Active bond management in less liquid markets

SUMMARY

With today’s heightened uncertainty, qualified investors may be able to access active management via alternatives managers focused on private market opportunities.


  • The weakness in the riskiest elements of credit markets in late 2022 and their rally in January 2023 seem divorced from typical bond fundamentals. Now, demand for new bond issues from traditional buyers has largely disappeared.
  • For high-yield bonds in the public markets, we prefer managers who can evaluate absolute and relative value, and who focus on events that may provide idiosyncratic upside.
  • The largest holders of corporate bonds and syndicated loans – mutual funds, ETFs and collateralized loan obligations – are sensitive to fund flows and the potential for ratings downgrades, which can distort market pricing for impacted securities.
  • These conditions provide a window for hedge funds and private credit managers to buy assets at unusually attractive prices.
  • In environments where public credit markets have been volatile, hedge funds demonstrate the utility of active management. Private credit funds are particularly well-positioned to provide liquidity when companies cannot access capital markets.
  • Alternative fixed income managers can be rewarded for providing liquidity in times of limited capital markets availability, allowing them to evaluate financing solutions across the risk continuum while patiently awaiting the emergence of potential stressed/distressed opportunities.
  • In particular, funds that specialize in credit underwriting, capital strategies and distressed restructuring may be well-placed to add value for investors in 2023 and 2024. With locked up capital, they may exploit wide dispersions between the best and worst performing credit securities.

OUTLOOK

Wealth Outlook 2024

Our global economic outlook for the year ahead

 

Growth will slow in early 2024, but we see no synchronized collapse across the global economy, as many fear. 

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