July 29, 2013

Long/Short Credit Garner Growing Interest by Funds: Cerulli

Less interest rate risk exposure and enhanced fixed income diversification are attractive features

Cerulli Associates reported Monday that it was witnessing increased interest in long/short credit strategies within both the retail and institutional channels.

The firm noted that long/short credit strategies “are designed to provide return while also reducing volatility and adding diversification.”

Several managers interviewed by the Boston-based research firm said they have seen demand for alternative fixed-income products, in particular long/short credit, from financial advisors and institutions in search of yield and protection against interest rate risk.

Within Cerulli’s universe of 17 alternative mutual fund categories, long/short credit was the seventh top-selling category in 2012. The 13 funds that comprise this category brought in net flows of $1.1 billion in 2012 and $1.4 billion year-to-date through May 2013. Five new funds were introduced in 2012 from firms such as Compass EMP Funds and Highland Capital Management.

“Even though long/short credit funds only represent 2%, or $4.5 billion, of alternative mutual fund assets, the category experienced robust growth in 2012, boosting assets by 46%,” according to the July Issue of The Cerulli Edge. "It was the third-fastest growing among the alternative categories, behind MLP funds and inverse/bear market funds, which expanded by 115% and 67%, respectively."

In addition to mutual fund interest, Cerulli analysts see an increase in demand for long/short credit hedge fund products. According to Cerulli’s 2013 alternative investments research, close to one-quarter (22%) of institutional asset managers have received several requests for these strategies over the past 12 months and another one-third (33%) received one or two requests.

Cerulli concluded by noting managers are feeling the need to develop products that are mindful of this likely trend.

"Some of these products target a duration of zero to reduce interest rate risk and offer diversification from a long-only credit allocation," it said. "When rates eventually rise, longer duration funds will be more sensitive since the underlying bonds will lose more value than a fund with shorter duration."

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