – and have realized the lowest annualized returns. Conversely, Credit hedge funds are the least liquid and have seen the greatest annualized returns. This pattern also continues among sub-strategies, in general.

For instance, Structured Credit hedge funds on average require 17 months for investors to liquidate versus only 4 months for investors in Macro hedge funds. However, Structured Credit has returned an average of 7.9% annually versus 1.3% for Macro strategies since 2010 – a classic example of the trade-off between risk and reward.

Credit vs. Equity Hedge Funds' Benchmark Capture
Credit vs. Equity Hedge Funds' Benchmark Capture

Source: HFR, Strategic Consulting analysis.

*Credit ex-Structured as it is difficult to define a benchmark for Structured strategies

Late in the cycle, but not game over

While there’s consensus among Credit hedge fund managers that the market is heading towards the end of the Credit cycle, there seems to be little pessimism at this prospect. Certain risks have increased as the Credit cycle goes into extra innings, such as increased price dislocation, looser lending standards and the end of quantitative easing. However, these same risks present opportunities for skilled managers to navigate markets and generate returns.

On the investor side, while there has been some decline in net interest, the study indicates that Credit is still one of the most popular hedge fund strategies. Moreover, investors are also interested in non-traditional and more illiquid Credit products managed by hedge funds.

Net Interest in Credit (BY19 vs. MY19)*
Net Interest in Credit (BY19 vs. MY19)

Source: Strategic Consulting survey results and analysis

*Excluding intermediaries (i.e., FoHFs and Advisors/Consultants)

Important content disclosuresImportant content disclosures

Contact the Strategic Consulting team

If you are interested in reading Taking Credit: Developments in the Credit Hedge Fund Landscape study, which is available to clients of Barclays Investment Bank, or if you would like to learn more about Strategic Consulting services and reports, please contact strategicconsulting@barclays.com.

Learn more about our Strategic Consulting offeringLearn more about our Strategic Consulting offering

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