Credit hedge fund managers are enjoying a surge of new investment from pension funds seeking steadier returns and a refuge from equity market volatility.
Although quantifying the uptick is not possible, the interest in credit hedge funds stems from a widespread move by U.S. pension funds out of equities and into fixed income — especially high-yield bonds and credit hedge funds — and other alternative asset classes, consultants said.
The trend is swelling the coffers of credit hedge fund managers such as long/short credit specialist Saba Capital Management LP, which experienced a 71% increase in assets to $1.5 billion between April 1 and Oct. 1.
Diversified credit specialist CQS (UK) LP added $1 billion in net inflows between Jan. 1 and Sept. 1, to bring assets to $8 billion.
Most of the firms' asset growth came from institutional investors, especially U.S. pension funds. Those moving from hedge funds of funds to direct investments are among the most common new investors, said Mandy Mannix, global head of sales and marketing at CQS, London.
“We're really seeing credit being established as a differentiated hedge fund approach and over the last 12 months, we've seen the request for information about credit strategies go from seldom to regular,” Ms. Mannix said.
The source of the demand for credit strategies is “a strong shift by institutional investors to credit strategies from equity. Much of the money moving out of stocks is going into long-only credit approaches, but if an investor is making a hedge fund allocation and doing that through direct investments, it's likely to go into credit funds,” said Patrick Adelsbach, a partner and head of event-driven and credit hedge fund manager research at consultant Aksia LLC in New York.
The reason for the shift is a “nervousness about equities,” Mr. Adelsbach said, a sentiment echoed by other sources.
“Pension fund CIOs are facing a wall of fear ... Many want to park their assets in a safe place and make a reasonable 7% to 8% return annually while they wait for better times. That means credit, specifically long/short credit hedge fund managers. These investors are likely the driver of the recent flows into fixed-income markets,” said Vidak Radonjic, managing partner, The Beryl Consulting Group LLC, Jersey City, N.J.
“There was a lot of money that went into liquid credit approaches that were focused on exploiting the post-crisis recovery phase in the first couple of quarters of 2009,” said Stephen Siderow, founder and president of credit hedge fund firm BlueMountain Capital Management LLC, New York. BlueMountain's assets totaled $4 billion as of Aug. 31.
“The investment growth phenomenon in 2010 is more related to pension funding challenges as they stare their 8% assumed rate of return in the face,” Mr. Siderow said.