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Alternative Market Briefing

Other Voices: Massive dislocations in the fixed income marketplace creates opportunities for top hedge funds

Wednesday, April 29, 2020

By: Don Steinbrugge, Agecroft Partners

The massive dislocations in the fixed income markets in March caused huge divergence in performance among hedge fund managers with similar strategies. The first quarter selloff affected most fixed income hedge fund strategies, including structured credit, corporate credit, distressed, high yield, CLOs, convertible bonds and relative value fixed income. This divergence in hedge fund performance will drastically transform many managers' competitive positioning.

This real life "stress test" of portfolios exposed those managers who subjected their clients' portfolios to unacceptable risk through excessive use of leverage and/or holding higher risk securities in their portfolios. Many of these managers looked relatively attractive in 2019 when volatility was low and interest rates and credit spreads continued to decline. However, this This reaching for yield strategy exposed their investors to unacceptable tail risk at a time when interest rates and credit spreads were near all-time lows.

Some of these managers, who have recently underperformed, incorrectly believed that diversification in their portfolios would reduce downside volatility in their performance. They forgot the lessons learned after the 2008 market crash when liquidity dried up, causing correlations to rise with broad based sell-offs across most non-treasury fixed income securities. The hardest hit securities were those with less liquidity, longer durations, and ......................

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