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Hedge Funds with Credit Strategies taking investors by storm
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Hedge funds investing in credit are in demand
Asset allocators are, for a second year in a row, more interested in hedge funds that invest in credit than in any other strategy.
The demand for credit hedge fund strategies (which include the trading of assets like company debt, structured credit, and some sovereign instruments) comes after both bonds and stocks rallied last year, according to the Goldman Sachs Prime Services Hedge Funds Insights and Analytics team's 2024 Hedge Fund Industry Outlook.
Capital allocators reported an average gain of 6.4% from their hedge fund portfolios between January and November 2023, up from a 0.9% loss in the same period in 2022. The report includes a survey of responses from 358 allocator firms globally, who control more than $1 trillion of assets allocated to hedge funds, as well as responses from 302 hedge fund managers who are clients of Goldman Sachs' Prime Services business and collectively manage more than $1 trillion.
Some 44% of investors plan to increase their exposure to hedge funds with a credit strategy this year and only 3% plan to decrease it. As in the previous report, distressed company credit and long-short credit (a strategy of betting on appreciation as well as depreciation, often including hedging) were the most sought-after sub-strategies for hedge funds.
Demand for Asia-focused hedge funds peaked in 2021, with almost half of allocators surveyed expressing interest in increasing their exposure to the region. Now it's the least sought-after, falling behind Europe and North America. Interest has increased slightly for Japan and pan-Asia strategies at the expense of demand for China, which continues to decline.
Despite positive returns (on average) in 2023, hedge funds underperformed traditional 60/40 portfolios (which allocate 60% of funds to S&P 500 stocks and 40% to 10-year US Treasury bonds) by the widest margin in since 2000. Hedge funds came into the year defensively positioned and struggled to keep pace.
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