Lower volatility and absolute return strategies to gain traction in credit markets, Fitch

Credit markets will become less directional in the coming months and short duration, lower volatility and absolute return strategies with more performance contribution, from bond picking, will gain traction according to Fitch Ratings.

Low growth and sustained net inflows of €228bn year to date have provided a supportive environment for the credit asset class over the past three years.

“Investors are looking for downside protection and credit returns that are less dependent on market direction, as they are seeing less potential for credit returns based on long-only strategies, at this point in the cycle,” Fitch said.

For this reason, strategies that can take relative value bets or hedge/manage market risk will be increasingly explored.

According to Fitch, derivatives will be used more widely, specifically CDS, which provide liquidity and give the ability to short credits.

As many funds can accommodate these strategies, the agency expects to see the following fund types being launched: short duration high yield funds, diversified, low volatility or target volatility funds, as well as absolute return credit funds.

Fitch added that bottom up name selection will be the main driver of performance in credit portfolios that will no longer be as dominated by systematic risk as they have been in the past few years.

“While institutional investors will continue to be attracted by the carry component of credit, performance oriented investors such as private banks and fund intermediaries will start looking for strategies capable of generating high single digit returns without excessive market beta risk,” Fitch said.

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