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Alternatives: an attractive opportunity set
Hedge funds must remain nimble and flexible to take advantage of the different opportunities in fixed income. With recent market volatility providing a greater opportunity set for alternatives, we have been able to launch new strategies with allocations that reflect this more attractive valuation proposition.
Alternatives: an attractive opportunity set - Raphael Robelin
Raphael Robelin:
Different opportunities arise in fixed income over the course of different cycles, and so what's very important for hedge funds is to be nimble, flexible, and have the ability to take advantage of that. Now, what's very interesting over the last couple of years is we've gone from an environment where many central banks around the world were using quantitative easing to buy bonds, keep core government bonds artificially expensive to basically try to generate inflation and give investors an incentive to buy something else.
That means that, A, there was a suppressed volatility in fixed income, and B, that the valuations were maybe less attractive than they could have been had there been no QE. Now, more recently, with inflation becoming much more problematic, central banks have reversed from quantitative easing to quantitative tightening. That means that, A, volatility has been much more elevated, and B, the value opportunity in fixed income has been restored, if you will.
That's very attractive in particular for hedge funds because the more volatility there is in the market, typically, if you do well, the greater the opportunity set. It also means that we've been able to launch new strategies like in structured credit because we feel that the valuation proposition had become much more attractive.
If you look, for example, at the BlueBay multi-strategy hedge fund, recently, we, A, increased our allocation to macro again because of this increase in volatility and maybe a market that was dominated by central banks buying lots of bonds. Now, a market that is more driven by fundamentals, we feel that the opportunity set in macro has become very attractive, and so it made sense to allocate more capital to this strategy.
Also, in structured credit, again, the valuations are pretty attractive. There are lots of things happening in CLOs, but also some troubled sectors like commercial real estate and so on, and so we can really take advantage of that. We decided in 2023 to build an allocation to structured credit, something that we had not done before in our multi-strat hedge fund.
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