Alternative Credit Funds: Credible Alternatives?
No AAA ratings in this space.
January 2023 Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Alternative credit funds aim to provide returns uncorrelated to traditional fixed income markets
- However, most of the performance can be explained by equities and plain-vanilla bonds
- All funds have lost money in the last 12 months, indicating that they are not alternative enough
INTRODUCTION
As savvy marketers say, the best way to sell a $2,000 watch is to place it next to a $10,000 one.
In the asset management industry, this pricing tactic can be easily deployed by including keywords like absolute return or alternative in the fund names as these categories charge higher fees than plain-vanilla mutual funds or ETFs. In almost all other industries more sophisticated products represent a marketing challenge, but complexity is an advantage when selling financial products as the investor community believes that complex is better. Given information asymmetries, capital allocators are at a disadvantage.
Fortunately, data and technology are empowering investors to get better at dissecting complex products (try Finominal’s Security Analyzer) and to measure how much value these would add to their portfolios. We have reviewed the following strategies, product types, and asset classes, where we found diversification benefits to be limited:
Is the Carry Trade a Diversifying Strategy?
Analyzing Floating Rate ETFs
Merger Arbitrage: Arbitraged Away?
Multi-Strategy Hedge Funds: Equity in a Different Shade?
Equity Market Neutral Hedge Funds: Powered by Beta?
