European credit hedge funds are highly sought after by investors, according to Barclays.

European credit hedge funds are highly sought after by investors, according to Barclays.

European Credit Hedge Funds Dominate Investor Interest

Investors are increasingly turning their attention to European credit hedge funds, making them the most sought-after global hedge fund strategy for the second half of the year. This revelation comes from a recent report by Barclays, which surveyed 230 investors representing a combined $6.5 trillion in assets under management.

According to the report, a net 14% of investors plan to allocate more of their portfolios to European credit hedge funds. This significant interest in European credit hedge funds highlights the growing confidence in the European market and its potential for strong returns. It also suggests a strategic shift away from more traditional hedge fund strategies.

While a total of 21% of investors expressed their intention to increase allocations to U.S. stock hedge funds, which engage in long and short bets on equities, 11% of investors plan to withdraw from this strategy. This decision to pull out may be influenced by concerns around the volatility of the stock market and the potential risks associated with long and short bets. It’s clear that investors are seeking alternative approaches to hedge fund investments, with European credit hedge funds emerging as the top choice.

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Barclays’ report also sheds light on the performance of different hedge fund strategies. Stock-focused hedge funds closed last year with a negative 8% return on average, but they managed to achieve a positive 5.2% performance in the first half of 2023. However, even this positive performance falls far behind the S&P 500, which rose by 18% during the same period. This underperformance may further explain the shift in investor interest towards European credit hedge funds, which offer a potentially more lucrative return.

Investors are not just eyeing European credit hedge funds, though. The report indicates a growing interest in private credit as well. Nearly a fifth of the investors surveyed expressed their intention to explore funds that focus on acquiring cheap bonds and distressed companies. This demonstrates a willingness to venture beyond traditional investments in search of potentially higher returns.

Furthermore, the survey reveals that most investors plan to increase their hedge fund allocations, signaling a continued belief in the value of these alternative investments. Pension funds, in particular, are keen to have cash on hand and are thus considering reducing their exposure to less-liquid private equity and venture capital funds. Instead, they aim to bolster their bond portfolios to ensure liquidity and stability. Endowments and foundations also favor hedge funds, while family offices plan to reduce their cash holdings but are less enthusiastic about private investments.

Another noteworthy finding from the report is that a fifth of investors now require hedge funds to meet a minimum performance-rate hurdle before charging fees for new deals. Often, this minimum performance-rate either corresponds to a fixed rate or tracks the yield of U.S. Treasuries. These stricter demands indicate that investors are becoming more discerning and expect adequate returns for their investments.

In conclusion, European credit hedge funds have emerged as the preferred choice for investors in the second half of the year, surpassing interest in U.S. stock hedge funds. With the European market gaining momentum and potentially offering strong returns, investors are showing a growing appetite for this particular alternative investment strategy. Alongside European credit hedge funds, private credit funds are also garnering attention as investors seek out higher returns. The report’s findings reflect a dynamic investment landscape where investors are becoming increasingly selective, demanding better performance and exploring non-traditional investment avenues.

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