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Alternative Market Briefing

Other Voices: Are there still opportunities in structured credit hedge fund strategies?

Wednesday, September 06, 2017

By Donald A. Steinbrugge, CFA, Managing Partner Agecroft Partners, LLC

Hedge fund managers focused on structured credit strategies can be simplistically divided into two categories: beta managers or alpha generators. Many investors believe the beta opportunity born out of the financial crisis has substantially run its course. As such, they find risk adjusted returns from structured credit beta managers are not particularly attractive. On the other hand, inefficiencies in the structured credit markets persist, providing opportunities to generate strong, alpha-driven risk adjusted returns relative to other hedge fund strategies.

Beta managers are defined as primarily long biased managers with some leverage. Typically their net exposure will range from 75% to 200%, adding value through security selection with low turnover. Many of these beta managers were founded after the 2008 financial crisis to take advantage of depressed securities prices and double digit spreads above treasuries. These managers were rewarded for adding risk as both interest rates and credit spreads declined from 2009 through 2014, and subsequently control the majority of assets in structured credit hedge funds. It was during this time that structured credit morphed from an exotic niche strategy to a long term core component of many investors' portfolios. Today, many investors believe the "trade" is almost over due to the housing recovery and the potential bottoming out of interest rates and cr......................

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