The survey from the International Association of Credit Portfolio Managers shows a significant change in the sentiment of credit managers on the direction of credit spreads. The diffusion index which ranges between 100 and -100 shows that the increase in negative sentiment has moved significantly downward. This decline is occurring even with corporate and high yield indices showing some tightening this last month. The survey was conducted in June, but the tilt is strong. This bias should be included in any portfolio adjustments.
Think about credit risk premiums relative to other risk premium alternatives. If investors would like to acquire excess returns, they should be generated through investments in other risk premium that are not showing the same negative tilt.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.
All hedge funds are not created equal as the return box chart shows for the post Financial Crisis period. There is a significant amount of dispersion across hedge fund styles. Over the period 2009-2018, the difference between the best and worst hedge fund category is almost 7 percent after we account for global equities and bonds.
The attraction to private equity and other less liquid alternatives is clear from the Guide to Alternatives by JP Morgan Asset Management. The return profile is much higher for private equity and debt funds than more liquid alternatives and global bonds; however, the dispersion in returns is multiples higher than what can be expected from other public categories.
