Institutional investors are optimistic about fixed income hedge funds, with 63% expecting annual returns of 10% or higher, according to research from RBC BlueBay Asset Management.
Despite these expectations, only 47% of fixed income hedge fund investors reported earning double-digit returns. In comparison, 52% cited performance in the 5-9% range, according to RBC BlueBay Asset Management, representative of RBC Global Asset Management outside of North America.
Fixed income hedge funds have gained prominence among institutional investors, with 60% currently invested in hedge funds and 84% allocating to fixed-income strategies, according to the researchers.
The research, comprising responses from 450 senior investment decision-makers managing between $5 billion and over $100 billion in assets, highlighted the key factors driving demand. These include historically strong financial performance (65%), evolving fee structures (48%), and greater market liquidity (45%). Notably, 84% of Asian investors and 70% of US investors cited performance as the main reason for investing in these funds.
The inaugural report, ‘Shifting Strategies: How institutions are embracing fixed income hedge funds,’ published in November 2024, examined institutional investors’ views on alternative investment strategies, including private credit, total return, and multi-strategy credit. The research found that 55% of respondents now hold a more positive opinion of hedge funds. 36% of investors shared that they plan to increase hedge fund allocations through new inflows, while 25% intend to reallocate from other alternative strategies.
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Geopolitical tensions, interest rate policies, and volatile equity markets are expected to be key market drivers over the next 3-5 years, according to the report’s findings. Asset class and predictability or volatility of returns are top considerations for investors when allocating to fixed income hedge funds. 42% of investors plan to seek higher-yielding assets based on macroeconomic expectations, with 48% targeting returns of 10-19% from their managers.
61% of institutional investors plan to evolve their hedge fund exposure, while 59% expect to increase allocations to private credit strategies over the next year. As institutional investors continue to navigate market volatility, fixed income hedge funds are poised to play an increasingly central role in their portfolios, shared the asset management firm.
Polina Kurdyavko, head of BlueBay emerging market debt at RBC Global Asset Management, commented: “We believe we are in the golden age for fixed income hedge funds. Geopolitical tensions and interest rate policies continue to be top of mind for investors, and the resulting uncertainty is likely to create volatility in the markets. We believe funds that can play the markets from both the long and short side are particularly well placed to capitalise on the mispricings and inefficiencies created by this volatility to deliver positive returns, regardless of the market direction.”
