Global institutional investors are increasingly bullish on the potential of fixed income hedge funds, with expectations of double-digit returns driving a surge in allocations, according to new research commissioned by RBC BlueBay Asset Management.
The report, which surveyed 450 senior investment decision-makers from asset owners managing between $5 billion and over $100 billion, revealed a growing appetite for fixed-income strategies amid ongoing market volatility and economic uncertainty.
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A mainstream choice
The research found that nearly two-thirds (63 per cent) of institutional investors anticipate annual returns of at least 10 per cent from fixed-income hedge funds. However, while optimism is high, past performance has not always matched these expectations, with only 47 per cent of investors having achieved double-digit returns. The majority (52 per cent) reported annual gains between 5 per cent and 9 per cent.
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Fixed-income hedge funds have moved into the mainstream as institutions seek higher yields without sacrificing liquidity. Of those surveyed, 60 per cent are currently invested in hedge funds, and among them, a substantial 84 per cent have allocated capital to fixed-income strategies. This marks a clear shift towards fixed income as investors navigate an environment of shifting interest rates, inflationary pressures, and geopolitical uncertainty.
Factors driving increased allocations
Several key factors are underpinning the demand for fixed-income hedge fund strategies. Historically strong financial performance was cited by 65 per cent of respondents, with the figure rising to 84 per cent in Asia and 70 per cent in the US. Other contributing elements include evolving fee structures (48 per cent) and greater levels of market liquidity (45 per cent).
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Additionally, more than half (55 per cent) of investors have developed a more favourable view of hedge funds, with over a third (36 per cent) planning to fund new allocations through fresh inflows rather than reallocating from existing alternative investments. However, 25 per cent of investors indicated they would decrease their allocations to other alternative strategies in favour of hedge funds.
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Market conditions favouring hedge fund strategies
Commenting on the research findings, Polina Kurdyavko, hedge fund manager and head of BlueBay emerging market debt at RBC Global Asset Management, believes this is a 'golden age for fixed income hedge funds'.
'Geopolitical tensions and interest rate policies continue to be top of mind for investors, and the resulting uncertainty is likely to create volatility in the markets.
'We believe funds that can play the markets from both the long and short side are particularly well placed to capitalise on the mispricings and inefficiencies created by this volatility to deliver positive returns, regardless of the market direction.'
The report further highlighted that investors consider geopolitical tensions (60 per cent), interest rate policies (58 per cent), and highly volatile equity markets (48 per cent) as the three main factors likely to impact fixed-income markets over the next three to five years. These uncertainties have made hedge funds an attractive proposition due to their ability to dynamically adjust to market conditions.
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Shifting strategies and future expectations
Institutional investors are increasingly considering higher-yielding assets in response to macroeconomic expectations for the year ahead. The study found that 42 per cent of investors plan to explore such opportunities, with 48 per cent setting target returns between 10 per cent and 19 per cent from their hedge fund managers.
In addition, 61 per cent of institutional investors intend to evolve their exposure to hedge funds, while 59 per cent are looking to expand allocations to private credit, including specialised situations, securitised credit and distressed debt.
