Investors navigate to long/short credit strategies

Fueled by rising investor demand for portfolio strategies that reduce interest rate risk and enhance fixed income diversification, long/short credit strategies became the third-fastest growing segment among alternative mutual funds in 2012, boosting assets of this investment category by 46 percent.

So reports Cerulli Associates in the July 2013 issue of “The Cerulli Edge: U.S. Monthly Product Trends.” The report explores product trends among mutual funds, exchange-traded funds (ETFs), money market funds and new product categories.

The report pegs net flows of long/short credit strategies at $1.1 billion in 2012 and $1.4 billion year-to-date through May of 2013 for the 13 funds that comprise the category. According to Cerulli, nearly one-quarter (22 percent) of institutional asset managers have received “several requests” for these strategies during the past 12 months and another one-third (33 percent) received one or two requests.

“While Cerulli does not know the timeline for interest rate changes, firms are feeling the need to develop products that are mindful of this likely trend,” the report states. “Some of these products target a duration of zero to reduce interest rate risk and offer diversification from a long-only credit allocation.

“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,” the report adds.

Alternative strategy mutual funds will account, on average, for 39 percent of new product plans over the next 12 months. Alternative strategies in other investment vehicles and traditional mutual fund strategies will comprise another 25 percent and 27 percent, respectively.