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    GLOBAL MARKETS | 3 POINT PERSPECTIVE | INNOVATION EDGE

    The credit hedge fund landscape: 3 trends driving growth and opportunity

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    Contributors: Roark Stahler, Siddhartha Agarwal, Ermanno Dal Pont & Kate Holleran
    06 Sep 2023

    As interest in credit hedge funds continues to thrive, our Prime Services & Strategic Consulting Team examined how funds have grown over the past decade. They also explored the challenges and opportunities managers foresee and where investor preferences lie.

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    The credit hedge fund landscape: Seeking growth and opportunity

    If you would like to read the full Credit Hedge Fund survey or discuss the findings with our Strategic Consulting Team, please contact strategicconsulting@barclays.com.

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    Our Prime Services & Strategic Consulting team polled 229 investors representing $6.5 trillion in total Assets Under Management (AUM) and $767 billion in hedge fund AUM.

    Of the investors surveyed, ~37% were private investors; ~31% were institutional investors; and ~31% were intermediaries. The sample included investors across all size categories, from less than $1 billion to more than $10 billion, with a potential bias towards Americas and those who invest directly in hedge funds

    Here are three key findings from the survey:

    1. Credit hedge funds underline their important role in the wider industry

    Credit hedge funds represent ~15% of the total hedge fund industry with $550 billion in AUM. They typically deploy capital across one of four key strategies: Credit Long/Short, Distressed, Structured and Credit Multi-Strategy. Overall AUM for credit hedge funds has grown by ~5% over the last 10 years, largely driven by performance as opposed to flows.

    In terms of performance, although credit hedge funds have delivered lower average returns than their discretionary equity counterparts over the past 10 years, the alpha generated over the period for both has been quite comparable (2.5% for credit versus 2.6% for discretionary equity). On a risk adjusted basis, even the Sharpe ratios were quite similar (0.7 for credit versus 0.8 for discretionary equity), which is the result of lower underlying volatility for credit hedge funds. Also, it is noteworthy that the distribution of returns and alpha was much more consistent for credit hedge funds compared to discretionary equity HFs.

    2. Growth driven by non-traditional products

    When looking at growth, large credit shops – those with over $10bn of AUM according to HFM – have grown twice as quickly as the overall credit hedge fund industry.

    Over the last 10 years, a significant portion of the growth for credit hedge fund managers can be attributed to growth in non-traditional hedge fund products. These types of products include drawdown vehicles (e.g., Opportunistic, Distressed), Private Credit, Long Only, and CLO products. Not surprisingly, the analysis uncovered more than half of investors that allocate to credit hedge fund products also allocate to these type of drawdown or long only products offered by the credit hedge fund managers.

    Drawdown vehicles have grown at a CAGR of 25%+ as managers have looked to capture more illiquid opportunities. This unsurprisingly is driven by investors’ greater interest in allocating to private credit, direct lending, real estate, and other less liquid areas of the credit world relative to “pure” credit hedge fund products for most of the past 10 years.

    3. Investor are keen for further allocations

    Coming out of their YE2022 Outlook, the team found significant investor enthusiasm for credit hedge funds, which appears to have been sustained at the 2023 mid-year mark. There was little change in investor interest across the various strategies. About 85% of investors surveyed have allocations to at least one credit hedge fund and most plan to broaden their exposure over the course of the year.

    Of the investors planning allocations to credit hedge funds, about 50% will do so by reducing investments in other hedge fund strategies. Additionally, around two thirds of investors prefer allocating directly to dedicated credit hedge funds in comparison to allocating to multi-strategy funds when they look to get credit exposure.

    Although credit hedge fund managers have been less focused on marketing to Private Banks and Funds of Hedge Funds (FoHFs), it appears those investor groups are the most likely to make allocations in the near term. The lower net interest in credit strategies from Pension/SWF/Insurance stems from ~20% of them planning to redeem from credit, which is higher than any other investor type.

    Findings portends growth for credit hedge funds

    Today, credit hedge funds represent a significant slice of the hedge fund industry. In the turbulent times experienced since the pandemic began, the survey appears to reveal a growing number of investors seeking to increase their allocations to credit hedge funds in the near term.

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    About the analysts

    Roark Stahler

    US Head of Strategic Consulting

    Mr. Stahler is the US Head of Strategic Consulting at Barclays. Mr. Stahler joined Barclays in 2008 as a member of the Strategy team working on various projects across the Investment Bank. Prior to joining Barclays, he worked as a consultant for McKinsey & Company, advising Asset Managers and other financial institutions as well as several other client types. Mr. Stahler holds an MBA as well as a BA from the Stern School of Business at New York University.

    Siddhartha Agarwal

    Vice President, Barclays Capital Solutions Strategic Consulting

    Mr. Agarwal is a Vice President on the Barclays Capital Solutions Strategic Consulting team, which he joined in 2022. Prior to joining Barclays, he worked in the Group Strategy and M&A team at Westpac Bank in Australia, and as a consultant for McKinsey & Company advising Asset Managers and other financial institutions. Mr. Agarwal holds an MBA from Tuck School of Business at Dartmouth and a Bachelors from Indian Institute of Technology.

    Ermanno Dal Pont

    Managing Director, EMEA Head of Capital Solutions

    Mr. Dal Pont is responsible for the Barclays Capital Solutions team in Europe and the Strategic Consulting team globally. Mr. Dal Pont joined Barclays in 2010 from Prudential PLC, where he was Head of Strategic Projects. Prior to Prudential, he was at Lehman Brothers, first in the Strategy and Corporate Development Group, and then in the Principal Investing division. Mr. Dal Pont spent his first six years of his career as a consultant for McKinsey & Company, advising Asset Managers and other financial institutions. Mr. Dal Pont holds an MBA from Columbia Business School and a degree in Economics from Bocconi University, Italy.

    Kate Holleran

    Managing Director, US Head of Capital Solutions

    Ms. Holleran is the US Head of Capital Solutions at Barclays. She joined Barclays in 2008 from Lehman Brothers, where she was part of the Capital Introduction team in the US. She began her career in Lehman Brothers Europe where she spent four years as a product controller supporting the equity finance business. Ms. Holleran received a degree in Business and Economics from the University of Dublin, Trinity College. She holds a designation from the Chartered Institute of Management Accountants (CIMA) and is a Chartered Alternative Investment Analyst (CAIA).

    Will Church

    Analyst, Barclays Capital Solutions Strategic Consulting

    Mr. Church is an Analyst on the Barclays Capital Solutions Strategic Consulting team, which he joined in 2023. Prior to joining Barclays, he worked as a Business Strategy Consultant at NTT DATA. Mr. Church holds a BA in Management from Leeds University and a CFA Investment Management Certificate.

    Andrew Zaback

    Analyst, Barclays Capital Solutions Strategic Consulting

    Mr. Zaback is an Analyst on the Barclays Capital Solutions Strategic Consulting team, which he joined in 2023. Mr. Zaback holds a BA in Finance from the University of Notre Dame.

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