The bad news for credit hedge funds is they’re lagging behind a broad index of bonds this year. The good news is that investors don’t seem to care.

While relative-value credit hedge funds barely eked out a positive return in the three months through September, they’re on track to receive the most new money since 2007 after amassing $40.57 billion in the first three quarters, Hedge Fund Research Inc. data show. Assets in the funds, which can go short as well has long, have about doubled in the past six years, reaching $756 billion as of September.

The reason for their appeal? Pensions, insurers and other big investors are getting nervous about lofty asset prices as the Federal Reserve prepares to raise interest rates. They want money managers who have the flexibility to profit in a falling market and are piling more cash into funds managed by firms such as CQS U.K. LLP, Pine River Capital Management LP and Tricadia Capital Management LLC.

“We’ve seen our investors want to pull funds from traditional fixed-income strategies and look at alternative credit strategies,” Michael Barnes, co-founder of New York- based Tricadia, said in a telephone interview. In a world awash with central-bank stimulus, “you have to look for alpha in other places than liquid markets.”

Tricadia Fund

The credit-focused hedge fund manager’s $2.8 billion Tricadia Credit Strategies fund has returned 2.53 percent this year through Oct. 15, and posted an average 7.5 percent annual gain in the three years ended 2013.

Tricadia, which oversees $4 billion, separately started a short-biased strategy a few months ago that focuses on trading indexes of credit derivatives. It aims to provide some positive return in stable markets and a bigger payoff in a market rout, Barnes said.

“Each point of positive performance that people see in the fixed-income space becomes a liability with how low the rate is,” said Kenneth Heinz, president of Chicago-based research firm HFR. Investors “are seeing the benefit of strategies that can go long and short.”

With yields on corporate debt hovering near record lows, it’s becoming more attractive to bet on a market disruption than to just own a batch of frequently-traded bonds, Barnes said.

Low Yields

First « 1 2 3 » Next