Global institutional investors are feeling bullish about the return potential from fixed income hedge funds, according to research commissioned by RBC BlueBay Asset Management. The report revealed that nearly two-thirds of global institutional investors (63 per cent) expect annual returns of 10 per cent or higher from fixed income hedge funds.
However, the firm writes that in contrast to investors’ expectations looking forward, fewer than half (47 per cent) of fixed income hedge fund investors surveyed reported having earned double-digit returns. Fifty-two per cent of investors said their annual fixed income hedge fund performance ranged between 5-9 per cent.
Fixed income hedge funds have become mainstream among global institutional investors as they seek higher yields without liquidity, the firm says. Of those who responded to the survey report, 60 per cent are currently invested in hedge funds, and of these, 84 per cent are allocated specifically to fixed-income strategies.
Comprising responses from 450 senior investment decision-makers from asset owners across the US, Europe, and Asia managing assets of between USD5 billion USD and more than USD100 billion USD, the report found several factors underpinning the demand for fixed income hedge fund strategies. These include historically strong financial performance (65 per cent) – rising to 84 per cent in Asia and 70 per cent in the US – evolving fee structures (48 per cent) and greater levels of market liquidity (45 per cent), the firm says.
In November 2024, the inaugural report entitled ‘Shifting Strategies: How institutions are embracing fixed income hedge funds’ surveyed institutional investors’ perceptions and intentions regarding alternative investment strategies including private credit, total return, and multi-strategy credit.
In the case of hedge funds, 55 per cent reported that their opinion of these strategies has become more positive. When asked about plans for their hedge fund allocation in the year ahead, more than a third (36 per cent) stated that they plan to fund this through new inflows while a quarter (25 per cent) plan to decrease their allocations to other alternative strategies.
Commenting on the findings, Polina Kurdyavko, a hedge fund manager and Head of BlueBay Emerging Market Debt, at RBC Global Asset Management, said:
“We believe we are in the golden age for fixed income hedge funds. Geopolitical tensions and interest rate policies continue to be top of mind for investors, and the resulting uncertainty is likely to create volatility in the markets. We believe funds that can play the markets from both the long and short side are particularly well placed to capitalise on the mis-pricings and inefficiencies created by this volatility to deliver positive returns, regardless of the market direction.”
Other highlights include:
Geopolitical tensions (60 per cent), interest rate policies (58 per cent) and highly volatile equity markets (48 per cent) were identified by investors as the three main factors they think will impact fixed income in the next three to five years.
Asset class (69 per cent) and predictability/volatility of returns (59 per cent) are the two priority factors for investors when assessing potential allocations investments into fixed income hedge funds.
42 per cent of investors plan to consider higher yielding assets because of macroeconomic expectations for the year ahead, with 48 per cent expecting target returns of between 10 per cent-19 per cent from their managers.
61 per cent of institutional investors plan to evolve their exposure to hedge funds and 59 per cent to private credit (e.g. specialist situations, securitised credit, distressed debt) over the next 12 months.
