The power of credit hedge funds - Good underlying returns

Credit hedge funds have provided better return to risk profiles than macro, equity, and multi-strategy hedge funds for both the last twenty years and the last decade as measured by the researchers at Barclays. It can be argued that there are more inefficiencies in credit markets versus equity markets and this has allowed active investors to generate strong risk-adjusted gains. The strategies used by credit funds are often similar to what are used in other asset classes; value, quality, carry, and volatility, so the focus has to be on factor dispersion that translates to higher returns.

The ability of these funds to capture returns and information ratios relative to a benchmark is high. The capture ratios are similar to or better than what is found for equity hedge funds. Credit hedge funds have benefited from falling rates and a good economic cycle, but performance has been good on relative basis.

The majority of bond buyers may be driven by motives different from hedge fund profit maximizers who are only interested in total return. This may allow credit hedge funds to product strong returns. This also suggests that the performance gain may fall with added players in the market; nevertheless, the effective gains suggest a close look at these alternatives.